Achee Holdings, LLC v. Silver Hill Financial, LLC

           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                    Fifth Circuit

                                                 FILED
                                                                           August 26, 2009

                                     No. 09-40232                      Charles R. Fulbruge III
                                   Summary Calendar                            Clerk



ACHEE HOLDINGS, LLC,

                                                   Plaintiff - Appellant
v.

SILVER HILL FINANCIAL, LLC; BAYVIEW LOAN SERVICING, LLC,

                                                   Defendants - Appellees




                   Appeal from the United States District Court
                        for the Southern District of Texas
                                 No. 3:08-CV-115


Before GARZA, CLEMENT, and OWEN, Circuit Judges.
PER CURIAM:*
       In this usury case under Texas law, Plaintiff-Appellant Achee Holdings,
LLC (“Achee”) appeals the district court’s order granting the Federal Rules of
Civil Procedure 12(b)(6) motion to dismiss filed by Defendants-Appellees Silver
Hill Financial, LLC (“Silver Hill”) and Bayview Loan Servicing, LLC
(“Bayview”). For the following reasons, we affirm.




       *
         Pursuant to 5TH CIR . R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR .
R. 47.5.4.
                                  No. 09-40232

      In June 2007, Achee executed an adjustable rate promissory note (“the
Note”) with Silver Hill. Under the terms of the Note, Silver Hill lent to Achee
the principal sum of $280,000.00.      The Note provided for two prepayment
penalties in the event that Achee sought to repay the principal during the initial
thirty-six months of the loan period (the “Lockout Period”): (1) an amount equal
to the interest which would have accrued on the unpaid principal balance during
the Lockout Period (labeled the “Lockout Fee”); and (2) an amount equal to five
percent of the then-outstanding unpaid principal balance (labeled the
“Prepayment Consideration”). During the Lockout Period, Achee sought to
prepay the principal amount. Bayview, as Silver Hill’s loan servicer, notified
Achee that it owed a payoff amount of $389,355.85, comprised of the following:
the principal and interest then presently due under the Note ($282,969.19); the
Lockout Fee ($92,083.81); and the Prepayment Consideration ($13,993.32).
      Achee refused to pay the Lockout Fee, and instead filed this lawsuit
alleging that the Lockout Fee is disguised interest that exceeded the allowable
amount    under    the   Texas    Finance    Code.      After   consideration     of
Defendants-Appellees’ Rule 12(b)(6) motion, the district court dismissed the
complaint for failure to state a claim. Achee appealed.
      We review de novo a district court’s order granting a motion to dismiss
under Rule 12(b)(6). Lovick v. Ritemoney Ltd., 378 F.3d 433, 437 (5th Cir. 2004).
All well-pleaded factual allegations are accepted as true, and all reasonable
inferences are drawn in the plaintiff’s favor. Id. Recently, the Supreme Court
held that “[t]o survive a motion to dismiss, a complaint must contain sufficient
factual matter, accepted as true, to ‘state a claim for relief that is plausible on
its face.’” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (citation omitted).
      The single issue in this case is whether the Lockout Fee constitutes
interest, such that it violates Texas usury laws. The essential elements of a
usurious transaction are “(1) a loan of money; (2) an absolute obligation that the

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principal be repaid; and (3) the exaction from the borrower of a greater
compensation than the amount allowed by law for the use of money by the
borrower.” Najarro v. SASI Int’l, Ltd., 904 F.2d 1002, 1005 (5th Cir. 1990)
(citation omitted). Unless otherwise provided by law, an interest rate greater
than ten percent a year is usurious. T EX. F IN. C ODE A NN. § 302.001(b) (Vernon
2006).   Interest is defined under Texas law as “compensation for the use,
forbearance, or detention of money . . . [but] does not include compensation or
other amounts that . . . are permitted to be contracted for, charged, or received
in addition to interest[.]” T EX. F IN. C ODE A NN. § 301.002(a)(4) (Vernon 2006).
      Where a contract grants the borrower the right to prepay, Texas courts
hold that a prepayment penalty is not interest because it is not compensation for
the use, forbearance, or detention of money; rather, it is “a charge for the option
or privilege of prepayment.” Parker Plaza W. Partners v. Unum Pension & Ins.
Co., 941 F.2d 349, 352 (5th Cir. 1991) (citations omitted). This principle is
codified at T EX. F IN. C ODE A NN. § 306.005, which states that “a creditor and an
obligor may agree to a prepayment premium . . . whether payable in the event
of voluntary prepayment . . . or other cause that involves premature termination
of the loan, and those amounts do not constitute interest.” However, lenders can
violate usury laws by charging fees that constitute “disguised interest.” Lovick,
378 F.3d at 439. Whether a particular fee is disguised interest depends on the
substance of the transaction, not how the parties label the fee. See In re CPDC,
Inc., 337 F.3d 436, 444 (5th Cir. 2003). Specifically, a fee will not be considered
interest if it is not for the use, forbearance, or detention of money. Id. at 445.
A fee may be considered interest, though, if it is not supported by separate and
additional consideration. Lovick, 378 F.3d at 439.
      Achee argues that the Lockout Fee is usurious because it is disguised
interest. However, Achee has shown no set of facts indicating that it is plausible
that the Lockout Fee is interest disguised as a prepayment penalty. Though the

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interest rate on the loan was used as part of the formula for calculating the
Lockout Fee, the substance of the transaction shows that it is clearly a
prepayment penalty. The Note granted Achee the option of paying the loan early
and also paying the Lockout Fee, in exchange for avoiding the twenty-seven
years of interest that would accrue over the remaining term of the loan. In other
words, the Lockout Fee acted as consideration in exchange for the privilege of
paying the loan in the first three years and avoiding further interest. See
Bearden v. Tarrant Sav. Ass’n, 643 S.W.2d 247, 249 (Tex. App.—Ft. Worth 1982,
writ ref’d n.r.e.).    The fact that the parties contracted for two types of
prepayment penalties, one of which only applied in the event of a payment
within the first three years of the loan, does not change the fact that the Lockout
Fee operated, in substance, as a penalty for very early prepayment. Moreover,
Achee could avoid paying the Lockout Fee altogether by waiting until after the
thirty-six month period expired to pay off the loan, a fact which we have
recognized as the rationale for the rule that prepayment penalties are not
interest. See Parker Plaza, 941 F.2d at 353. Accordingly, since the Lockout Fee
is not compensation for the use, forbearance, or detention of money and is rather
a charge for the option or privilege of prepayment, under Texas law the Lockout
Fee is not interest and the usury laws are not violated.1
       For the foregoing reasons, we AFFIRM the district court’s order dismissing
the complaint for failure to state a claim.




       1
         We have also observed that a prepayment premium may be usurious if it exceeds “the
legal rate calculated to the stipulated maturity date.” See Parker Plaza, 941 F.2d at 353.
Though Achee does not raise this argument, we note that the prepayment penalties in this
case do not exceed the legal interest rate calculated over the thirty-year term of the loan.

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