Free Brief - District Court of Colorado - Colorado

Case 1:01-cv-01857-RPM-MJW

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Filed 07/10/2006

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Civil Action No. 01-cv-01857-RPM-MJW ATTORNEYS TITLE GUARANTY FUND, INC. as successor in interest and assignee of Joseph H. Fallon, IV Plaintiff, v. PROLAND MANAGEMENT, LLC; CRAIG NELSON; and TOM WARNES, Defendants. DEFENDANTS' MEMORANDUM REGARDING APPLICATION OF COLORADO USURY LAW Defendants Proland Management, LLC ("Proland"), Byron T. ("Tom") Warnes and Craig Nelson (collectively, the "Defendants"), through their undersigned counsel, submit the following memorandum of points and authorities to assist the Court in determining the proper application of Colorado usury law to the transactions that are the subject of this action. A. COLORADO LAW LIMITS LAWFUL INTEREST TO A RATE NOT EXCEEDING FORTY-FIVE PERCENT PER ANNUM. A usurious loan is not enforceable in accordance with its terms. Becker v. Marketing and Research Consultants, Inc., 526 F.Supp. 166 (Dist. Colo.1981). Two Colorado statutes set the usury limits for Colorado non-consumer transactions, the Consumer Credit Code (C.R.S. § 5-12-101, et seq.) and the Colorado Criminal Code, C. R. S. Title 18, Chapter 15, which defines criminal 1

Case 1:01-cv-01857-RPM-MJW

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usury. The Colorado Consumer Credit Code sets the maximum allowable interest on non-consumer transaction at forty-five percent per annum. "The parties to any bond, bill, promissory note, or other instrument of writing may stipulate therein for the payment of a greater or higher rate of interest than eight percent per annum, but not exceeding forty-five percent per annum..." C.R.S. § 5-12-103 (1), emphasis supplied. "Interest" is defined as " the sum of all charges payable directly or

indirectly by a debtor and imposed directly or indirectly by a lender as an incident to or as a condition of the extension of credit to the debtor, whether paid or payable by the debtor, the lender, or any other person on behalf of the debtor to the lender or to a third party." C.R.S. § 5-12-103 (2) , emphasis supplied. The calculation of the rate of interest must be made under the assumption that the loan will be paid in accordance with its agreed terms: "The rate of interest shall be deemed to be excessive of the limit under this section only if it could have been determined at the time of the stipulation by mathematical computation that such rate would exceed an annual rate of forty-five percent when the rate of interest was calculated on the unpaid balances of the debt on the assumption that the debt is to be paid according to its terms and will not be paid before the end of the agreed term." C.R.S. § 5-12-103 (1). The civil usury statute is paralleled by like, but not identical, terms proscribing criminal usury. As in the civil statute, the rate is set at forty-five percent per annum. "Any person who knowingly charges, takes, or receives any money or other property as a loan finance charge where the charge exceeds an annual percentage rate of forty-five percent or the equivalent for a longer or shorter period commits the crime of criminal usury, which is a class 6 felony." C.R.S. § 18-15104 (1), emphasis supplied.

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B.

THE FALLON NOTE PROVIDED A RATE OF INTEREST EXCEEDING FORTY-FIVE PERCENT PER ANNUM, BEFORE MATURITY. The economic terms of the loan transaction between Dr. Fallon and Proland Management,

LLC are not in dispute1. Copies of the Fallon Note and the Settlement Statement for the loan transaction are attached to Affidavit of Craig Nelson submitted in opposition to Plaintiff's Motion for Summary Judgment as Exhibits B and C, respectively. Under the assumption that the Fallon Note was to be paid debt was paid according to its terms, the applicable factors in the calculation of the interest rate for purposes of application of the usury laws include: (a) the date of the loan (June 27, 2001); (b) the maturity date of the loan (July 3, 2001 as to $340,500, and July 10, 2001, as to an additional $340,500); (c) the interest payable as scheduled in the Note ($5,000); and (d) the other charges payable to Dr. Fallon in connection with the Loan (Loan Origination Fee of $50,000 and Brokerage Fees of $15,000 ­ See Lines 701 and 808 of the Settlement Statement). After maturity, the unpaid balance was to bear interest at the "default rate" of twenty-five percent (25%) per annum. The term of the Fallon Note was six (6) days as to $340,500 and thirteen (13) days as to the remaining $340,000. The maximum amount of funds that Dr. Fallon could claim to have loaned to Proland was not more than $616,000 ($681,000, less included fees payable to Dr. Fallon totaling

For the first time in this case, in a pleading captioned "Motion for Determination as a Matter of Law that the Interest Rate of the Promissory Note is Not Usurious" Plaintiff asserts that the brokerage fee listed in the Settlement Statement was not payable to Dr. Fallon. In making this argument, Plaintiff relies upon the putative transcript of a deposition of Dr. Fallon taken in another matter. For reasons that will be more fully set forth in this Memorandum, whether Dr. Fallon retained the brokerage fee should be irrelevant to the application of Colorado usury law; to the extent the ultimate disposition of those fees is relevant, the assertions in Plaintiff's referenced Motion are disputed. 3

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$65,000). Thus, the fees and interest equated to a per diem rate of 1.9% per day for the first six days and 1.6 % per day for the thirteen day term of the balance2. This equates to an annual rate of 693.5% and 577%, respectively. Since the maximum allowable contract rate of interest is 45% per annum, the Fallon loan transaction was usurious. Plaintiff asserts that the brokerage fee paid in connection with the loan should not be counted as interest. If the brokerage fee is not counted as interest, as argued by Plaintiff, this change reduces the amount of usurious interest, but does not change the fact that the loan was usurious, if paid as agreed. Moreover, Plaintiff's reliance upon Concord Realty Co. v. Continental Funding Corp.,

776 P.2d 1114 (Colo. 1989) to exclude the brokerage fee from the "interest" component of the Fallon loan is misplaced. The Supreme Court, in Concord, did not expressly address the treatment of brokerage fees paid to the lender, and subsequently disbursed to a third party. Moreover, the Colorado Supreme Court has limited and distinguishes its holding in Concord. In Dikeou v. Dikeou, 928 P.2d 1286 (Colo. 1996), the Supreme Court held that the calculations of interest rates under C.R.S. § 5-12-103 should be consistent, insofar as practicable, with the definition of "finance charges" under the Consumer Credit Code. Dikeou , supra, at 1292. Under that standard, all charges imposed by the lender, including brokerage fees, are included in the calculation of interest. This construction of the statute also is consistent with the calculation of finance charges under the criminal statute. The definition of loan finance charge in the criminal usury statue provides: (a) "Loan finance charge" means the sum of all charges payable directly or indirectly

Although Defendant's calculation employs a "per diem" rate, this is merely a mathematical step in determining the "annual" rate, as provided in both the Colorado civil and criminal usury rates. 4

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by the debtor and imposed directly or indirectly by the lender as an incident to or as a condition of the extension of credit, whether paid or payable by the debtor, the lender, or any other person on behalf of the debtor to the lender or to a third party, including, but not limited to, any of the following types of charges that are applicable: (I) Interest or any amount payable under a point, discount, or other system of charges, however denominated; (II) Premium or other charge for any guarantee of insurance protecting the lender against the debtor's default or other credit loss; (III) Charges incurred for investigating the collateral or credit-worthiness of the debtor or for commissions or brokerage for obtaining the credit. C.R.S. 18-15-101 (6), emphasis supplied. Under Dikeou, it is clear that Colorado usury limitations are to be calculated in a manner consistent with the method of calculations of finance charges, under the consumer provisions of the Consumer Credit Code. This includes annualizing the credit charges, as well as including all charged made by or for the benefit of the lender in the amount treated as "interest." To do otherwise would permit lenders to avoid the already generous usury rate in Colorado by mere wordsmithing. CONCLUSION Based upon the facts and argument set forth above, Defendants submit that the Court must find that the pre-default terms of the Fallon Note violated the Colorado usury statutes. Accordingly, the lawful balance of the note on the maturity date (July 10, 2001) could not lawfully exceed the principal ($616,000), plus interest at the rate of forty-five per cent per annum on that amount for the thirteen day term of the Note ($4,745). Plaintiffs claims should be so limited.

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Dated: July 10, 2006

Respectfully submitted, THOMAS F. QUINN, P.C. s/ Thomas F. Quinn By: ______________________________________ Thomas F. Quinn 1600 Broadway Ste 1675 Denver CO 80202 Telephone: 303.832.4355 Fax: 303.672.8281 Email: [email protected] Counsel for Defendants Craig Nelson Tom Warnes and Proland Management LLC

CERTIFICATE OF SERVICE I hereby certify that a true and correct copy of the foregoing pleading was served upon Plaintiffs by electronic transmission through the ECF filing system on this 10th day of July 2006: Stacy A. Carpenter, Esq. [email protected]

s/ Thomas F. Quinn __________________________________________

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