Timely Amended Claim Avoids Usury Penalty

After just sixteen days on the bench, Austin Bankruptcy Judge Craig Gargotta has penned his first opinion. In Ingalls vs. Cunningham, Adv. No. 06-1236 (Bankr. W.D. Tex. 10/16/07), Judge Gargotta considered whether a creditor which filed an arguably usurious claim could take advantage of Texas's usury cure provision when it amended the claim to delete the offending charges. Judge Gargotta concluded that it could.

In this case, the creditor filed an initial claim for $89,280 on November 19, 2005. On April 24, 2007, the Trustee sought to amend an existing adversary proceeding to include a claim for usury. Ten days later, the creditor objected to the motion and filed an amended claim for $32,041.66 which eliminated the offending charges. The parties entered an agreed order which allowed the amendment but preserved the defendant's right to challenge the usury claim.

On defendant's motion to dismiss, the court considered whether the creditor's amended claim was sufficiently timely to constitute an allowable cure under the Texas Finance Code. Texas has two separate usury cure provisions. If the creditor discovers the usury violation, Texas Finance Code Sec. 305.103 allows the creditor to correct the violation within 60 days from "the date the creditor actually discovered the violation" by giving notice to the obligor. A second section, Texas Finance Code Sec. 305.006, applies when the obligor discovers the violation. It requires the obligor to give the creditor 60 days notice prior to filing suit or filing a counterclaim. During the 60 day period, the creditor may correct the violation in the same manner as under Sec. 305.103 (that is, by giving notice to the debtor).

In this case, the court found that Sec. 305.006 applied because this case involved a suit by the debtor's chapter 7 trustee. The court found that the trustee's motion for leave to amend constituted notice to the obligor of the usury violation triggering the 60 day period to cure. The court found that amending the proof of claim to exclude the allegedly usurious charges consituted an adequate cure. Because the creditor filed its amended claim well within the 60 day cure period, it was not subject to being sued for usury. As a result, the court granted the motion to dismiss.

This case raises several practice points. The first is that a proof of claim in a bankruptcy case can constitute a demand for usurious interest. As a result, alert debtors and trustees should scrutinize the claims filed to see if there are claims which could be asserted. Second, the two usury cure provisions appear to work independently. If a creditor discovers the usury, it has 60 days to cure the violation. However, if the creditor fails to do so, it has a second 60 day period once it receives notice from the obligor. Thus, although Texas has "draconian" usury penalties, a prudent creditor has an easy means to avoid liability if it acts promptly.