July 22, 2017

Colorado Court of Appeals: Forbearance Fees and Interest Charges on Loan Were Not Usurious

The Colorado Court of Appeals issued its opinion in Blooming Terrace No. 1, LLC v. KH Blake Street, LLC on Thursday, May 18, 2017.

Usury—Motion to Dismiss—Attorney Fees.

KH Blake Street, LLC and Kresher Holdings, LLC (collectively, lender) loaned Blooming Terrace No. 1 LLC (borrower) $11 million for an origination fee of $220,000. The loan was secured by a deed of trust and memorialized by a promissory note (note) that contained an accrual interest rate of 11% per annum, a default interest rate of 21% per annum, a 5% late charge on any late monthly payments, and an $110,000 exit fee. The note required monthly interest payments calculated at the rate of 8% per annum, with none of the monthly payments being applied to the principal.

Borrower defaulted. The parties executed a forbearance agreement whereby lender agreed to forbear from foreclosing on the deed of trust in exchange for a $110,000 forbearance fee plus continued accrual of default interest, late charges, and certain additional fees. At that time, the amount of all outstanding charges was $778,583.33. The loan was not paid when due, and the forbearance agreement was amended for $220,000. Borrower then paid off the loan, including all outstanding interest, fees, and costs.

Borrower sued lender, claiming that the fees, interest, costs, and expenses exceeded the 45% per annum interest allowable under Colorado’s usury law. Lender moved to dismiss under C.R.C.P. 12(b)(5), arguing the loan fees did not constitute interest above the maximum allowable rate. The district court agreed, concluding that the effective rate of interest was 12.924% based on the total amount of interest charged during the life of the loan. The complaint was dismissed. Lender sought attorney fees pursuant to the note, and the district court awarded attorney fees in the amount of $15,407.20 to lender.

On appeal, borrower argued that the court of appeals should annualize the forbearance charges. The district court had measured the interest charged on a purely per annum rate based on the entire amount of interest charges over the life of the loan. The court concluded that borrower’s computation would not accurately reflect the rate of interest actually charged. Although it found the district court overlooked some charges, the court agreed with the district court’s computation approach and calculated an interest rate of 17.60%. The court concluded that the interest charges were not usurious and the complaint failed to state a claim for which relief could be granted

Borrower then argued it was error to grant attorney fees, asserting that because the forbearance agreements were not loan documents, the litigation regarding those agreements was not related to any loan document. The note provided for attorney fees incurred in any litigation related to any “Loan Document.” This litigation concerned the interest charged by lender under both the note and the forbearance agreements. Therefore attorney fees were properly awarded.

Borrower further contended that the district court abused its discretion in calculating the fees awardable to lender. The court rejected this contention.

The judgment was affirmed and the case was remanded for determination of the amount of reasonable appellate attorney fees to be awarded to lender.

Summary provided courtesy of The Colorado Lawyer.

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