Opinion ID: 378899
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Heading: The Louisiana Corporate Usury Exception

Text: 7 The appellant's primary point on appeal is that the bankruptcy court erred in not reducing the amount of Chase's claim against the debtor for allegedly usurious interest. The Chase note for $7.6 million to Corporate Hotel, Inc. set the interest at four points above the prime rate charged by the Chase Manhattan Bank in New York. Of the $8.72 million claim allowed to Chase by the bankruptcy court, $2.04 million was accrued interest. Chase has stipulated that a substantial part of the interest included within its claim accrued at a rate greater than 10 percent. At all times relevant to this case, Title 9, Section 3503 of the Louisiana Statutes provided that interest on loans secured by a mortgage on immovable property shall not exceed 10 percent. 3 Title 9, Section 3501 of the Louisiana Statutes provides for the forfeiture of the entire interest in any note that charges a rate in excess of the lawful maximum. 4 Chase has stipulated that a large proportion of the over $2 million interest included in its claim was accrued at a rate in excess of ten percent. Chase claims that its loan was not usurious because it falls within the Louisiana corporate usury exception, which allows corporations to agree to any rate of interest and which prohibits a corporation from asserting a usury defense. 5 8 Appellant claims that the corporate usury exception does not apply to Chase because Chase made its loan to a dummy corporation formed solely for the purpose of circumventing the usury laws of Louisiana. Appellant cites no Louisiana authority for this proposition. Instead, he relies on cases from other jurisdictions. Chase has responded with a three point attack to defeat appellant's attempt to avoid the corporate usury exception. First, Chase claims that Corporate Hotel, Inc. was not a dummy corporation formed merely to circumvent the usury laws of Louisiana. Second, Chase claims that the jurisdictions in this country are split on whether a debtor can form a dummy corporation to evade the usury laws, and that the Louisiana courts would follow the better rule, which allows evasion. Third, Chase claims that no state has ever voided a corporate usury exception on facts similar to those in the instant case. We assume, without deciding, that Corporate Hotel, Inc. was a dummy corporation formed so Chase could charge interest over ten percent. We hold that the Louisiana courts would apply the corporate usury exception given the facts of this case, and we affirm the bankruptcy court's allowance of interest as part of Chase's claim. 6 9 The key fact in determining whether the Louisiana courts would hold the usury exception inapplicable to the loan from Chase to Corporate Hotel, Inc. is that Chase loaned almost $8 million for a business purpose to a profit making enterprise. As the New York Court of Appeals stated in Schneider v. Phelps, 41 N.Y.2d 238, 391 N.Y.S.2d 568, 571, 359 N.E.2d 1361, 1365, There is no difficulty in sanctioning the use of a shell corporation to avoid the usury laws provided that the true borrower has a business purpose and the corporation itself is a financing device in furtherance of the profit oriented enterprise. The court went on to distinguish between a shell corporation formed to secure a loan for the profit making purposes of a business and a shell corporation formed to secure a loan for the personal obligations of an individual. The court held that it would recognize the corporate usury exception only for a shell corporation formed to secure a loan for a business purpose. It also held that the corporate usury exception would not apply to a shell corporation formed to strip from an impoverished debtor the benefits of the usury laws. 391 N.Y.S.2d at 571, 359 N.E.2d at 1365. In the instant case, there is no question that Corporate Hotel, Inc., was formed to secure a loan for a business purpose of a profit making enterprise. 10 The Arizona courts have followed New York in holding that a usury defense is not available to a corporate shell formed to borrow money for a business purpose. See Gangadean v. Flori Investment Co., 11 Ariz.App. 512, 466 P.2d 63 (1970). In that case, the plaintiff sued to recover on a note made by a corporation that was incorporated two days before the loan was made. The individual defendants in the action, a husband and wife, had guaranteed the note. The trial court found that the loan was made for the business purpose of marketing a beauty oil product and held that the individual defendants could not accept a usury defense. The appellate court affirmed. Fifty years ago, the Court of Appeals of Maryland held that a loan to a dummy corporation formed to finance the acquisition of furniture business was within the corporate usury exception. In Rabinowich v. Eliasberg, 159 Md. 655, 152 A. 437 (1930), the lender agreed to loan $65,000 to finance the acquisition of a furniture business provided Rabinowich formed a corporation to take title to the property of the furniture business and to mortgage that property to the lender. Again, this case illustrates that a lender can require a borrower to form a corporation to circumvent or lessen the impact of usury laws as long as the loan is made for a business purpose. See also American Century Mortgage Investors v. Regional Center, Ltd., 529 S.W.2d 578 (Tex.Civ.App. Dallas 1975) (reversing the grant of a temporary injunction enjoining foreclosure of a loan at four and one half percent over prime where the lender required borrower to form a corporation so it could demand a higher rate of interest.) 11 The cases that appellant cites for the proposition that a dummy corporation cannot be formed to circumvent the usury laws generally involve loans made to shell corporations formed to acquire a loan for the personal obligations of the individual guarantor of the loan. In Havens v. Woodfill, 266 N.E.2d 221 (Ind.App.1971), the lender required the borrowers, a husband and wife, to form a partnership to circumvent the Indiana usury statute. The lender made three separate loans of $100 to the borrowers. The concurring opinion in the case stressed that there was no evidence that the husband and wife were engaged in any business enterprise. 266 N.E.2d at 227. In Walnut Discount Co. v. Weiss, 205 Pa.Super. 161, 208 A.2d 26, 28 (1965), the court stated that a Pennsylvania corporate usury exception does not extend its effect to loans to individuals who, though on the face of the documents (are) endorsers or guarantors of a corporate obligation, are in fact the real debtors. The appellant here seeks to use this broad language to support a favorable result in this case. The facts of the two cases, however, are not similar at all. In Walnut Discount, the borrowers were two parents who guaranteed a $2900 obligation of a successor corporation to a bankrupt corporation of which their son had been president. See also Lesser v. Strubbe, 67 N.J.Super. 537, 171 A.2d 114, 116 (Super.Ct. at Div.1961) (allowing the assertion of a usury defense in a loan to a corporation when the trial court found the loan was actually made to an individual through the guise of a corporation and the lender knew all along that the loan proceeds were to be used for the personal purposes of the borrower.) 12 The Florida courts will not recognize the corporate usury defense when the trial court finds that a loan was in fact made to an individual and that the corporation was formed as a device to evade the usury laws. See Tel Service Co. v. General Capital Corp., 227 So.2d 667, 670 (Fla.1969). The mere fact, however, that a lender insists that a borrower form a corporation so that it can charge a higher rate of interest is not sufficient to establish that the loan is made to an individual. Id. 13 Thus, the great weight of authority does not allow the assertion of a corporate usury defense in loans to dummy corporations formed to charge a higher rate of interest than could be charged an individual when the loan is made for a business purpose. Assuming without deciding, as we have, that those are the facts in this case, we conclude that Louisiana would follow the weight of authority in interpreting its corporate usury exception. Recent amendments to the corporate usury exception by the Louisiana Legislature buttress this conclusion. As discussed above, 7 the Legislature has extended the usury exception to include loans to partnerships in commendam, like the debtor in the instant case. The Legislature has also provided that individual guarantors of a corporate or a partnership debt cannot assert the usury defense. These two developments make it very unlikely that a Louisiana court would allow the assertion of the usury defense on the facts of this case. We hold the Chase loan to Corporate Hotel, Inc. was within the Louisiana corporate usury exception. 14 III. Is an Interest Rate of Four Points Above Prime Fixed in Writing as Required by Louisiana Law? 15 As quoted above, Louisiana law requires the interest rate on an obligation secured by a mortgage on immovable property to be fixed in writing; testimonial proof of it is not admitted in any case. La.Rev.Stat.Ann. Tit. 9, § 3503 (West). Appellant claims that the interest due Chase, which was set at four percentage points above prime, was not fixed in writing. This Court does not agree with appellant's contention. The requirement that an interest rate be fixed in writing is akin to a parol evidence rule. See Katz v. Krauss Company Employees Pension Fund, 161 So.2d 389 (La.Ct.App.1964) (referring to the same language in La.Civ.Code Ann. art. 2924 (West) as a parol evidence rule). A rate of four points above prime is fixed in writing within the meaning of the Louisiana statutes and the Louisiana civil code. There is no danger of a swearing match over what the parties meant by four points above prime. Thus, holding that such an interest rate is not fixed in writing would not serve the purposes of the parol evidence rule. Furthermore, variable interest rates keyed to the prime rate are commonplace in business loans. This Court in the absence of any case authority or logical reason, will not torture the words of a statute to invalidate thousands or perhaps tens of thousands of loans. 16