TCI Courtyard Inc et al v. Wells Fargo Bank, NA

Filing 15

MEMORANDUM OPINION AND ORDER: For the reasons herein stated, the court affirms the bankruptcy court's (1) Order Allowing Claim of Wells Fargo Bank (Claim No. 1-1), entered June 27, 2013; (2) Order Denying Confirmation of Debtor's Plan, entered June 27, 2013; and (3) Order Dismissing Case, With Prejudice, entered June 27, 2013, and dismisses this appeal. The clerk of court is directed to prepare, sign, and enter judgment in accordance with this Memorandum Opinion and Order pursuant to Rule 8016(a) of the Federal Rules of Bankruptcy Procedure. (Ordered by Judge Sam A Lindsay on 5/20/2014) (tln)

IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
TCI COURTYARD, INC.,
Appellant,
v.
WELLS FARGO BANK, NA,
Appellee.

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Civil Action No. 3:13-CV-3465-L

MEMORANDUM OPINION AND ORDER
Before the court is Appellant TCI Courtyard, Inc.’s (“TCI Courtyard”) appeal of the
bankruptcy court’s (1) Order Allowing Claim of Wells Fargo Bank (Claim No. 1-1), entered June
27, 2013; (2) Order Denying Confirmation of Debtor’s Plan, entered June 27, 2013; and (3) Order
Dismissing Case, With Prejudice, entered June 27, 2013. After consideration of all briefing by the
parties, the record on appeal, and the applicable law, the court affirms the bankruptcy court’s orders.
I.

Factual and Procedural Background

This appeal originates from a proof of claim filed by Wells Fargo Bank, NA (“Wells Fargo”)
in the Chapter 11 bankruptcy of TCI Courtyard, a corporation that owns an apartment complex
located in Holland, Ohio. Wells Fargo filed a proof of claim asserting a claim of $15,064,672.83
based on a promissory note secured by a mortgage on the apartment complex (the “Promissory
Note”). TCI Courtyard objected to Wells Fargo’s proof of claim, arguing that it failed to reflect
accurately the amounts owed to Wells Fargo. At a hearing conducted by the bankruptcy court,
Wells Fargo presented evidence that the total amount due on the Promissory Note included
$4,905,346.82 in compounded default interest. After the evidence was presented, TCI Courtyard

Memorandum Opinion and Order – Page 1

argued for the first time that compound interest is disfavored under Illinois law and that the
Promissory Note called for only simple interest. The bankruptcy court struck TCI Courtyard’s legal
argument regarding compound interest as an untimely “ambush” and did not specifically interpret
the default interest provision of the Promissory Note. Doc. 1-4 at 174. The court found that Wells
Fargo’s calculations including compound rather than simple interest were “reasonable and
appropriate and consistent with the loan documents.” Id. at 173. Accordingly, it allowed Wells
Fargo’s claim as proposed, denied confirmation of TCI Courtyard’s plan, and dismissed the
bankruptcy petition.
II.

Legal Standard – Bankruptcy Appeals

In a bankruptcy appeal, district courts review bankruptcy court rulings and decisions under
the same standards employed by federal courts of appeal: a bankruptcy court’s findings of fact are
reviewed for clear error, and its conclusions of law de novo. In re Dennis, 330 F.3d 696, 701 (5th
Cir. 2003); In re National Gypsum Co., 208 F.3d 498, 504 (5th Cir. 2000). A bankruptcy court’s
“[f]indings of fact, whether based on oral or documentary evidence, shall not be set aside unless
clearly erroneous.” Fed. R. Bankr. P. 8013. A finding is clearly erroneous and reversible only if,
based on the entire evidence, the reviewing court is left “with the definite and firm conviction that
a mistake has been committed.” In re Dennis, 330 F.3d at 701 (citation omitted). In conducting this
review, the court must give due regard to the opportunity of the bankruptcy judge to determine the
credibility of the witnesses. Id.; In re Young, 995 F.2d 547, 548 (5th Cir. 1993) (quoting Fed. R.
Bankr. P. 8013). A bankruptcy judge’s evidentiary rulings are reviewed for an abuse of discretion.
See In re Repine, 536 F.3d 512, 518 (5th Cir. 2008).

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III.

Analysis

TCI Courtyard raises three issues on appeal, contending that the bankruptcy court: (1) erred
in allowing Wells Fargo’s claim to be computed with compound default interest; (2) improperly
concluded that TCI Courtyard’s objection to the use of compound interest was untimely; and (3)
mistakenly denied confirmation of TCI Courtyard’s plan and dismissed its voluntary petition for
bankruptcy. The parties agree that this appeal essentially turns upon whether the bankruptcy court
erred in allowing Wells Fargo’s claim to be computed with compound default interest. The court
therefore need not determine whether the bankruptcy court incorrectly found TCI Courtyard’s
objection and legal argument to be untimely.
The September 28, 2001 Promissory Note is governed by Illinois law. See Doc. 1-2 at 224.
Illinois law “does not favor compound interest.” Harrington v. Kay, 483 N.E.2d 560, 567 (Ill. App.
Ct. 1985); see also Tadros v. Kuzmak, 660 N.E.2d 162, 169 (Ill. App. Ct. 1995). Thus, unless a
contract or statute explicitly calls for compound interest, Illinois courts do not award it. See, e.g.,
Weigel Broad. Co. v. Smith, 682 N.E.2d 745, 752 (Ill. App. Ct. 1996) (“In general, compound
interest is available only when there is no statutory bar and the parties specifically agree to
compound interest.”); Martin v. Heinold Commodities, Inc., 608 N.E.2d 449, 456 (Ill. App. Ct.
1992) (“[A]bsen[t] . . . express statutory or contractual language providing for prejudgment interest
to be compounded, interest must be computed on a simple basis.”), rev’d in part on other grounds,
643 N.E.2d 734 (Ill. 1994).
TCI Courtyard and Wells Fargo disagree on the proper interpretation of the Promissory Note.
The Promissory Note states that “[s]o long as an Event of Default remains outstanding . . . interest

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shall accrue at the Default rate and, to the extent not paid when due, shall be added to the Principal
Amount[.]” Doc. 1-2 at 221. The Default Rate is defined as the “[l]esser of (i) the Contract Rate
plus five percent (5%) per annum; or (ii) the maximum amount permitted by applicable law.” Id.
at 215. The Contract Rate of interest is “[a] rate of interest equal to seven percent (7.00 %) per
annum.” Id. at 214.
TCI Courtyard contends that this provision calls for simple interest. It states that “per
annum” has been defined by Illinois courts to designate simple interest and that the Promissory Note
here states that the default interest is to be computed per annum. Doc. 10 at 8 & 10. Illinois courts
have explained that “‘[p]er annum’ merely denotes the frequency at which the applicable rate of
interest is to be applied and does not permit a compounded annual method of computation.” Helland
v. Helland, 573 N.E.2d 357, 359 (Ill. App. Ct. 1991). Wells Fargo disagrees with this contractual
interpretation. It urges that the Promissory Note in this case specifically provides that unpaid
interest is to be added to the principal amount of the loan, which indicates that the parties purposely
contracted for compound interest. Doc. 13 at 18. Wells Fargo distinguishes the cases cited by TCI
Courtyard since all such cases “merely state a per annum rate and are otherwise silent a[s] to the
method of calculation.” Id. (citing Weigel, 682 N.E.2d at 752; Helland, 573 N.E.2d at 358; &
Harrington, 483 N.E.2d at 570).

The court concludes that the plain terms of the Promissory

Note mandate compound interest. Black’s Law Dictionary defines compound interest as “[i]nterest
paid on both the principal and the previously accumulated interest.” Black’s Law Dictionary 887
(9th ed. 2009). “Compound interest exists when accrued interest is added to the principal sum, and
the whole is treated as a new principal for the calculation of the interest for the next period.” Reaver
v. Rubloff-Sterling, L.P., 708 N.E.2d 559, 562 (Ill. App. Ct. 1999); see also In re Martinson, No. 00-

Memorandum Opinion and Order – Page 4

81593, 2000 WL 33964097, at *7 (Bankr. C.D. Ill. Dec. 29, 2000). Here, the Promissory Note
unambiguously states that after default, the interest, “to the extent not paid when due, shall be added
to the Principal Amount[.]” Doc. 1-2 at 221 (emphasis added). That is, the contract not only sets
forth that default interest is to be computed per annum, but also that the accrued interest shall be
paid on both the principal and the previously accumulated interest. The parties were not silent on
the matter, as they specifically agreed that the interest would be added to the principal amount if not
paid when due. To hold otherwise – that the use of the term “per annum” mandates simple interest
notwithstanding the remaining contract language – would entirely ignore the parties’ use of the
clause “to the extent not paid when due, shall be added to the Principal Amount[.]”
In Illinois, “[c]ontract language must not be rejected as meaningless or surplusage, and it is
presumed that the terms and provisions of a contract are purposely inserted and that the language
was not employed idly.” Lempa v. Finkel, 663 N.E.2d 158, 166 (Ill. App. Ct. 1996). “[I]f the
contract terms are unambiguous, the parties’ intent must be ascertained exclusively from the express
language of the contract . . . , giving the words used their common and generally accepted meaning.”
Shields Pork Plus, Inc. v. Swiss Valley Ag Serv., 767 N.E.2d 945, 949 (Ill. App. Ct. 2002). A
contract is ambiguous if “the language used is susceptible to more than one meaning . . . or is
obscure in meaning through indefiniteness of expression[.]” Id. Ambiguity is not presumed from
the parties’ disagreement over the contract’s meaning; rather, it must be apparent from the language
itself. Id.
Here, the contractual language is not susceptible to more than one meaning. It is apparent
that the parties intended for the default interest rate to be compounded. To conclude that the parties
meant for the interest rate to accrue as simple interest at the Default Rate would ignore as surplusage

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the language in the contract that default interest “shall be added to the Principal Amount.” The
contract did not only state that “interest shall accrue at the Default Rate,” and the court will not
ignore the remaining language of the provision. Accordingly, the bankruptcy court did not err in
allowing Wells Fargo’s claim to be computed with compound default interest. Because the court
finds no error in the Order Allowing Claim of Wells Fargo Bank (Claim No. 1-1), TCI Courtyard’s
challenges to the Order Denying Confirmation of Debtor’s Plan and Order Dismissing Case, With
Prejudice – both of which are based upon the allegedly improper calculation of interest – are without
merit.
IV.

Conclusion

For the reasons herein stated, the court affirms the bankruptcy court’s (1) Order Allowing
Claim of Wells Fargo Bank (Claim No. 1-1), entered June 27, 2013; (2) Order Denying
Confirmation of Debtor’s Plan, entered June 27, 2013; and (3) Order Dismissing Case, With
Prejudice, entered June 27, 2013, and dismisses this appeal. The clerk of court is directed to prepare,
sign, and enter judgment in accordance with this Memorandum Opinion and Order pursuant to Rule
8016(a) of the Federal Rules of Bankruptcy Procedure.
It is so ordered this 20th day of May, 2014.

_________________________________
Sam A. Lindsay
United States District Judge

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