Opinion ID: 387880
Heading Depth: 1
Heading Rank: 3

Heading: Contrivance to Evade Texas Usury Laws?

Text: 29 The bankruptcy judge, considering the circumstances outlined above, held that the contractual choice of law by the parties need not be honored since it was a contrivance to evade the usury laws of Texas. Hutcheson-Ingram argues that this factual finding by the bankruptcy judge should not have been disturbed by the district judge, since not clearly erroneous. In overturning that determination, the district court correctly noted that there was no evidence from which to infer that the transaction was a contrivance to evade Texas's usury law, there being a reasonable relation between the transaction and Mississippi. Succinctly, as we will elaborate more fully below, under UCC § 1-105 as a matter of law a party choice of law in a multistate UCC transaction cannot be regarded as a contrivance to evade the usury law of the borrower's state even though the motivation may be to permit a higher rate of interest than allowable in the borrower's jurisdiction when the transaction bears a reasonable relation to the state whose law is chosen to govern the transaction (as shown by the subsidiary facts found by the bankruptcy judge). See Part II supra. Walker v. Associated Financial Services Corp., 588 S.W.2d 416 (Tex.Civ.App.1979), writ ref'd n. r. e.; Securities Investment Company v. Finance Acceptance Corp., 474 S.W.2d 261 (Tex.Civ.App.1971), writ ref'd n. r. e. See also Hi Fashion Wigs Profit Sharing v. Hamilton Investment Trust, 579 S.W.2d 300 (Tex.Civ.App.1979), no writ history. 30 We have found no Texas case, and we are cited to none, that has refused to uphold an express party choice of law on the ground that the party choice constituted a contrivance to evade Texas law. See Pedersen & Cox, supra, 34 Sw.L.J. at 771 n.80. 31 Of the cases cited to us by the borrower Hutcheson-Ingram, 11 only one Building & Loan Ass'n of Dakota v. Griffin, 90 Tex. 480, 39 S.W. 656 (1897) found a contrivance to evade the usury laws of Texas. In that case, Texas residents borrowed money from a building and loan association whose corporate headquarters were in the territory of South Dakota. Although organized under the laws of South Dakota, the lender was licensed to do business in Texas and had in fact been conducting business in Texas for some ten years. The borrowers resided in Texas, all their property was situated in Texas, and the loan was secured by Texas property. The loan agreement contained no party choice of law provision, but provided that payments on the loan would be made at the lender's Dakota offices. On the basis of that provision, the lender argued that the (non)usury law of South Dakota, rather than the usury law of Texas, should control, since that territory was the place of performance for the loan. The Texas Supreme Court rejected the lender's argument, concluding that the stipulation for payment in Dakota was merely a contrivance to evade the laws of Texas. Building & Loan Ass'n of Dakota v. Griffin, 90 Tex. at 488, 39 S.W. at 659. 32 We do not find the Griffin case persuasive. First, we note that Griffin is a pre-UCC case, reached without consideration of the policies underlying the UCC as adopted by the legislature of Texas in 1967. To whatever extent its result would differ from that to be reached under Section 1105(1), the choice of law rule it embodies has been supplanted by express legislative act in the adoption of Texas UCC § 1.105(a). See Pacific Products v. Great Western Plywood, 528 S.W.2d 286, 291 (Tex.Civ.App.1975). Second, Griffin did not involve an express party choice of law, as does the present case, and thus does not address the precise question presented here. Finally, the result in Griffin is grounded upon that court's conclusion that the parties did not really intend their contract to be performed in South Dakota. Since the characterization of South Dakota as the place of performance was the only basis for applying the law of that territory, upon the court's finding that the contract was in truth to be performed in Texas there remained no basis for applying South Dakota law. 12 Thus, the contrivance identified by the Griffin court was the party's false recitation that their contract was to be performed in South Dakota rather than in Texas. See Lubbock Hotel Co. v. Guaranty Bank & Trust Co., 77 F.2d 152, 156 (5th Cir. 1935). 33 The contrivance exception to recognition of party choice of a particular state's law to apply to the contract thus does not arise simply because a purpose of the contract was to secure the benefit of that state's law and to avoid the usury law of another state that likewise had a reasonable relationship to the transaction. The exception is designed only to preclude the evasion or avoidance at will of the usury laws that would otherwise apply, by empowering the courts to ignore a party choice that would apply the law of a jurisdiction with no normal relation to the transaction. See Part II supra, esp. Seeman v. Philadelphia Warehouse Co., supra, 274 U.S. at 408, 47 S.Ct. at 628; Nordstram & Ramerman, supra, 1969 Duke L.J. at 628. In short, the contrivance exception is nothing more than a restatement of the basic UCC choice of law rule: A party choice of law will be held to constitute a contrivance when (1) the actual contacts between the chosen jurisdiction and the transaction do not establish a reasonable relation or (2) when the contacts themselves are contrived in order to validate a party choice of law. Thus, that the present transaction is itself a loan disguised as a sale and leaseback, or that the parties so disguised their transaction or chose the law of Mississippi in order to avoid Texas usury laws, is wholly immaterial for choice of law purposes, so long as the contacts between the state of Mississippi and the transaction are real and not contrived. 34 Nothing in the record would suggest that the contacts between this transaction and the state of Mississippi are not real, or did not occur in the normal course of the transaction. Clearly, they are not so tenuous as to fall short of establishing a reasonable relation between this transaction and that state. Thus, the applicable choice of law rule, Texas UCC § 1.105(a), UCC § 1-105(1) (1962 version), requires that the parties' choice of law provision be honored, and that the law of Mississippi be applied. 13