IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

 

No. 97-20690

 

ECE TECHNOLOGIES INCORPORATED

Plaintiff - Appellee

versus

CHERRINGTON CORPORATION; ET AL

Defendants

CHERRINGTON CORPORATION

Defendant - Appellant

*****************************************************************

CHERRINGTON CORPORATION

Plaintiff - Appellant

versus

ECE TECHNOLOGIES INCORPORATED, doing business as

Eastman Cherrington Environmental

Defendant - Appellee

 

Appeal from the United States District Court

for the Southern District of Texas

 

February 22, 1999

Before HIGGINBOTHAM, BENAVIDES, and DENNIS, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge

Today, we consider whether a set of commercial agreements

between the parties was in substance a loan, or whether the

agreements created a contractor-subcontractor relationship that

included a loan. Whether the agreements violated Texas usury laws
2

turns on this characterization. We hold that the district court

erred in rejecting as a matter of law the assertion that this was

a loan in violation of the usury laws.

I

In May 1995, Cherrington Corp. agreed that for $1.5 million it

would sell certain equipment to Kyokuto Boeki Kaisha, Ltd., and

build a horizontal drilling rig for it. Cherrington lacked capital

to finance the manufacture and could not obtain financing through

a lending institution. Recognizing Cherrington’s unique ability to

manufacture the highly specialized drilling equipment, KBK offered

to prepay $900,000 of the purchase price to provide the necessary

funds if Cherrington could obtain a letter of credit, but

Cherrington was unable to obtain one.

David Barber, Cherrington’s Chief Operating Officer, contacted

Eastman Cherrington Environmental, Inc., and the two companies

reached several agreements. ECE’s counsel, Mark Riley, prepared

the documents and informed Barber that the form of the transaction

documents was nonnegotiable. The “Loan Agreement,” “Security

Agreement,” and “Promissory Note” together provided for the

$900,000 financing that Cherrington would receive, on which

Cherrington would pay 12% annual interest. KBK’s $900,000

prepayment and final $600,000 payment, it was agreed, would go

directly to ECE, which would then reimburse Cherrington an agreed

upon share. 
3

The Loan Agreement and the Note both contain usury savings

clauses reducing any charge exceeding the legislative maximum to

the lawful rate. The savings clause in section 11.6 of the Loan

Agreement applied beyond that particular agreement to include “any

Loan Document or agreement entered into in connection with such

note.”

In the “Assignment of Purchase Order” agreement, Cherrington

agreed to transfer and assign all of its rights in the KBK purchase

order to ECE. Finally, in the “Manufacturing Agreement”, which

included a Texas choice-of-law and forum clause, ECE hired

Cherrington to perform engineering services and to manufacture the

drilling rig in accordance with the purchase order, and to deliver

the specified equipment after selling it to ECE. The agreement

recited that KBK had consented to the assignment, but no

representative of KBK signed the agreement. 

The terms of the Manufacturing Agreement left Cherrington

“responsible for furnishing the design, manufacture and delivery of

the Drilling Rig,” including the provision of “all supervision,

inspection, labor, materials, tools, manufacture equipment and

subcontracted items necessary,” and did not appear to leave any

responsibility with ECE. It did leave ECE the power to approve or

reject any subcontractor employed by Cherrington. 

Section 6.1 of the agreement provided a formula determining

the amount Cherrington would receive for the manufacture, not to

exceed the “Guaranteed Maximum Price” of $600,000, which would
4

include compensation for all costs incurred in design and

manufacture. In addition, ECE was to receive a $20,000 “oversight

fee,” a $9,000 per month letter-of-credit fee, and half of the

profits from the transaction (in no case less than $225,000).

Finally, Cherrington warranted the rig and indemnified ECE “from

and against any claim, loss, damage, expense or liability

(including attorneys’ fees and costs) that may result . . . .”

The agreements were all executed by July 6, 1995. On July 14,

after ECE’s bank issued a $900,000 letter of credit in favor of

KBK, KBK paid the first installment of $900,000 to ECE to secure

performance. The same day, ECE made its first advance to

Cherrington of funds under the promissory note. Ultimately, ECE

advanced a total of $825,026 to Cherrington.

During construction, disputes developed between Cherrington

and ECE. There was a dispute over construction delays, and another

over ECE’s demand that Cherrington turn over to ECE the proceeds of

a separate $900,000 receivable. Cherrington filed suit in

California state court against ECE on October 10, 1995, and ECE

filed a lawsuit against Cherrington and others on October 23, 1995.

Cherrington’s suit was removed, transferred, and consolidated with

ECE’s suit, in the Southern District of Texas. Various contract

and tort claims were asserted. On December 5, 1995, Cherrington

filed a counterclaim asserting usury, later amended to include

breach-of-contract claims. Meanwhile, Cherrington completed the

drilling rig, delivering it to KBK on October 30, 1995. All
5

parties executed a “Certificate of Substantial Completion” and

“Statement of Acceptance and Approval.”

On December 6, 1996, the district court granted ECE’s motion

for summary judgment on Cherrington’s usury claim. It also granted

Cherrington’s motion for partial summary judgment on ECE’s tortious

interference claims, which are not at issue here. The remaining

claims were tried in January, 1997 to a jury, which found breaches

of contract on both sides and awarded damages. Cherrington elected

to seek recovery of attorneys’ fees for breach of contract under

Tex. Civ. Prac. & Rem. Code § 38.001. The jury, however, found

that a reasonable attorney’s fee for prosecuting Cherrington’s

successful breach-of-contract claim was $0. Cherrington challenged

this jury finding, but the district court denied that motion, as

well as all post-judgment relief sought by ECE.

Cherrington appealed both the summary judgment rejecting its

usury claim and the decision refusing to set aside the jury finding

of $0 in reasonable attorneys’ fees. ECE also gave notice appeal,

but withdrew it.

II

Settled by debtors, Texas has long been hostile to charges of

interest the state thought were excessive. This policy cuts little

slack for artful avoidance. It is not surprising then that Texas

usury law focuses on the substance of a transaction, not on its

form. “[I]n determining whether a loan transaction is usurious, it

is substance rather than form that is investigated.” Fears v.
1ECE focuses on Moser v. John F. Buckner & Sons, 292 S.W.2d

668 (Tex. Civ. App.--Waco 1956, writ ref’d n.r.e). This case

6

Mechanical & Indus. Technicians, Inc., 654 S.W.2d 524, 530 (Tex.

App.--Tyler 1983, writ ref’d n.r.e.); see also Najarro v. Sasi

Int’l, Ltd., 904 F.2d 1002, 1006 (5th Cir. 1990) (discussing Texas

usury law); Gonzales County Sav. & Loan Ass’n v. Freeman, 534

S.W.2d 903, 906 (Tex. 1976) (“Charges which are in fact interest

remain so, regardless of the label used.”); Skeen v. Slavik, 555

S.W.2d 516, 521 (Tex. Civ. App.--Dallas 1977, writ ref’d n.r.e.)

(“[W]here . . . a charge is admittedly compensation for the use,

forbearance, or detention of money, it is, by definition, interest

regardless of the label placed upon it or the artfulness with which

it is concealed.”); id. (“[W]e must look beyond the superficial

appearances of the transactions to their substance in determining

the existence or nonexistence of usury.”); Johns v. Jaeb, 518

S.W.2d 857, 859 (Tex. Civ. App.--Dallas 1974, no writ) (“When money

is advanced to enable one to engage in a business venture with the

understanding that the advance and an added amount are to be

returned, there is a loan, and the added amount is interest, which

may not exceed the statutory maximum, regardless of the form of the

transaction.”); Maxwell v. Estate of Bankston, 433 S.W.2d 229, 231

(Tex. Civ. App.--Texarkana 1968, no writ) (“In determining the

question of usury all devices are disregarded . . . [even] though

usury may be covered under the guise of some additional and

different consideration.”).1
involved a contractor who advanced money to the subcontractor. The

court concluded that “the evidence is sufficient to sustain the

jury’s findings that payments made under these contracts were not

made and received with the idea of interest but solely for a

profit.” Id. at 673. The present case, however, has a different

procedural posture, since we are reviewing a summary judgment

finding that there was no usury, not a jury finding to that effect.

This is a meaningful distinction. The Moser court carefully

emphasized that its holding was merely that the question was for

the jury. See, e.g., id. at 672, 673-74.

7

We cannot say as a matter of law that in substance this was

not a loan transaction. It appears on the summary judgment record

that ECE’s only role of any moment was to make advances to

Cherrington to enable it to manufacture and deliver the drilling

rig, and Cherrington performed the same duties that it would have

performed had it merely obtained financing. The strongest

counterargument is that ECE assumed liability for nonperformance of

the obligations of manufacturing and delivering the drilling rig

for KBK. The Assignment of Purchase Order stated that Cherrington

assigned to ECE “all of Cherrington’s right, title, and interest in

and to the Purchase Order . . . and all of its obligations

thereunder.” The indemnity provisions, however, nearly undo this,

since ECE could recover from Cherrington if KBK or a third party

sued it.

The indemnity provisions do not completely cancel the effect

of the assignment, though, because ECE’s assumption of liability

would presumably allow KBK to recover from ECE if Cherrington were

judgment-proof. Thus, unlike a typical provider of financing, ECE

might have faced liability beyond the amount of money it lent. This
8

does not as a matter of law preclude a trier of fact from a

characterization of the transaction as a loan. KBK’s status as a

third-party beneficiary should not control the classification of

the transaction between ECE and Cherrington. It appears on the

summary judgment record that KBK neither bargained for this

assignment nor was a party to the instrument itself; KBK appears

virtually to have been a donee beneficiary. KBK sought out

Cherrington because of its experience in the manufacture of the

special slant drilling equipment it wanted. A trier of fact could

reasonably conclude that ECE brought nothing to the table but

money. The exacting terms of the deal with the passive role of the

customer support the inference that ECE was paid for lending money.

ECE attempted to stay clear of the grasp of Texas usury law,

but the usury savings clauses in the agreements were not effective,

if usurious interest was in fact received. See Windhorst v. Adcock

Pipe & Supply, 547 S.W.2d 260, 261 (Tex. 1977) ("By describing the

conditions precedent to recovery of penalties in the disjunctive,

the Legislature made it clear that only one such condition need

occur to trigger penalties; either a contract for, a charge of or

a receipt of usurious interest."); see also Cochran v. American

Sav. & Loan Ass’n, 586 S.W.2d 849, 850 (Tex. 1979) (suggesting that

receipt of funds is sufficient for a finding of usury); Victoria

Bank & Trust Co. v. Brady, 779 S.W.2d 893, 901-02 (Tex. App.--

Corpus Christi 1989), rev’d on other grounds, 811 S.W.2d 931 (Tex.

1989).
9

Because this appeal involves only the district court’s

granting of ECE’s motion for summary judgment, and not the denial

of a cross-motion for summary judgment by Cherrington, we cannot

announce how the district court should dispose of such a motion.

Nonetheless, we offer some general principles to guide the district

court’s assessment of whether any genuine issues of material fact

remain. Under Texas law, where a contract is not facially

usurious, the question of whether there was an intent to commit

usury is for the jury. See Moser, 292 S.W.2d at 671-72 (citing

various cases). However, the only intent that the victim need

establish is the intent to enter into a contract that is usurious.

See, e.g., Alamo Lumber Co. v. Gold, 661 S.W.2d 926, 928 (Tex.

1983) (“[I]t is not the lender’s subjective intent to charge usury

that makes a loan usurious, but rather his intent to make the

bargain that was made.”). 

The question thus reduces to whether the lender has provided

some other consideration for any allegedly usurious charge. Cf.

Texas Commerce Bank v. Goldring, 665 S.W.2d 103, 104 (Tex. 1984)

(“[A] fee which entitled the borrower to a distinctly separate and

additional consideration apart from the lending of money is not

interest and cannot be the basis of usury.”). We hold that the

summary judgment record does not establish what Cherrington

received for its payments to ECE, other than the use of its money.

The district court, on appropriate motion, would need to determine

whether the answer to this question requires resolution of a
10

genuine issue of material fact. If it does, then the case is for

the jury.

III

The award of zero attorney’s fees could be consistent with the

evidence only if the state law authorized the trier of fact in its

discretion not to award any fees. Texas law does not. To the

contrary, Texas courts have found findings of “zero” or “none” on

fees questions to be against the weight of the evidence and thus

have required new trials limited to the fees issue. In ElizabethPerkins, Inc. v. Morgan Express Inc., 554 S.W.2d 216, 219 (Tex.

Civ. App.--Dallas 1977, no writ), the court held, “Although the

jury was not bound to accept this testimony [concerning fees]

absolutely, it was not at liberty to reject it totally in finding

‘none’ in answer to the question concerning reasonable attorney's

fees.” The Texas courts have followed this holding consistently.

See Great State Petroleum, Inc. v. Arrow Rig Serv., Inc., 706

S.W.2d 803, 812-13 (Tex. App.--Fort Worth 1986, no writ); First

Tex. Sav. Ass’n v. Dicker Ctr., Inc., 631 S.W.2d 179, 188 (Tex.

App.--Tyler 1982, no writ). Here, Cherrington’s expert on

attorneys’ fees testified that $125,000 would have been a

reasonable fee for prosecuting Cherrington’s breach-of-contract

claim, and ECE’s expert said he “would not disagree” with $75,000.

The award of zero attorney’s fees was thus against the weight of

the evidence, regardless of whether the evidence is weighed using

a federal or a state scale. 
11

IV

For the reasons above, we reverse the district court’s award

of summary judgment on the usury claim and remand for further

proceedings, including entry of summary judgment for Cherrington if

appropriate. In addition, we set aside the jury finding of zero

attorneys’ fees and remand for trial on that issue.

REVERSED IN PART AND REMANDED.