Opinion
Civil Action No. 5:02-CV-0252-C
December 3, 2003
MEMORANDUM OPINION AND ORDER
COMES NOW CHASE AGRI-CREDIT SYSTEM, INC.'s ("Plaintiff or "Chase") Motion for Summary Judgment and Memorandum in Support, filed with this Court on July 15, 2003, and Appendix in Support, filed on July 17, 2003. The Court also considered Plaintiff's Original Complaint, filed with this Court on October 18, 2002, together with Defendants JACK SPEARS DRILLING CO., INC. ("JSDC") and JACK SPEARS and MAGGIE SPEARS' ("the Spearses") (collectively, "Defendants") Original Answer, filed on November 19, 2002. The Court further considered Defendants' Response in Opposition to Plaintiff's Motion for Summary Judgment and Memorandum and Appendix in Support, filed with this Court on August 4, 2003; Plaintiff's Reply, filed on August 29, 2003; and Defendants' Motion for Leave to File Amended Answer, filed on November 24, 2003.
I. BACKGROUND
Plaintiff is a Kansas corporation in the business of financing and/or purchasing accounts receivable generated by other businesses, primarily farm implement companies such as that of Defendant JSDC, a Texas corporation operating a drilling business in Plains, Texas. Jack and Maggie Spears are the principal owners of JSDC. On September 4, 1996, Plaintiff and JSDC entered into an "Agreement Between Chase Agri-Credit System, Inc. and Jack Spears Drilling Co., Inc." (the "Agreement") whereby Plaintiff agreed to purchase or take assignment of various of JSDC's customer accounts on an ongoing basis at a discount of 2 per cent. [Compl. Ex. 1, Agreement ¶ 7]. The Agreement further obligated JSDC to repurchase from Plaintiff 100 per cent of any accounts that Plaintiff determined, for any reason, to be uncollectible. [Compl. Ex. 1, Agreement ¶ 8]. The terms of the Agreement stipulated that Plaintiff would "follow similar collection procedures and exercise the same degree of diligence as it does with its other programs" in dealing with delinquent accounts but that it was not "required to file suit to collect an account, and may deem an account uncollectible if it reasonably appears that normal collection procedures (excluding the filing of a lawsuit) will not result in the timely payment of the account." [Compl. Ex. 1, Agreement ¶ 10]. The terms of the Agreement provided that Plaintiff could "chargeback" these uncollectible accounts to JSDC after 120 days of delinquency. [Compl. Ex. 1, Agreement ¶ 10]. The Agreement was signed by the president of Chase Agri-Credit System, Inc. and by Jack Spears in his capacity as president of JSDC. Jack Spears and Maggie Spears signed the Agreement on September 10, 1996, in their individual capacities to "personally guarantee payment and performance when due of all obligations of Merchant [JSDC] under the foregoing agreement."
The Agreement provided that various operating procedures implementing the Agreement would be set forth in an Addendum to the Agreement (the "Addendum") that might be changed from time to time to modify the operating procedures. The latest Addendum was executed between Plaintiff and JSDC on April 17, 1999, signed by Jack Spears in his capacity as president of JSDC. The Addendum provided, among other operational procedures, that JSDC would invoice customers on JSDC's own invoices but that the invoices had to disclose a 1.5 percent monthly finance charge on balances that exceeded"30 days from the initial billing. [Compl. Ex. 1, Addendum ¶ 3]. It further provided that JSDC would "buy-back" 120-day delinquent accounts, when requested by Plaintiff, by the end of the next billing cycle after notice. [Compl. Ex. 1, Addendum ¶ 11].
On various dates, ranging from March 27, 2001 to July 29, 2002, Plaintiff charged back to JSDC various delinquent accounts. In addition, on May 21, 2001, Plaintiff sent Defendants JSDC and the Spearses a certified letter notifying them that they were in default under the Agreement. [Compl. Ex. 2]. The letter described the nature of the default as breach of the Agreement "by, among other things, failing to satisfy the Recourse obligations of Jack Spears Drilling Co., Inc. pursuant to Sections 8 and 10 of the Agreement as well as the minimum payment requirement set forth in Section 9." [Compl. Ex. 2]. As a result of the various chargebacks, Plaintiff alleges that Defendants owed it $114,314.22 as of August 12, 2002, consisting of $97,753.51 in principal and $16,560.71 in interest. [Compl. Ex. 2]. Plaintiff filed suit against Defendants on October 18, 2002, alleging breach of contract against JSDC as obligor on the Agreement and breach of the guaranty by the Spearses.
Defendant Jack Spears contends that Plaintiff, through a sales representative whose identity is uncertain, fraudulently induced Defendants to enter into the Agreement by means of making several material misrepresentations, such as (1) Chase would legally collect all of JSDC's accounts even to the extent of suing them; (2) Defendants were not going to lose anything on the deal; and (3) Chase would "prepare all of the paperwork . . . and get after the people who do not pay." [Def.'s Resp. App. at 1 ¶ 4 (Aff. of J. Spears)]. Defendants claim they relied on these material misrepresentations in signing the Agreement [Def.'s Resp. App. at 2 ¶ 4 (Aff. of J. Spears)], believing that the Agreement comported with the representations made by the salesman previously [Def.'s Resp. App. at 2 ¶ 5 (Aff. of J. Spears)], and that Plaintiff did not perform according to the representations made by the salesman [Def.'s Resp. App. at 2 ¶¶ 5, 6 (Aff. of J. Spears)].
Defendants further contend that Plaintiff charged a monthly finance charge of 1.5 percent on unpaid balances due on the customer accounts it purchased from them [Def.'s Resp. App. at 2 ¶ 5 (Aff. of J. Spears)], and that many of the accounts charged back to them were invoiced more than four years prior to the date this cause of action was filed [Def.'s Resp. App. at 2 ¶ 8 (Aff. of J. Spears)]. In addition to their claim of fraudulent inducement, Defendants raise several additional affirmative defenses they claim makes the Agreement itself illegal and unenforceable as to JSDC, including that the Agreement was usurious, that Plaintiff was in material breach of the account limit of $15,000 established by the Agreement, that the Agreement violated the Truth in Lending Act, and that the statute of limitations barred the action. Defendants further claim that there was a lack of consideration to the Spearses individually as guarantors and that the fraudulent inducement relieves them of their obligation as guarantors.
II PROCEDURAL BACKGROUND
Plaintiff filed its Complaint with this Court on October 18, 2002, and Defendants JSDC and the Spearses filed their Answer and a Motion for Accounting on November 19, 2002, which
Motion was denied on July 16, 2003. Plaintiff filed its Motion for Summary Judgment and Memorandum in Support of same on July 15, 2003. The Appendix to the Motion was filed on July 17, 2003. Defendants filed their Response in Opposition to Plaintiff's Motion for Summary Judgment and Memorandum and Appendix in Support on August 8, 2003. Plaintiff's Reply was filed on August 29, 2003. Defendants' Motion for Leave to File Amended Answer was filed on November 24, 2003.
III. STANDARD
Summary judgment is appropriate only if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any," when viewed in the light most favorable to the non-moving party, "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986) (internal quotations omitted). A dispute about a material fact is "genuine" if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Id. at 248. In making its determination, the court must draw all justifiable inferences in favor of the non-moving party. Id. at 255. Once the moving party has initially shown "that there is an absence of evidence to support the nonmoving party's case," Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986), the non-movant must come forward, after adequate time for discovery, with significant probative evidence showing a triable issue of fact. FED. R. Civ. P. 56(e); State Farm Life Ins. Co. v. Gutterman, 896 F.2d 116, 118 (5th Cir. 1990). Conclusory allegations and denials, speculation, improbable inferences, unsubstantiated assertions, and legalistic argumentation are not adequate substitutes for specific facts showing that there is a genuine issue for trial. Douglass v. United Servs. Auto Ass'n, 79 F.3d 1415, 1428 (5th Cir. 1996) (en bane); SEC v. Recile, 10 F.3d 1093, 1097 (5th Cir. 1993). To defeat a properly supported motion for summary judgment, the non-movant must present more than a mere scintilla of evidence. See Anderson, 477 U.S. at 251. Rather, the non-movant must present sufficient evidence upon which a jury could reasonably find in the non-movant's favor. Id. The court will not, "in the absence of any proof, assume that the non-moving party could or would prove the necessary facts." McCallum Highlands v. Washington Capital Dus, Inc., 66 F.3d 89, 92 (5th Cir. 1995), as modified70 F.3d 26 (5th Cir. 1995). Affidavits, or portions thereof, that are not based on personal knowledge or that are based merely on information and belief cannot be considered in deciding a motion for summary judgment. Richardson v. Oldham, 12 F.3d 1373, 1378-79 (5th Cir. 1994).
Finally, in reviewing the summary judgment evidence, "Rule 56 does not impose upon this Court a duty to sift through the record in search of evidence to support a party's opposition to summary judgment." Ragas v. Tenn Gas Pipeline Co., 136 F.3d 455, 458 (5th Cir. 1998). Rather, the Court need rely only on those portions of the submitted documents to which the nonmoving party directs the Court's attention. Id. See also Forsyth v. Barr, 19 F.3d 1527, 1536-37 (5th Cir. 1994) (finding that two volumes of summary judgment evidence was insufficient to preclude summary judgment when plaintiffs failed to identify specific portions which supported their claims). Moreover, Local Rule 56.5(c) expressly requires that a party filing an appendix "must include in its brief citations to each page of the appendix that supports each assertion that the party makes concerning the summary judgment evidence." To the extent the parties ask this Court to search the documents to find evidence to support the summary judgment arguments, this Court refuses to do so. Rather, this Court will consider only the admissible summary judgment evidence discussed and specifically identified in the parties' motions and responses.
IV DISCUSSION
First Defense: Misrepresentation or Fraudulent Inducement
Defendants claim, as their first affirmative defense, that they were each fraudulently induced to do the following: Jack Spears as President of JSDC to sign the Agreement and the Spearses individually to sign the guaranty. To prove fraudulent inducement, a party is required to show (1) a false and material representation; (2) that is known to be false when made, or made without knowledge of its truthfulness; (3) which was intended to be acted upon; (4) which was relied upon; and (5) which caused damage. Dunbar Med. Sys. Inc. v. Gammex Inc., 216 F.3d 441, 453 (5th Cir. 2000); Formosa Plastics Corp., USA v. Presidio Eng'rs Contractors, Inc., 960 S.W.2d 41, 47-48 (Tex. 1998). A promise to perform an act in the future is fraudulent if the promise is made with the intent to deceive and with no intention of performing as promised. Formosa 960 S.W.2d at 48; Coffel v. Stryker Corp., 284 F.3d 625, 633-34 (5th Cir. 2002).
Where a written contract exists, the parol-evidence rule normally acts to prevent the admission of any extrinsic evidence regarding prior or contemporaneous agreements. National Union Fire Ins. Co. v. CBI Indus. Inc., 907 S.W.2d 517, 521 (Tex. 1995). However, the parol-evidence rule does not prevent the use of oral testimony to establish fraudulent inducement. Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 179 (Tex. 1997). Any evidence presented to prove fraudulent intent must be relevant to the alleged fraudfeasor's intent at the time the representation was made. Formosa, 960 S.W.2d at 48; Coffel, 284 F.3d at 634. Intent is usually a fact question that is not amenable to summary judgment because it depends on the credibility of the witnesses and the weight to be given their testimony. See Spoljaric v. Percival Tours Inc., 708 S.W.2d 432, 434 (Tex. 1986); Coffel, 284 F.3d at 634. Proof of a person's fraudulent intent may be made by either direct or circumstantial evidence, but questions of intent are not usually susceptible to direct evidence. See Spoljaric, 708 S.W.2d at 435. Failure to perform a promise made is not in itself proof of an intent not to perform but is a circumstance that may be considered with other evidence to infer intent. Id. Even slight circumstantial evidence of fraud, when considered together with the failure to perform, is sufficient to establish fraudulent intent. Id. However, evidence that is "so weak that it creates only a mere surmise or suspicion of its existence . . . constitutes no evidence." T.O. Stanley Boot Co. Inc. v. Bank of El Paso, 847 S.W.2d 218, 222 (Tex. 1992).
Defendants' circumstantial evidence of fraud consists of their claim, supported by an affidavit of both the Spearses, that a Chase representative made certain oral representations to the effect that Chase would exert great effort to collect all of JSDC's accounts, even to the extent of preparing all of the paperwork and suing the customers that did not pay, and that Defendants would not lose anything on the deal. Defendants claim that they relied on these material misrepresentations in signing the Agreement and the guaranty, believing that the written Agreement comported with the representations made by the salesman, and that Plaintiff did not perform according to the oral representations. Even taking the affidavit as true, indulging every reasonable inference in favor of the non-movants, and resolving any doubts in their favor, as this Court is required to do, Defendants' affidavit, standing alone, is insufficient evidence, as a matter of law, from which to infer fraudulent intent. Defendants have failed to produce any additional circumstantial evidence, however slight, from which an inference could be made regarding the intent of Plaintiff's agent when the representations were made.
Defendants are not certain of the identity of the Chase representative who allegedly made the misrepresentations to them, only that these representations were made shortly before the date the Agreement and guaranty were signed. [Defs.' Resp. to Pl.'s First Set of Interrogs. ¶¶ 4, 10].
Defendants attempt to bootstrap their evidence of fraudulent intent by claiming that the Agreement itself is evidence because its terms materially differ from the oral representations previously made by the salesman. However, if written contracts are to have any appreciable status over oral agreements in our legal system in their ability to lessen disputes and misunderstanding, they must be presumed to provide a more reliable and certain understanding of the intent of the parties involved in an agreement and the terms of that agreement. See DRC Parts and Accessories, L.L.C. v. VM Motori, S.P.A., 112 S.W.3d 854, 858 (Tex.App.-14th Dist. [Houston] 2003, pet. filed). Although the written Agreement might be some evidence that the salesman's statements were false when they were made, see Burleson State Bank v. Plunkett, 27 S.W.3d 605, 613 (Tex.App.-10th Dist. 2000, pet. denied) (holding that the documents setting out a loan transaction belied the statements made by bank representatives previously), the mere fact that a discrepancy exists between the earlier oral representations and the final signed Agreement cannot be what is meant by additional circumstantial evidence of fraudulent intent, nor has any case of which this Court is aware ever held so. At the least, Defendants would have to allege some additional fact, such as that Plaintiff used oral representations at the time of the signing to induce them to sign the written Agreement and guaranty without reading its terms. See id. at 614 (finding that assurances that signatures were mere formality at time of signing in order to prevent guarantor from reading terms, together with refusal to deliver copies of contract, were sufficient evidence of fraudulent intent). Yet there is no evidence that such was the case. Indeed, the alleged misrepresentations were made some time prior to the signing of the Agreement itself and not at the moment of signing.
In fact, even were the Agreement itself permitted to be evidence of fraudulent intent, it would be just as much evidence that Defendants entered into a written contract with no intent to abide by its terms either, thereby inferring fraudulent intent on their part as well in signing the Agreement while intending to rely instead on the prior oral representations. See DRC Parts, 112 S.W.3d at 859.
Beyond the issue of intent, Defendants must also establish reliance, and again, the presence of the written Agreement undercuts that element. Where Defendants entered into a written Agreement while relying on contrary oral representations, they did so at their own peril and this Court is not inclined to reward them with a claim for fraudulent inducement when Plaintiff seeks to invoke its rights under that Agreement. See id. at 859. Although the law is clear that a written contract does not always disprove the existence of justifiable reliance on prior oral representations as a matter of law, see, e.g. Schlumberger Technology Corporation v. Swanson, 959 S.W.2d 171, 181 (Tex. 1997) (holding that even a disclaimer of reliance or a merger clause does not bar a claim for fraudulent inducement under all circumstances), whether such reliance is justified under the circumstances is a determination that must be established by evaluating the facts on a case-by-case basis. DRC Parts, 112 S.W.2d at 865. The Agreement itself (as well as the Addendum) is a rather short and uncomplicated document, and there is no evidence that Defendants did not in fact read it prior to signing, either as obligor or guarantors. Nothing about Defendants' relationship with the salesman, of whose name they are not even certain, suggests any reason for them to rely on his representations over what was plainly written in the Agreement. Indeed, nothing about the circumstances of the signing is evidence that
Defendants were justified in their reliance on anything other than the written Agreement itself. As such, Defendants fail to produce the evidence that is necessary for them to prove fraudulent intent or justified reliance as a matter of law, and Plaintiff is entitled to summary judgment on the defense of fraudulent inducement.
Second Defense: Usury
Next, Plaintiff argues that it is entitled to summary judgment on Defendants' defense that the Agreement constituted an illegal charge of usurious interest. In Defendants' Original Answer to the Complaint, they appear to claim that the Agreement, under which Plaintiff purchased Defendants' accounts receivable at a 2 percent discount from the invoice, amounts to a daily interest rate and as such constitutes a usurious charge of interest and further that it contains a contingent provision for payment in amounts greater than that allowed by law. Defendants, in their Response to Plaintiff's Motion for Summary Judgment, raise the defense of usury based on the Addendum's requirement that JSDC's invoices to its customers reflect the application of a 1.5 percent finance charge on unpaid balances after 30 days from invoicing, amounting to an illegal 18 percent annual rate of interest. In the alternative, Defendants argue that they only intended to agree to a one time imposition of a 1.5 percent late charge and that, in the absence of an agreement between the parties, the 18 percent rate of interest charged was in excess of the maximum 6 percent rate allowed by statute where no interest rate is agreed upon and therefore illegal and void as a matter of law. Therefore, this Court must determine whether, as a matter of law, either the 2 percent discount charged under the Agreement, or the requirement in the Addendum that JSDC include a 1.5 percent finance charge on unpaid balances, amounts to a usurious charge of interest to Defendants.
Plaintiff complains that Defendants raise this issue for the first time in their Response. This Court construes Defendants' allegations of usury as to the provisions for the 1.5 percent finance charges included in the Addendum to be within the substance of Defendants' defense based on a contingent provision for usurious interest referred to in Defendants' Answer and therefore properly before this Court.
The statutes for computing maximum interest rates at the time the Agreement was signed were complicated; however, our disposition of this issue makes it unnecessary for this Court to determine whether the rates Plaintiff required JSDC to actually charge the customers exceeded the maximum.
Pursuant to TEX. FIN. CODE ANN. § 302.002 (West Supp. 2004), in effect at the time the Addendum was signed.
A usury violation requires three elements: (1) a loan of money, (2) an absolute obligation to repay the principal, and (3) the exaction of a greater compensation than allowed by law for the use of the money by the borrower. First Bank v. Tony's Tortilla Factory Inc., 877 S.W.2d 285, 287 (Tex. 1994); C.C. Port Ltd. v. Davis-Penn Mortg. Co., 61 F.3d 288, 289 (5th Cir. 1995). The Texas Finance Code prohibits contracting for, charging, or receiving interest that is greater than the amount authorized by law. TEX. FIN. CODE ANN. § 305.001 (West 1998). Interest is defined as compensation for the use, forbearance, or detention of money. Id. at § 301.002(a); Tony's Tortilla, 877 S.W.2d at 287. Usury statutes are penal in nature and are to be strictly construed. Tony's Tortilla, 877 S.W.2d at 287. Likewise, parties are presumed to intend to comply with the law, and a court should construe a contract as being non-usurious except where a fair and reasonable construction of the document shows a clear intent of the demanding party to exact an interest rate in excess of that allowed by law. See Hoxie Implement Co., Inc. v. Baker, 65 S.W.3d 140, 146 (Tex.App.-Amarillo 2001, pet. denied).
The statute in effect at the time the Agreement was signed, Tex. Civ. Stat. Ann., art. 5069-1.06 (West 1987), and the statute in effect when the Addendum was signed, TEX. FIN. CODE ANN. § 305.001(a), prohibit essentially the same practices.
The definition of what constitutes interest is likewise essentially the same in the statute in effect at the time the Agreement was signed, Tex. Civ. Stat. Ann., art. 5069-1.01(a), and when the Addendum was signed, TEX. FIN. CODE ANN. § 301.002(a).
As to Defendants' defense that the 1.5 percent monthly charge to be added to its invoices to its customers constituted a usurious charge, the Court notes that that claim or controversy is not before this Court, as Defendants have no standing to contest the legality of that charge. The 1.5 percent charge would be relevant to Defendants' affirmative defense only to the extent Defendants allege that it was intended to be applied against them rather than against their customers, which they do not appear to allege and which this Court nevertheless finds is not provided for under the terms of the Agreement itself.
Even were this Court to allow Defendants to challenge the legality of the interest charged to JSDC's customers, ultimately that would not have the effect of making the Agreement itself illegal and unenforceable as to JSDC or the Spearses. See FSLIC v. Griffin, 935 F.2d 691, 701 (5th Cir. 1991) ("When the Texas Supreme Court has used the term `void' in connection with usury, they seem to imply only that the usurious interest is void. The Texas courts have not held that underlying obligation itself is void for illegality."); Houston Sash and Door Co. v. Heaner, 577 S.W.2d 217, 222 (Tex. 1979) ("The usury statute, furthermore, does not declare the underlying open account transaction void, but merely provides [defendant] a defensive setoff. It is only where the underlying obligation is void for illegality that a guaranty must fall with it.") (citations omitted).
As to Defendants' defense that the 2 percent charge was usurious, the law is clear that the purchase of receivables at a discount is not a loan and usury laws are not applicable to such a transaction. See Ravkind v. Mortgage Funding Co., 881 S.W.2d 203, 205-06 (Tex.App.-Houston [1st Dist] 1994, no writ) (holding that sale of a note at discount is not a loan); Redman Indus v. Couch, 613 S.W.2d 787, 790 (Tex.App.-Houston [14th Dist.] 1981, writ ref'd n.r.e.; superseded by statute on other grounds) (same). A document that is not ambiguous and which provides on its face for the purchase of receivables at a discount is not a loan, absent evidence that the form of the contract was used as a sham or subterfuge, or part of a scheme or artifice to disguise the true nature of the transaction in order to permit the charging of usurious interest. Ravkind, 881 S.W.2d at 206; A.B. Lewis Co. Inc. v. Nat'l Inv. Corp. of Houston, 421 S.W.2d 723, 729 (Tex.App.-Houston [14th Dist.] 1967. writ ref d n.r.e.). Under Texas law, a contract is not ambiguous if, after applying the proper rules of construction, the provision in question can be given a definite meaning or interpretation. Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). A provision of a contract is not ambiguous simply because the parties disagree as to its meaning. REO Indus v. Natural Gas Pipeline Co., 932 F.2d 447, 453 (5th Cir. 1991).
Defendants have presented no summary judgment evidence that the Agreement to purchase accounts at a discount was a sham or artifice to disguise what was in fact a loan, in order to enable Plaintiff to charge usurious interest. The Agreement on its face never characterizes itself as a loan of money. To the contrary, the Agreement unambiguously states that it is for the "purchase [of] the Merchant's existing customer account balances," [Compl. Ex. 1, Agreement ¶ 1], for which a "discount charge of 2% of total sales slips" shall be made, [Compl. Ex. 1, Agreement ¶ 7]. Defendants contend that the 2 percent charge is to be construed as imposing a daily charge and not a one-time discount. Such a contention is simply untenable.
Further, any obligation imposed by the Agreement or Addendum on Defendants is a contingent rather than an absolute obligation. The language clearly anticipates that payment of the accounts is to come from the customers themselves. Defendants' obligation was contingent on the happening of an event of default by the customers, in which case Defendants became liable for repayment under the Agreement's provisions for full "recourse liability" [Compl. Ex. 1, Agreement ¶ 8], and for a chargeback to Defendants of any uncollectible accounts receivable [Compl. Ex. 1, Agreement ¶ 9]. The documents themselves clearly refer to the chargebacks as an obligation to "buy-back" or re-purchase the delinquent accounts receivable. A fair and reasonable construction of the documents produces no evidence of a lending transaction between Plaintiff and Defendants, nor any evidence of an absolute obligation by Defendants to repay any principal.
Absent evidence that either the Agreement or the Addendum were a loan, or that they imposed an absolute obligation for repayment, it is not necessary for this Court to determine whether the documents in question provided for a usurious interest rate, as there can be no usury without an underlying lending transaction with an absolute obligation to repay. In the absence of evidence to the contrary, this Court construes the Agreement as a purchase of receivables at a discount, with a contingent obligation to re-purchase uncollectible accounts, and not as a loan of money. To the extent Defendants' defense of usury is directed to the legality and enforceability of the Agreement and Addendum, this Court finds they are neither usurious nor unenforceable as a matter of law and Plaintiff is entitled to summary judgment on the defense of usury. Third Defense: Breach of Contract for Charges in Excess of $15,000
This Court's determination that the Agreement itself is not usurious is not dispositive of the issue of whether Plaintiff and Defendants actually agreed to the imposition of any charges in excess of the amounts of the actual account balances that may have been included in the chargebacks to Defendants. The Court finds that the Agreement and Addendum only provide for a finance charge to customers for unpaid account balances and do not provide for any finance charge to obligors or guarantors for unpaid chargeback amounts.
Defendants contend that the Agreement limits any individual account to a maximum $15,000 limit, and that Plaintiff allowed credit limits above that amount in breach of the contract. Defendants allege in their Response that the $65,560.27 charged back to them may have included individual customer accounts that exceeded the $15,000 limit, while they claim in their answers to interrogatories that the $65,560.27 chargeback itself was a breach of the Agreement's $15,000 limit [Defs.' Resp. to Pl.'s First Set of Interrogs. ¶ 16]. Plaintiff has presented summary judgment evidence in the form of the affidavit from Ryan Adam [Pl.'s App. to MSJ at 4 ¶ 18] and statements detailing those customer accounts in default that comprised the chargeback to JSDC [Pl.'s App. to MSJ Ex. 3 4]. This evidence shows that no individual account charged back to Defendants exceeded the $15,000 limit. Defendants' doubts as to whether any of the charged-back accounts exceeded the limit, or speculation that they may have done so, is not an adequate substitute for specific facts showing that there is a genuine issue for trial.
In addition, the language of the Agreement is clear that "the credit limit for each customer of the Merchant shall be $15,000.00" [Compl. Ex. 1, Agreement ¶ 4 (emphasis added)] and that Plaintiffs recourse liability against Defendants was "100 per cent of any accounts which the System deems uncollectible for any reason whatsoever, and the Merchant shall remain liable for any deficiency." [Compl. Ex. 1, Agreement ¶ 8]. It stretches the bounds of reason to claim that JSDC is a customer of itself and can therefore avail itself of the limit in order to challenge the amount charged back to it. Neither have Defendants presented any evidence nor have they alleged that the $65,560.27 listed as a charge to "Spears, Jack" [Compl. Ex. 3] was an individual account of Jack Spears as a customer of JSDC, instead of a posting of the chargeback in the same amount that Plaintiff has established by competent summary judgment evidence. Further, the document is clear on its face that Defendants' liability for 100 percent recourse is not subject to the $15,000 limit and that the limit is only applicable to the Merchant's (JSDC) customer accounts. There being no evidence to controvert the fact that the $65,560.27 was a chargeback under the recourse terms of the Agreement and that the terms of the Agreement allowed 100 percent recourse liability not limited by any amount, Plaintiff is entitled to summary judgment on the defense of breach of contract for exceeding the terms of the Agreement limiting customer accounts to $15,000.
Fourth Defense: Truth in Lending Act
Defendants allege an affirmative defense based on their contention that Plaintiff was a creditor that dealt directly with JSDC's customers and failed to disclose all finance charges in violation of the Truth in Lending Act ("TILA"), 15 U.S.C.A. § 1601, et. seq. Defendants further allege that Plaintiff's violation of TILA makes the Agreement unenforceable. Plaintiff argues that the accounts purchased under the Agreement are not credit transactions as defined by TILA, that the Agreement is for a business transaction and therefore not subject to TILA, and that Defendants are not consumers and therefore not persons entitled to bring a cause of action under TILA.
By its very terms, TILA is intended to apply to consumer credit transactions. 15 U.S.C.A. § 1601; Fairly v. Turan-Foley Imports Inc., 65 F.3d 475, 477 (5th Cir. 1995). The Act provides that the adjective "consumer" is specifically intended to characterize a transaction "in which the party to whom credit is offered or extended is a natural person and the money, property or services which are the subject of the transaction are primarily for personal, family, household, or agricultural purposes." 15 U.S.C.A. § 1602(h). Disclosure obligations under TILA relate to "consumer credit transactions." 15 U.S.C.A. § 1631(a); Tower v. Moss, 625 F.2d 1161, 1165-66 (5th Cir. 1980). TILA specifically does not apply to credit transactions involving extensions of credit primarily for business or commercial purposes. 15 U.S.C.A. § 1603(1); 12 C.F.R. § 226.3(a); Tower, 625 F.2d at 1165-66. In determining whether a particular transaction is exempt from coverage of TILA, the purpose of the transaction is controlling. Sapenter v. Dreyco Inc., 326 F. Supp. 871, 874 (E.D. La. 1971). Further, when the purpose of the transaction is to benefit a corporation and its business, the mere fact that individuals acted as guarantors to the transaction does not alter its business purpose. Poe v. First Bank of DeKalb County, 597 F.2d 895, 895-96 (5th Cir. 1979).
In the instant case, the Agreement is titled an "Agreement Between Chase Agri-Credit System, Inc., and Jack Spears Drilling Co., Inc." There is no question that the purpose of the Agreement was to benefit the business purposes of JSDC by providing for Plaintiff's purchase of JSDC's accounts receivable at a discount and that Defendants understood that was the purpose of the Agreement. [Defs.' App. to Resp., Aff. of Jack Spears at 1-2 ¶ 4]. Further, Defendant Jack Spears admits that he entered the transaction with the understanding that it would be "a good deal for . . . my company and his company [Chase]." [Defs.' App. to Resp., Aff. of Jack Spears at 2 ¶ 5]. Defendants' affirmative defense argument fails to recognize the clear meaning of sections 1602(h), 1603(1), and 163 1(a), which exempt the Agreement from the disclosure provisions of TILA. There being no evidence of any purpose other than the plain and evident business purpose of the transaction, this Court finds as a matter of law that the Agreement is not subject to the provisions of TILA and that Plaintiff is entitled to summary judgment on Defendants' affirmative defense based on TILA. Fifth Defense: Limitations
Because this Court's decision that TILA does not apply to the Agreement is based on a determination that the Agreement is a business rather than consumer transaction, it is not necessary to reach the issue of whether Plaintiff is a creditor or whether there was an extension of credit under TILA. In addition, the Court notes that even were this Court to interpret the terms of the Agreement, pertaining to credit limits for customers of JSDC to make it a consumer transaction subject to TILA, Defendants are not the proper parties to bring such a claim. TILA provides for enforcement either by administrative action or by a civil cause of action by a consumer against a creditor who fails to make the required disclosure. 15 U.S.C.A. 1640(a); Tower, 625 F.2d at 1165. Defendants are not consumers and therefore would lack standing to bring such a cause of action.
Defendants' proposed First Amended Answer would seek to remove this defense based on discovery in the case. However, as this defense was raised in Defendants' Original Answer and since the disposition of this case by summary judgment makes Defendants' Motion for Leave to File Amended Answer moot, this Court has retained its analysis and disposition regarding this defense.
Actions on a debt are subject to a four-year limitations period. TEX. Civ. PRAC. REM. CODE ANN. § 16.004(a)(3) (West 2002). A suit to recover money for breach of contract is subject to the limitations period on an action for debt. Kansa Reinsurance Co. Ltd. v. Congressional Mortgage Corp. of Texas, 20 F.3d 1362, 1369 (5th Cir. 1994). A claim for breach of contract accrues and limitations begins to run when a party fails to perform a duty required by the contract. Hoover v. Gregory, 835 S.W.2d 668, 677 (Tex.App.-Dallas 1992, writ denied). Default as determined by the terms of the guaranty is established when a breach of contract occurs as to guarantors. See Ocean Transport Inc. v. Greycas Inc., 878 S.W.2d 256, 267 (Tex.App. — Corpus Christi 1994, writ denied).
Plaintiff's breach of contract action accrued on the date the Agreement obligated Defendants to "buy-back," and Defendants failed to buy-back, the defaulting customer accounts previously sold at a discount to Plaintiff. Defendants were obligated to buy-back delinquent accounts before the end of the next billing cycle after Plaintiff requested the buy-back. [Compl. Ex. 1, Addendum ¶ 11]. The Agreement provided that the request to buy-back an account could take the form of a "charge back" to JSDC's account. [Compl. Ex. 1, Agreement ¶ 10]. Furthermore, the Spearses were obligated by the terms of the Agreement to all the obligations of JSDC under the Agreement.
Plaintiff has presented summary judgment evidence that establishes that delinquent accounts were charged back to Defendants on dates ranging from March 27, 2001 through July 29, 2002. [Pl.'s App. to MSJ Ex. 3 4]. This Court need not determine when the end of the next billing cycle for any of these chargebacks would have occurred as in any case they would all have fallen within the four-year limitations period preceding the commencement of this cause of action on October 18, 2002. Defendants have produced no evidence controverting these chargeback dates. Plaintiff is entitled to summary judgment on the defense of limitations.
Defendants' attempts to create a fact issue regarding whether some of JSDC's transactions with its customers were outside the limitations period are not material to this cause of action. This breach of contract suit is premised on Defendants' failure to buy-back the accounts Plaintiff charged back to them pursuant to the terms of the Agreement.
Sixth Defense: Lack of Consideration to Guarantors
The Spearses claim that there was a lack of consideration to support their guaranties. Under Texas law, separate consideration need not flow directly to a guarantor in order to support a guaranty agreement, where the primary obligation and the guaranty agreement are executed contemporaneously. See Cortez v. Nat'l Bank of Commerce, 578 S.W.2d 476, 480 (Tex.App.-Corpus Christi 1979, writ ref'd n.r.e.). The Agreement and guaranty are part of a unified document, and there is no evidence before the Court that they were not signed contemporaneously; rather, all evidence is to the contrary. Therefore, there can be no affirmative defense based on lack of separate consideration. Instead, this Court will interpret the Spearses' argument for lack of consideration as an argument that Plaintiff's fraudulent inducement of JSDC operated to extinguish any consideration that might have flowed to JSDC, and therefore there was no consideration to support the guaranties signed by the Spearses.
The Court also detects the semblance of an argument in Defendants' Original Answer that the Spearses actually signed the Agreement in the capacity of obligors and not guarantors. Defendants seek to make this defense explicit in their proposed First Amended Answer. Any conclusion of law the Spearses intend for this Court to draw from this argument would be without effect, as the premise itself is false and wholly without merit. The language of the Agreement itself is unambiguous that the Spearses signed in the capacity of guarantors. This disposes of the defense to the extent that it is based on lack of consideration to the Spearses as putative obligors, and, as this is purportedly the basis of the proposed Amended Answer, Defendants' Motion for Leave to File Amended Answer is rendered moot.
A guaranty is not dependent on the force of the underlying agreement, and only illegality that renders the underlying agreement void is sufficient to extend to the guarantor's obligations so as to make them unenforceable as to him. Houston Sash Door, 577 S.W.2d at 222. A void agreement is one that requires no affirmative defense in order to avoid it. Limestone County v. Knox, 234 S.W.131, 134 (Tex.Civ.App.-Dallas 1921, no writ). An affirmative defense that renders the underlying agreement merely voidable by the obligor does not extinguish the force of the agreement as to the guarantor. 68 TEX. JUR.3d § 202 (West 2002). According to The Restatement (Second) of Contracts, "typical instances of voidable contracts are those where . . . the contract was induced by fraud, mistake, or duress." RESTATEMENT (SECOND) OF CONTRACTS § 7 cmt. b (1981); see also FDIC v. Aetna Cas. Sur. Co., 947 F.2d 196, 203 (6th Cir. 1991). The underlying Agreement, which the Spearses signed in their capacity as guarantors, is not such as would be void for illegality. Assuming, arguendo that any of Defendants' defenses were affirmed, these defenses are not such as would make the Agreement void for illegality and on that basis do not entitle the Spearses to have the underlying Agreement rendered unenforceable as to them.
Furthermore, the general rule that a guarantor is not liable unless the principal obligor is liable is subject to the exception that the guarantor may not assert defenses that are personal to the principal obligor. National Sur. Corp. v. U.S., 143 F.2d 831, 835 (5th Cir. 1944); see also Wiman v. Tomaszewicz, 877 S.W.2d 1, 5 (Tex.App.-Dallas 1994, no writ) (holding that limitations defenses personal to principal obligor were not available to guarantor); Houston Sash, 577 S.W.2d at 222 (holding that a guarantor may not interpose an obligor's personal defense of usury). Failure of consideration is a personal defense. See Jonwilco, Inc. v. C.I.T. Fin. Servs., 662 S.W.2d 664, 666 (Tex.App.-Houston [14th Dist] 1983, no writ) (holding failure of consideration is personal defense ineffective against holder-in-due-course). Consequently, failure of consideration where, as here, the primary obligation and the guaranty agreement are executed contemporaneously, is a personal defense belonging to the obligor, JSDC, and may not be asserted derivatively by the Spearses as guarantors. Plaintiff is entitled to summary judgment on the Spearses' defense of lack of consideration to them as guarantors. Plaintiff's Counts of Breach of Contract and Breach of Guaranty
Having disposed of all of Defendants' affirmative defenses by way of summary judgment, this Court now turns to Plaintiff's claim that the Agreement constituted a valid contract between it and JSDC and that JSDC breached that contract when it failed to pay the chargebacks when due under the terms of the Agreement, causing damage to Plaintiff in the amount of the chargebacks plus pre-judgment interest and attorney fees. This Court also considers Plaintiff's claim that the Spearses entered into a valid guaranty agreement with it to personally guarantee payment and performance by JSDC, the primary obligor under the Agreement, and that the Spearses defaulted on their obligations under the guaranty, thereby breaching the guaranty and causing damage to Plaintiff in the amount of the chargebacks plus pre-judgment interest and attorney fees.
Defendants rely wholly on their affirmative defenses to attack the validity of the Agreement and Addendum. The Agreement and Addendum, however, appear on their face to be valid agreements based on mutual consideration. Defendants further claim that Plaintiff has presented no "credible admissible evidence" that the Spearses defaulted on their obligations as guarantors. [Defs.' Resp. at 2]. However, Plaintiff has presented summary judgment evidence in the form of its demand letter for payment sent to Defendants on May 21, 2002 [Compl. Ex. 2], and the affidavit of Ryan Adam, based on his personal knowledge as credit manager for Plaintiff, that Plaintiff received no payment from any of Defendants in response to the demand letter [Pl.'s App. to MSJ, Aff. of R. Adam at 5, ¶ 24]. Defendants have produced no evidence to dispute any of these facts. Therefore, this Court finds that the Agreement and Addendum constitute a valid contract as a matter of law and, summary judgment having been rendered against Defendants on all their affirmative defenses, that JSDC is in breach of the Agreement and the Spearses are in breach of the guaranty.
Attorney Fees and Judgment Interest
Plaintiff argues that it is entitled to attorney fees on its claim for breach of a written contract. As this Court has found that Defendants are in breach of the Agreement and guaranty, Plaintiff is entitled to reasonable attorney fees, pursuant to Texas Civil Practice and Remedies Code, section 38.001(8). Plaintiff is also entitled to statutory pre-judgment interest as provided by state law and post-judgment interest as provided by federal statute. See Quest Medical Inc. v. Apprill, 90 F.3d 1080, 1095 (5th Cir. 1996).
IV. CONCLUSION
After considering all the relevant arguments and evidence, this Court finds that the Agreement and Addendum constitute a valid contract as a matter of law, that Defendants' affirmative defenses are invalid as a matter of law, and that JSDC is in breach of the Agreement and the Spearses are in breach of the guaranty. Plaintiff's Motion for Summary Judgment is hereby GRANTED in full and Defendants' Motion for Leave to File Amended Answer is DENIED as moot.
By 9:00 a.m. on December 15, 2003, Plaintiff shall file an affidavit setting forth the amount of all customer accounts charged back to JSDC under the terms of the Agreement, representing the balances of the accounts due on the date of the chargeback exclusive of any amounts for finance charges due from the account holders themselves. Plaintiff shall also file an affidavit setting forth its reasonable attorney fees and costs. Defendants shall have until 9:00 a.m. on December 29, 2003, to file any controverting affidavits.
SO ORDERED