Cunningham v. LeGrand et al

Filing 103

MEMORANDUM OPINION AND ORDER directing that the plaintiff is permitted to raise his usury challenge at this stage of the case; that the post-default interest rate of the note be deemed limited to 18 percent per year and to that extent is not a usurious interest rate; that Legacy be deemed a holder in due course. Signed by Judge John T. Copenhaver, Jr. on 6/10/2013. (cc: attys; any unrepresented parties) (tmh)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF WEST VIRGINIA
AT CHARLESTON
RYAN E. CUNNINGHAM,
Plaintiff,
v.

Civil Action No. 2:11-0142

RONALD F. LEGRAND and
LEGACY DEVELOPMENT SC
GROUP, LLC,
Defendants.

MEMORANDUM OPINION AND ORDER

Pending is defendants' brief containing their proposal
for the form of the court's judgment order, filed September 7,
2012.

I.

The factual development that follows is taken from the
memorandum opinion and order entered today that denies Mr.
Cunningham's motion for judgment as a matter of law.

Mr. Cunningham alleged in this action that he desired
to sell some stock he owned in a limited liability company
called Mountain Country Partners, LLC.

As a condition of

receiving the stock sale proceeds, he asserted that the managing
member of Mountain Country Partners, LLC, defendant Ronald
LeGrand, first required him to sign a promissory note.

Mr.

Cunningham was also required by Mr. LeGrand to sign an
accompanying security agreement.

Mr. Cunningham alleged that Mr. LeGrand told him the
signed documents were necessary in order to comply with a
federal securities regulation.

He asserted he was assured by

Mr. LeGrand that the note and security agreement were mere
formalities never to come due and owing.

It is undisputed that

Mr. Cunningham signed the two documents and received the
promised $1.025 million from Mountain Country Partners, LLC.

Mr. LeGrand, on behalf of Mountain Country Partners,
LLC, later transferred the note and security agreement to
defendant Legacy Development SC Group, LLC (“Legacy”), a limited
liability company also managed by Mr. LeGrand.

Legacy later

demanded that Mr. Cunningham pay the amount due on the note.

Mr. LeGrand denied throughout that he told Mr.
Cunningham that the note and security agreement were mere
formalities that would never come due.

Legacy asserts that the

$1.025 million received by Mr. Cunningham was a loan that must
be repaid according to the note's terms.

Mr. Cunningham pled three claims for relief in this
action.

First, he asserted that there was no consideration for

either the note or security agreement that he entered into with
2

Mountain Country Partners, LLC.

Second, he asserted that the

note and security agreement were a sham transaction that neither
he, Mountain Country Partners, LLC, nor Mr. LeGrand intended to
be binding.

Third, he claimed that he was induced to enter into

the note and security agreement by fraud inasmuch as Mr. LeGrand
allegedly told him that the note and security agreement were
mere formalities that would never come due and owing.

Legacy asserted a counterclaim for breach of contract
against Mr. Cunningham arising out of his failure to comply with
the terms of the note and security agreement.

Trial commenced August 28, 2012, and concluded with the
jury's August 30, 2012, verdict.

The court fashioned special

interrogatories that were submitted to the jury.

The jury's

answers to those questions resulted in the defendants'
entitlement to a money judgment on the note, with interest to be
determined by the court.

The matter of interest had not

previously been joined in the case given the parties' central
differences on the nature of the underlying transaction.

The

late and contingent ripening of the matter of interest is
indicated by the following colloquy between the court and counsel
immediately preceding closing arguments:
THE COURT: And are the parties in agreement that if
the jury reaches the last question on the form having
to do with a finding, should the jury make it, that Mr.
3

Cunningham had defaulted on the note and security
agreement, is it the agreement of the parties that the
jury may be informed that such a result would result in
a verdict for the defendant Legacy in the amount of the
note of 1,025,000 dollars, together with interest, and
further that in such case, it would be for the
court to fix the amount of interest? Is that agreeable
with the defendant, first of all?
MR. NEELY: Yes, sir[, for the plaintiff].
MR. HISSAM: Yes, it's agreeable with the defendants,
Your Honor.
(Trans. at 248).

Based upon the jury's finding that Mr. Cunningham
defaulted on his obligations under the note and security
agreement, the court is now obliged to calculate the interest due
and owing.

The note, dated March 26, 2007, specifies as follows:

FOR VALUE RECEIVED, the undersigned Ryan E. M.
Cunningham hereinafter called "Maker") unconditionally
promises to pay to the order of Mountain Country
Partners, LLC, a West Virginia limited liability
company, and its successors and assigns (hereinafter
called the "Holder") . . . the principal sum of
One Million Twenty-Five Thousand Dollars
($1,025,000.00), together with interest at the rate of
five percent (5%) per annum from the date of this Note,
on March 26, 2017 (the "Maturity Date").
. . . .
Maker agrees if full payment is not made within (15)
days after the Maturity Date or any earlier
acceleration of this Note, Holder may charge and
collect from Maker a late charge equal to five (5%)
percent of the amount due on such date. . . . From
the date of any actual or deemed default by Holder,
interest shall accrue on the principal balance at the
highest lawful rate of interest allowable under the
commercial laws of the State of Florida . . . .
4

Upon the occurrence of a default, Holder enjoys all the
remedies provided under . . . the "Security Agreement"
. . . and of a secured creditor under the Uniform
Commercial Code for the State of Florida.
Notwithstanding such default rights, interest and
remedies, no circumstances shall entitle Holder to
receive at any time any charges not allowed or
permitted by law or any interest in excess of the
maximum allowed by law.
(Defs.' Tr. Ex. 1 (emphasis added)). 1

On October 16, 2012, Legacy became the subject of an
involuntary bankruptcy proceeding in the District of South
Carolina.

All action was thus suspended herein until May 14,

2013, at which time Legacy advised the court that the bankruptcy
court had granted relief from the automatic stay on April 25,
2013.

1

Pursuant to paragraph 6 of the Security Agreement, which
governed decreases in collateral value, Legacy notified Mr.
Cunningham on March 2, 2011, that he was obliged to provide
additional collateral valued at, or reduce his debt obligation
by, $400,000. He was further notified that his failure to do so
would be treated as a default. When Mr. Cunningham failed to do
so, he was deemed in default and the payment obligation was
accelerated.
5

II.

A.

Interest

A two-part calculation appears appropriate under the
terms of the note.

First, a portion of the interest accrues from

the date of the note forward to default, which is March 19, 2011.
The rate for that period is five percent, resulting in an
interest amount of $204,157.53.

Second, the balance of interest

due and owing following default is "the highest lawful rate of
interest allowable under the commercial laws of the State of
Florida . . . ."

(Id.)

That interest amount, however, is

limited by the savings clause above that restricts "any interest"
to "the maximum allowed by law."

The defendants assert as

follows:
Florida law provides that, for loans exceeding $500,000
in amount or value, the highest rate of interest
allowable is 25% per year. Fla. Stat. § 687.03 (setting
rate of 18% unless amount loaned is greater than
$500,000, in which case maximum rate is set by Fla.
Stat. § 687.071); Fla. Stat. § 687.071 (setting 25% as
maximum allowable rate). Accordingly, from the date of
default, the rate of interest to be applied to the
principal is 25% per year.
(Defs.' Brief on Jgt. Ord. at 3).
The court previously concluded that Florida law
governed the note and the security agreement:

6

Generally, West Virginia will recognize the
parties’ choice of law provision “unless the chosen
state has no substantial relationship to the parties to
the transaction or unless the application of the law
would be contrary to the fundamental public policy of
the state whose law would apply in the absence of a
choice of law provision.” Bryan v. Mass. Mut. Life Ins.
Co., 364 S.E.2d 786, 790 (W. Va. 1987). See also Gen.
Elec. Co. v. Keyser, 275 S.E.2d 289, 293 (W. Va. 1981);
cf. Lee v. Saliga, 373 S.E.2d 345, 351 (W. Va. 1988)
(“Our traditional contract conflict rule gives
substantial deference to the state where the contract
is made and where it is to be performed, assuming both
incidents occur in the same state. This rule is subject
to two qualifications: (1) that the parties have not
made a choice of applicable law in the contract itself;
and (2) the law of the other state does not offend our
public policy.”).
Both instruments bear a relationship to Florida
inasmuch as LeGrand . . . is a citizen of Florida. In
addition, Legacy (the current holder of the note and
security agreement) is a Florida limited liability
company. Because the court is not aware of any
fundamental public policy that would be offended by the
application of Florida law, and because plaintiff does
not object to application of Florida law, the choice of
law provisions are deemed valid. Thus, the note and
security agreement, as well as defendants’ counterclaim
for breach of contract, are governed by Florida law.
Cunningham v. LeGrand, No. 2:11-0142, slip op. at 14-15 (S. D. W.
Va. Jun. 5, 2012)(emphasis added).

While Mr. Cunningham earlier

did not object to the application of Florida law, he now asserts
that, "The [note’s] demand for penalty interest in the amount of
$476,509.02 is clearly usurious and contrary to well established
West Virginia law, e.g., the Bryan and General Electric cases

7

cited by the Court" in its June 5, 2012, memorandum opinion and
order.

(Pl.'s Resp. at 2). 2

As support for his assertion, Mr. Cunningham cites West
Virginia Code section 47-6-5(b), which provides as follows:
Parties may contract in writing for the payment of
interest for the loan or forbearance of money at a rate
not to exceed eight dollars upon one hundred dollars
for a year, and proportionately for a greater or less
sum, or for a longer or shorter time, including points
expressed as a percentage of the loan divided by the
number of years of the loan contract.
W. Va. Code § 47-6-5(b).

There is a more recent statutory

enactment, however, that must be considered.

West Virginia Code

section 47A-1-1 created the West Virginia Lending and Credit Rate
Board ("Board").

The Board is authorized

to prescribe semiannually the maximum interest rates
and finance charges on loans, credit sales or
transactions, forbearance or similar transactions made
pursuant to this section subject to the provisions,
conditions and limitations hereinafter set forth and to
authorize lenders, sellers and other creditors to
charge up to the maximum interest rates or finance
charges so fixed. The rates prescribed by the board are
alternative rates and any creditor may utilize either
the rate or rates set by the board or any other rate or
rates which the creditor is permitted to charge under
any other provision of this code.
2

Though he now raises multiple West Virginia contacts with
the execution and performance of the note and security agreement,
the court does not understand Mr. Cunningham to seek
reconsideration of the validity of the entire choice-of-law
analysis. Mr. Cunningham instead appears to desire a declaration
that the default interest provision found in the note is
unenforceable as violative of West Virginia public policy on
usurious contracts.
8

Id.

The most recent rate setting executive order by the Board,

dated October 5, 1999, directs as follows:
As an alternative to any statutory rate, any person
[which defined in West Virginia Code §31A-1-2(n) means
"any individual, partnership, society, association,
firm, institution[], company, public or private
corporation, state, governmental agency, bureau,
department, division or instrumentality, political
subdivision, county court, municipality, trust,
syndicate, estate or any other legal entity whatsoever,
formed, created or existing under the laws of this
State or any other jurisdiction"] may charge a maximum
finance charge not exceeding eighteen percent per annum
calculated according to the actuarial method, on all
loans, credit sales or transactions, forbearance or
similar transactions, regardless of purpose.
This Order is effective December 1, 1996 and,
pursuant to West Virginia Code §47A-1-1(g), shall
remain in full force and effect until such time as the
Board meets and prescribes different maximum rates of
interest and/or maximum finance charges.
(W. Va. Exec. Ord. at 2 (Oct. 5, 1999), available at http://www.
dfi.wv.gov/about/Documents/WVLendingandCreditRateBoardOrderOct199
9.pdf).

The maximum applicable interest rate on the note is thus

18%.

Mr. Cunningham additionally relies upon West Virginia
Code section 47-6-6, seeking to escape entirely an interest
obligation on the note and, additionally, to penalize the
defendants for using a putatively usurious rate:
All contracts . . . made directly . . . for the loan .
. . at a greater rate of interest than is permitted by
law shall be void as to all interest provided for in
any such contract . . . and the borrower or debtor may,
in addition, recover from the original lender or
9

creditor or other holder not in due course an amount
equal to four times all interest agreed to be paid and
in any event a minimum of one hundred dollars. Every
usurious contract . . . shall be presumed to have been
wilfully made by the lender . . . , but a bona fide
error, innocently made, which causes such contract or
assurance to be usurious shall not constitute a
violation of this section if the lender or creditor
shall rectify the error within fifteen days after
receiving notice thereof.
W. Va. Code § 47-6-6 (emphasis added).

The applicable choice of law rules are the same as
applied by the court at summary judgment.

When exercising

diversity jurisdiction, a federal district court must apply the
choice-of-law rules of the state in which it sits. Klaxon Co. v.
Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941); Volvo Const.
Eqpt. N. Am., Inc. v. CLM Eqpt. Co., Inc., 386 F.3d 581, 599-600
(4th Cir. 2004).

Thus, the conflicts rules of West Virginia

apply.

The procedural posture of the case, however, has
changed considerably since the June 5, 2012, summary judgment
order in which the court concluded Florida law applied to the
parties’ contractual dispute.

Now that the jury has rendered its

verdict, the focus is on the interest due and owing under the
note.

The court must thus determine the applicable post-default

interest rate from the face of the note.

The note initially

mentions "the highest lawful rate of interest allowable under the
10

commercial laws of the State of Florida" as the applicable
measure.

Though that rate would presumably be 25% if Legacy's

counterclaim were being maintained in Florida, it is inapplicable
here inasmuch as it would offend a fundamental tenet of the
public policy of West Virginia, the site of the forum where
enforcement of the note obligation is sought.

See, e.g., General

Elec. Co. v. Keyser, 166 W. Va. 456, 463, 275 S.E.2d 289, 293
(1981) ("The most significant reason for denying effect to choice
of laws provisions in usury cases is the strong public policy
surrounding usury laws . . . .").

Since the note's 25% interest obligation may not be
used, the court returns to the face of the note, which
additionally specifies that "interest [thereon shall not be] in
excess of the maximum allowed by law."

The "maximum allowed by

law" in this action is 18%, the maximum lawful West Virginia
rate.

It is with this rate that the court will calculate the

balance of interest due and owing following default.

This

analysis also necessarily negates application of both the
interest bar and the quadruple damage provision found in section
47-6-6. 3

3

The quadruple damage provision is inapplicable. The
original lender on the note, Mountain Country Partners, LLC, is
not a party to this action; and, as discussed more fully infra,
Legacy is a holder in due course, which status exonerates it from
(continued . . .)

11

The defendants offer two contentions to avoid this
result.

First, they assert that Mr. Cunningham never raised the

usury defense affirmatively at an earlier juncture.

It is true

that the defense would ordinarily be deemed waived under such
circumstances.

The facts necessary for disposing of the defense,

however, did not require development through discovery.

The

matter of interest was simply not an issue in the case until the
jury rendered its verdict.

It is thus appropriate for Mr.

Cunningham to have advanced his usury challenge at that point. 4

the penalty according to the statutory text of section 47-6-6.
Even if the interest bar and the quadruple damages provision
were somehow applicable, the court would not enforce either under
the circumstances. The claim, in the nature of an offensive
cause of action, simply comes too late. The claim was not a
subject of the pretrial order and could have been pled at the
outset. The presence of such a remarkable penalty at an earlier
point in the action would doubtless have influenced the parties’
litigation and settlement decisions. Allowing its use in the
case now, after not receiving mention at the time for receiving
motions pursuant to Federal Rule of Civil Procedure 50 as the
defendants suggest, is thus quite prejudicial and foreclosed.
4

The circumstances here bear no resemblance to those in
Georgia Pacific Consumer Products, LP v. Von Drehle Corp., 710
F.3d 527 (4th Cir. 2013), a case in which the court of appeals
found an abuse of discretion in the district court permitting a
defendant to assert preclusion defenses 16 months after the
defendant learned of the substantive basis for the defenses.
In Von Drehle, three months following an earlier remand by
the court of appeals, Von Drehle moved to amend its answer to
include affirmative defenses of claim and issue preclusion. The
district court initially denied the request as untimely and
prejudicial but, following a jury trial that ended in GeorgiaPacific's favor, it reconsidered, allowed the late-rising
defenses and then entering judgment in Von Drehle's favor.
Unlike this case, Von Drehle moved to amend its answer not
(continued . . .)

12

Second, the defendants assert that “Plaintiff offers no
authority to suggest that Florida’s statutory maximum interest
rate would offend West Virginia’s fundamental public policy when
applied to an arm’s length transaction between sophisticated
business partners.”

(Reply at 7).

Neither section 47A-1-1 nor

section 47-6-6, however, admit of such an exception.

In sum, no prejudice redounds to the defendants in
allowing the usury defense to be considered at this stage of the
case.

As noted, it is only now when the court has, for the first

time, undertaken to fix the interest due and owing on the
obligation.

Inasmuch as the matter of calculating interest did

not arise until post-verdict, and would not have been adjudicated
at an earlier point in the case pending the jury’s findings, the
court is unable to conclude that Mr. Cunningham failed to act
seasonably.

The court, accordingly, finds good cause supports

considering the usury defense at this point in the case,
especially inasmuch as it raises a profound issue of public

only post-judgment but post appeal. Second, 480 days elapsed
between the defense coming available to Von Drehle and its
initial request to rely upon the defenses in the district court.
Third, the district court permitted the preclusion defenses postjudgment but failed to explain why, in doing so, it abandoned its
earlier ruling in the case that Von Drehle unjustifiably delayed
in pursuing them to Georgia-Pacific's prejudice. These factors
and others distinguish Von Drehle from this action.
13

policy emphasized by both the Legislature and the court of last
resort in this state.

B.

Holder in Due Course

A finding respecting an additional matter is necessary
prior to the entry of Judgment herein.

The proposed Judgment

includes a provision that treats Legacy as a holder in due
course.

The requirements for holder-in-due-course status under

Florida law are as follows:
The instrument when . . . negotiated to the holder
does not bear such apparent evidence of forgery or
alteration or is not otherwise so irregular or
incomplete as to call into question its authenticity;
and
The holder took the instrument:
1. For value;
2. In good faith;
3. Without notice that the instrument is
overdue or has been dishonored or that there
is an uncured default with respect to payment
of another instrument issued as part of the
same series;
4. Without notice that the instrument
contains an unauthorized signature or has
been altered;
5. Without notice of any claim to the
instrument described in s. 673.3061; and

14

6. Without notice that any party has a
defense or claim in recoupment described in
s. 673.3051(1).
Fla. Stat. Ann. § 673.3021; see also Daiwa Products, Inc. v.
Nationsbank, N.A., 885 So. 2d 884, 888 (Fla. Dist. Ct. App. 4
2004) (noting "[A] 'holder in due course' is a 'holder who takes
an instrument without 'apparent evidence of forgery or
alteration" for value, in good faith, and without notice of
certain claims and defenses.'”) (citation omitted).

The court has previously discussed the issue of
Legacy's status pursuant to section 673.3021.

See Cunningham v.

Legrand, No. 2:11-0142, slip op. at 26-31 (S.D. W. Va. Jun. 5,
2012).
case.

That discussion came at the summary judgment stage of the
Summary judgment for the defendants was reserved based

upon this observation:
The question of Legacy’s status as a holder in due
course . . . depends on the resolution of . . . [a]
crucial issue of fact. That is, if the factfinder
determines that LeGrand fraudulently induced the note,
and then later signed the assignment of the note for
both the transferee and transferor, a lack of good
faith, among other things, would be shown. Far from
constituting good faith, such circumstances –- if
proven -- would demonstrate the antithesis of
reasonable commercial standards of fair dealing. In
short, the disputed acts of fraud preclude summary
judgment on plaintiff’s request for a declaration that
Legacy was not a holder in due course of plaintiff’s
note.
(Id. at 31).

Inasmuch as the the jury's findings remove any

15

impediment to Legacy qualifying as such, the court concludes that
Legacy is entitled to the status of a holder in due course.

III.

Based upon the foregoing discussion, the court ORDERS
as follows:

1.

That the plaintiff be, and hereby is, permitted to
raise his usury challenge at this stage of the case;

2.

That the post-default interest rate of the note be, and
hereby is, deemed limited to 18 percent per year and to
that extent is not a usurious interest rate; and

3.

That Legacy be, and hereby is, deemed a holder in due
course.

The Clerk is directed to forward copies of this written
opinion and order to counsel of record and any unrepresented
parties.
DATED:

June 10, 2013

John T. Copenhaver, Jr.
United States District Judge

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