Court Opinion

ID: 7824664
Source: CourtListenerOpinion
Date Created: 2022-09-07 18:04:03.708032+00
Date Added: 2024-06-11T16:30:49.608762
License: Public Domain

Judith A. Desimone, Special Justice, dissenting. While the majority opinion has summarized the salient facts of the case, a few details provide insight into the background of the unique provision in the $1,600,000.00 promissory note and mortgage at the heart of this case. At the outset of negotiations, the sellers of the apartment complex were asked for special consideration by the buyer. The special consideration requested was a reduction in payments to be made over the first two years of the mortgage. Sellers were amenable to this request, but asked, in return, for some interest on their partially-forgiven sums. The buyer, a general partnership, agreed, and an attorney for one of those general partners was asked to draw the appropriate papers. The provision at issue read as follows: “Payable for the first twenty-four (24) months in equal installments of $10,666.67 per month, payable on the first day of each month, commencing on December 1, 1982, such payments to be applied to interest only, with unpaid interest accruing and compounding at the rate of ten percent (10%) per annum for said twenty-four (24) months only; thereafter, payable in equal installments of interest only of $13,333.33 per month for ninety-six (96) months, with the entire principal plus interest thereon at the rate of ten percent (10 %) per annum due November 1, 1992, and in addition, an amount equal to the unpaid and compounded interest which accrues during the first twenty-four (24) months following the date of this Note shall be due and payable November 1, 1992.” The drafting attorney recognized a potential usury problem, and purposefully inserted language that purportedly classified the loan as one for “business purposes” under the Depository Institutions Deregulation and Monetary Control Act of 1980, the pertinent provision of which reads as follows: 12 U.S.C.S. §86a (a): If the applicable rate prescribed in this section exceeds the rate a person would be permitted to charge in the absence of this section, such person may in the case of a business or agricultural loan in the amount of $ 1,000 or more, notwithstanding any State constitution or statute which is hereby preempted for the purposes of this section, take, receive, reserve, and charge on any such loan, interest at a rate of not more than 5 per centum, in excess of the discount rate, including any surcharge thereon, on 90-day commercial paper in effect at the Federal Reserve bank in the Federal Reserve district where the person is located. If the enterprise were determined to fall within the classification “business” under the Act, it would be exempt from the State’s constitutional limitation on interest charges. The buyer, Chateau Cantrell Apartment Company, was a general partnership organized for one purpose, purchase and sale of the Chateau Cantrell Apartment complex. That purpose came to total fruition approximately one year later, when the partnership was sold. Evidence adduced revealed that one of the general partners had an extensive real estate development background, and in fact owned a real estate development company, which company was hired to manage the Chateau Cantrell complex. There is no evidence, however, that any of the general partners took an active role in the management of the complex. For the determination of whether the enterprise fits the classification “business” under the Monetary Control Act, the Court has been cited to an Opinion issued by the General Counsel of the Federal Home Loan Bank Board, March 19, 1981, S34. That authority has been termed “convincing” in a relatively recent decision, Bank of Evening Shade v. Lindsey, et ux., 278 Ark. 132, 644 S.W.2d 920 (1983), which decision quoted from Ford Motor Credit Co. v. Milhollin, 444 U.S. 555 (1980), asserting that such an administrative opinion should be dispositive “unless demonstrably irrational.” Milhollin at 567. The March 19,1981, Opinion of the General Counsel of the Federal Home Loan Bank Board responded precisely to an inquiry as to the meaning of the term “business” under the Monetary Control Act. As noted by the Majority, that General Counsel advised that the nature of a loan is determined by the use to which the loan proceeds will be put, i.e., whether for a business purpose. S34 Opinion, p. 1. Loan proceeds should be used “in the active conduct of a trade or business,. . . .” precluding the applicability of this statute to loans for passive investments or those where a borrower did not take an active role in the operation or management of the business. Id. The General Counsel looked to similar interpretations of the National Bank Act, 12 U.S.C. Sec. 85, which contained the identical provision regarding “business” as the Monetary Control Act. Counsel pointed out that drawing on such interpretations by the Office of the Comptroller of the Currency was consistent with tax law distinctions between business and non-business activities. Id. Further, the General Counsel looked toward interpretation of business loans under the Truth in Lending Act, and detailed case decisions analyzing the individual facts and circumstances presented, which decisions apparently turn on the degree of active management. Id., p. 2. See, for example, Sapenter v. Drayco, Inc., 326 F. Supp. 871 (E.D. La.), aff'd without opinion, 450 F.2d 941 (5th Cir. 1971), cert. denied, 406 U.S. 920 (1972). Whatever the degree of personal involvement of the principals in the case of Brigg’s v. Capital Savings and Loan Ass’n, 268 Ark. 527, 597 S.W.2d 600 (1980), it is clear that development was part of the enterprise purpose. In this case, the purchase and resale of the Chateau Cantrell Apartment complex was the sole purpose. After several hearings, the Chancellor below found that the buyer, Chateau Cantrell Apartment Company had only one asset, “that being the Chateau Cantrell Apartment complex, . . . and ... did not manage, construct, renovate, or operate the apartment complex.” In rejecting the active/passive guidepost provided by the General Counsel, the majority provides no criteria with which to analyze such an enterprise, leaving advising attorneys to incorporate “wo~ds of art” into documents in order to persuade future reviewing courts that an otherwise problematical agreement will pass muster under an appropriate statute. The potential that form will triumph over substance provides slight encouragement for those same attorneys to suggest agreements structured so as to avoid such provisions as those which initiated these proceedings. In view of the patently rational analysis of the General Counsel, See, Bank of Evening Shade v. Lindsey, supra, I would affirm the reasoning of the Chancellor below, and hold that this note and mortgage involved a loan which was not “for business or agricultural purposes within the meaning of 12 U.S.C. Sec. 86A”, and that the key provision was clearly usurious under the Arkansas Constitution. Glaze, J., joins in this dissent.