law-usury | Texas Finance Code | Choice of Law | Forum Selection Clause | Preemption |
Contrary to Public Policy in Forum State
USURY CAUSE OF ACTION UNDER TEXAS LAW
The essential elements of a usurious transaction are: "(1) a loan of money, (2) an absolute obligation to
repay the principal, and (3) the exaction of a greater compensation than allowed by law for the use of the
money by the borrower." First Bank v. Tony's Tortilla Factory, Inc., 877 S.W.2d 285, 287 (Tex.1994). The
Texas Finance Code defines the term "loan" as "an advance of money that is made to or on behalf of an
obligor, the principal amount of which the obligor has an obligation to pay the creditor," and an "obligor" is "a
person to whom money is loaned or credit is otherwise extended." TEX. FIN.CODE ANN. § 301.002(a)(10),
(13) (Vernon 2006). A "creditor" is "a person who loans money or otherwise extends credit." See TEX. FIN.
CODE ANN. § 301.002(a)(3) (Vernon 2006).
USURY AND CHOICE OF LAW, FORUM SELECTION
MNI also claims that enforcement of the forum-selection clause would unjustly preclude its day in court
because Pennsylvania law does not allow a corporation to maintain a cause of action for usury. See 15 Pa.
Cons. Stat. § 1510. Such a result, MNI claims, would subvert Texas’ public policy that favors preventing acts
of usury. See Steve Sash & Door Co. v. Ceco Corp., 751 S.W.2d 473, 476 (Tex. 1988). Its argument is
based on the choice-of-law provisions in the Master Agreement and Restructuring Agreement
that designate Pennsylvania law as the law governing the contracts. However, MNI’s inability to
assert its usury claim in Pennsylvania does not create a public policy reason to deny enforcement of
the forum-selection clause. In In re AutoNation, Inc., 228 S.W.3d 663 (Tex. 2007), we addressed a
similar contention as to employment law. There, the contention was that Texas public policy
mandated that Texas law apply to employment agreements governing Texas employees even
though the agreement in question designated Florida law. Id. at 669. We said that absent a Texas
statute requiring suit to be brought in Texas, the existence of Texas statutory law in an area did not
establish such Texas public policy as would negate a contractual forum-selection provision. Id.
Further, MNI has made no showing that even if Pennsylvania law is applied, Pennsylvania would not
apply Texas law in determining the parties’ rights. See id. at 671 (O’Neill, J. concurring). Thus, MNI
did not provide evidence that enforcing the forum-selection clause would subvert Texas’ public
policy in regard to usury. . In re Lyon Financial Services, Inc., No. 07-0486, 257 S.W.3d 228 (Tex. June 20,
2008)(per curiam) (orig. proc.) (mandamus, forum selection clause, motion to dismiss improperly denied)
A usurious transaction is composed of three elements. There must be (1) a loan of money; (2) an
absolute obligation to repay the principal; and (3) the exaction of a greater compensation than allowed by
law for the use of the money by the borrower. See, e.g., First Bank v. Tony's Tortilla Factory, Inc., 877 S.W.
2d 285, 287 (Tex. 1994); Domizio v. Progressive County Mut. Ins. Co., 54 S.W.3d 867, 872 (Tex. App.-
Austin 2001, pet. denied); Wiley-Reiter Corp. v. Groce, 693 S.W.2d 701, 703 (Tex. App.- Houston [14th
Dist.] 1985, no writ). "Interest" is defined under the Finance Code as "compensation for the use,
forbearance, or detention of money." See Tex. Fin. Code ' 301.002(a)(4). "Usurious interest" is defined as
"interest that exceeds the applicable maximum amount allowed by law." Id. ' 301.002(a)(17). Because usury
statutes are penal in nature, they are strictly construed, and if there is any doubt as to legislative intent to
punish the activity complained of under usury statutes, the doubt must be construed in favor of the lender.
Domizio, 54 S.W.3d at 872; Tygrett v. Univ. Gardens Homeowners' Ass'n, 687 S.W.2d 481, 484-85 (Tex.
App.- Dallas 1985, writ ref'd n.r.e.).
FRANK F. STARR v. HENRY DART; from Harris County; 14th district (14‑07‑00673‑CV, ___ SW3d ___, 07-
24-08, pet. denied)(breach of settlement agreement, penalty, usury)
M E M O R A N D U M O P I N I O N
Appellant Frank F. Starr appeals from the trial court=s judgment on cross-motions for summary judgment in
favor of appellee Henry Dart. In a single issue, Starr contends that the trial court erred by denying his
summary judgment motion and granting that of Dart, because the settlement agreement Dart sued to
enforce imposed usurious interest. Consequently, Starr argues that the settlement agreement is void and
Dart owes Starr penalties and attorney=s fees under the Texas Finance Code. We affirm.
Factual and Procedural Background
Starr and Dart are parties to a Settlement and Release Agreement (the "Settlement Agreement") under
which Dart agreed to dismiss a lawsuit and transfer all of his stock in Edugration, Inc. to Starr in
consideration for $424,000.00. This amount was to be paid by Starr as follows: (1) $100,000.00 on August
1, 2005; (2) $162,000.00 on June 1, 2006; and (3) $162,000.00 on January 1, 2007. Starr also agreed to
pay an additional $1,000.00 per day for any late payments.
Starr made the first payment of $100,000.00, and in accordance with the Settlement Agreement, Dart
dismissed the lawsuit with prejudice. However, Starr failed to timely make the second payment. Starr and
Dart then negotiated an amendment to the Settlement Agreement, entitled "Addendum A." Under
Addendum A, Starr agreed to pay Dart $22,000, representing the "liquidated damages" that had accrued
between June 1, 2006, and June 23, 2006, as a result of Starr=s failure to timely make the second payment.
Starr and Dart also agreed that the remaining balance of $324,000.00 would be due on or before October 2,
2006, and Starr again agreed to pay $1,000.00 per day as liquidated damages for each day after October
2, 2006, that the full payment was not made. However, Starr failed to pay the $324,000.00 due October 2,
2006, or any liquidated damages as provided in Appendix A.
Dart sued Starr to enforce the Settlement Agreement and Addendum A, and moved for summary judgment
on claims for breach of contract and attorney=s fees. Starr responded to Dart=s motion and filed a cross-
motion for summary judgment, asserting that the $1,000.00 per day liquidated damages provision was
an unenforceable penalty and constituted usurious interest under the Texas Finance Code. In the trial
court=s judgment granting Dart=s motion for summary judgment and denying Starr=s cross-motion for
summary judgment, signed July 24, 2007, the trial court ordered that the liquidated damages provision was
an unenforceable penalty, but granted judgment in favor of Dart in the amount of $324,000.00, as well as
attorney=s fees and pre- and post-judgment interest. This appeal followed.
Analysis of Starr=s Issue
Starr contends that the late fees of $1,000.00 per day are not only an unenforceable penalty as the trial
court held, but also are interest charges far exceeding what is usurious under Texas law. As a result, Starr
argues that the excessive charges both extinguish his debt and obligate Dart to pay him statutory penalties
and attorney=s fees. When, as here, the parties file cross-motions for summary judgment, one of which was
granted and the other denied, we review the summary judgment evidence presented by both sides,
determine all questions presented, and affirm or reverse accordingly. See Valence Operating Co. v.
Dorsett, 164 S.W.3d 656, 661 (Tex. 2005).
A usurious transaction is composed of three elements. There must be (1) a loan of money; (2) an absolute
obligation to repay the principal; and (3) the exaction of a greater compensation than allowed by law for the
use of the money by the borrower. See, e.g., First Bank v. Tony=s Tortilla Factory, Inc., 877 S.W.2d 285,
287 (Tex. 1994); Domizio v. Progressive County Mut. Ins. Co., 54 S.W.3d 867, 872 (Tex. App.CAustin 2001,
pet. denied); Wiley-Reiter Corp. v. Groce, 693 S.W.2d 701, 703 (Tex. App.CHouston [14th Dist.] 1985, no
writ). AInterest@ is defined under the Finance Code as Acompensation for the use, forbearance, or
detention of money.@ See Tex. Fin. Code ' 301.002(a)(4). AUsurious interest@ is defined as Ainterest that
exceeds the applicable maximum amount allowed by law.@ Id. ' 301.002(a)(17). Because usury statutes
are penal in nature, they are strictly construed, and if there is any doubt as to legislative intent to punish the
activity complained of under usury statutes, the doubt must be construed in favor of the lender. Domizio, 54
S.W.3d at 872; Tygrett v. Univ. Gardens Homeowners= Ass=n, 687 S.W.2d 481, 484B85 (Tex. App.CDallas
1985, writ ref=d n.r.e.).
B. Starr=s Contentions
According to Starr, the late fees in this case constitute interest because they are compensation for the
detention of money, which Aarises when a debt has become due and the debtor has withheld payment
without a new contract giving him the right.@ See Tygrett, 687 S.W.2d at 483. Starr also cites Pentico v.
Mad-Wayler, Inc., 964 S.W.2d 708 (Tex. App.CCorpus Christi 1998, pet. denied), for the proposition that the
late fees are interest because A[l]ate charges fall into the category of a contingent additional charge which
[is] treated as interest and added to the interest contracted for if a payment is received after the expiration
of the grace period.@ Id. at 715 (stating that late charges assessed for failure to timely make payments
under promissory note constituted interest because the statutory definition includes compensation for the
obligor=s detention of money past the date it is due and payable).
Dart concedes that in some instances the usury statutes may apply to late fees, but argues that the usury
statutes do not apply to the Settlement Agreement and Addendum A, because the first essential element of
a usurious transaction is missing; namely, there is no loan of money. See, e.g., Crow v. Home Sav. Ass=n of
Dallas County, 522 S.W.2d 457, 459B60 (Tex. 1975) (AIt is a fundamental principle governing the law of
usury that it must be founded on a loan or forbearance of money; if neither of these elements exist, there
can be no usury.@); Garcia v. Tex. Cable Partners, L.P., 114 S.W.3d 561, 566 (Tex. App.CCorpus Christi
2003, no pet.) (holding that late fees charged to cable television subscriber did not constitute usury because
a lending transaction was not involved); Domizio, 54 S.W.3d at 873 (stating that Afor the usury laws to apply,
there must be an overcharge by a lender for the use forbearance, or detention of the lender=s money@);
Bexar County Ice Cream Co., Inc. v. Swensen=s Ice Cream Co., 859 S.W.2d 402, 406 (Tex. App.CSan
Antonio 1993, writ denied), overruled on other grounds, Barraza v. Koliba, 933 S.W.2d 164 (Tex. App.CSan
Antonio 1996, writ denied) (noting that [t]here is a line cases holding that late charges are not usurious
interest if their payment is not pursuant to a credit or lending transaction); Potomac Leasing Co. v. Housing
Auth. of the City of El Paso, 743 S.W.2d 712, 713 (Tex. App.CEl Paso 1987, writ denied) (holding lease
agreement did not involve a lending or credit transaction and therefore the usury laws did not apply); see
also Sage St. Assocs. v. Northdale Constr. Co., 863 S.W.2d 438, 440 (Tex. 1993) (holding that constitutional
provision proscribing usurious interest did not apply to the rate of prejudgment interest set by a court
because its language Agoverns only lending and credit transactions@).
Moreover, in Wiley-Reiter Corp. v. Groce, this Court reasoned that the usury statutes did not apply to a
settlement agreement because it did not involve a lending transaction or a debtor-creditor relationship. See
Wiley-Reiter Corp., 693 S.W.2d at 703. In that case, Groce sued the Wiley-Reiter Corporation and others
(AWiley-Reiter@) over his investment in certain gas leases in which Wiley-Reiter held an interest, claiming
breach of contract, common law fraud, fraud in connection with a transaction involving stock or real estate,
and violation of the Deceptive Trade Practices Act and the Texas Securities Act. Id. at 702. The parties
entered into a written settlement agreement in lieu of Groce=s obtaining a confession of judgment for
punitive damages under the DTPA and other statutory claims. Id. The settlement agreement provided that
Wiley-Reiter would pay Groce=s out-of-pocket damages and attorney=s fees on an installment basis. Id.
Groce also agreed to convey, sell or assign working interests in certain oil and gas leases to Wiley-Reiter,
provided all payments were made on time. Id. at 703. The settlement agreement also authorized Groce
to confess judgment in his favor in the amount of three times the balance of the remaining payments due
under the terms of the agreement if Wiley-Reiter failed to timely pay. Id. at 702.
When Wiley-Reiter missed two payments, Groce sought and was granted judgment in the amount of
$97,920.00, which represented three times the remaining balance due. Id. Wiley-Reiter appealed, claiming
that the amount of the judgment included interest of $72,420.00Cthe equivalent of 284%Cand so clearly
violated the usury statutes as a matter of law. Id. Groce responded that the settlement agreement did not
violate the usury statutes and that Wiley-Reiter failed to preserve the issue for appeal. Id. at 702B03.
Turning to the first issue concerning whether the settlement agreement was usurious, the court determined
that the usury laws did not apply. As the court explained, AAppellants did not borrow any money from
appellee, nor did Appellee charge appellant[s] for the use or detention of appellee=s money. Thus, the
fundamental principle of the usury laws did not exist.@ Id. at 703. Further, the court noted that the requisite
credit relationship which might have entitled Wiley-Reiter to invoke the protection of the usury laws did not
exist, as the settlement agreement Awas not in any way based on a lending transaction.@ Id. Thus, the
court concluded, the settlement agreement Adid not involve a debtor-creditor relationship@ as
contemplated by the usury statutes. Id. The court next considered whether Wiley-Reiter had failed to
preserve the issue for appeal, and found that it had failed to do so because it did not properly raise the
issue below. Id. at 704.
Starr attempts to distinguish Wiley-Reiter by arguing that the holding was limited to the facts of the case, it
was dicta because the issue was waived, and the terms did not involve a transfer of an interest in property.
Starr also argues that the basis for the usury claim, a provision that called for the payment of three times the
balance of the payments due, could not have been usurious interest because the amounts claimed to be
usurious Awere included within the principal amount of the judgment@ and were meant to equate to the
punitive or statutory damages the plaintiff sought. In contrast, Starr contends the payment and Alate fee@
provisions of the settlement agreement in this case amount to a promissory note from Starr to Dart, and
there is no good policy reason to treat such a settlement agreement differently than any other contract.
However, although we have carefully considered Starr=s arguments, we find Wiley-Reiter=s analysis of the
issue instructive and applicable to this case. We agree with the Wiley-Reiter court=s reasoning that a
settlement agreement such as this one, freely entered into by parties to litigation to compromise
and settle their dispute, does not involve a lending or credit transaction and is not the type of
agreement the usury laws were intended to govern. Further, Starr has not cited to us any case that
holds, contrary to Wiley-Reiter, that such a settlement agreement may be subject to the usury laws.
Therefore, based on Wiley-Reiter and our review of the case law and the Finance Code, we reject Starr=s
contention that the Settlement Agreement and Appendix A were usurious. We overrule Starr=s issue.
Having concluded that the Settlement Agreement and Addendum A were not lending or credit transactions
subject to the usury laws, we overrule Starr=s issue and affirm the trial court=s judgment.
/s/ Wanda McKee Fowler
Judgment rendered and Memorandum Opinion filed July 24, 2008.
Panel consists of Chief Justice Hedges and Justices Fowler and Boyce.
 The compromise also included Groce=s agreement to non-suit one of the individual defendants at the
time and, if all parties performed their obligations under the terms of the agreement, to execute a
take‑nothing judgment against individual and corporate defendants. Wiley-Reiter Corp., 693 S.W.2d at
703. In the event all obligations were performed, Groce agreed to waive any cause of action he might have
under the Texas Securities Act or any other cause of action which might arise from his continued ownership
interest in the leases and wells. Id.
 Starr cites several cases he contends have extended the reach of the usury laws since Wiley -Reiter, but
these cases are distinguishable because they involve either promissory notes or commercial or consumer
contracts for goods or services, and none apply the usury statutes to a settlement agreement. See Hoxie
Implement Co., Inc. v. Baker, 65 S.W.3d 140, 154B55 (Tex. App.CAmarillo 2001, pet. denied) (on reh=g)
(holding that, because a jury found buyer did not breach allegedly usurious agreement to purchase farm
machinery from seller, no creditor/debtor relationship existed upon which to conclude that seller committed
usury); Pentico, 964 S.W.2d at 715B16 (holding that erroneously-prepared amortization schedule
accompanying demand letter seeking late charges for failure to timely make payments on promissory note
constituted interest); Hardwick v. Austin Gallery of Oriental Rugs, Inc., 779 S.W.2d 438, 443 (Tex. App.
CAustin 1989, writ denied) (holding that late charge demanded by holder of promissory note for late
payments constituted interest); Commerce, Crowdus & Canton, Ltd. v. DKS Constr., Inc., 776 S.W.2d 615,
617B18 (Tex. App.CDallas 1989, no writ) (holding that interest charged in construction contracts was
usurious without addressing whether the contracts constituted loans or lending transactions); Butler v. Holt
Mach. Co., 741 S.W.2d 169, 173B74 (Tex. App.CSan Antonio 1987, writ denied) (holding late charges paid
under extension of credit to refinance outstanding balances on three contracts to purchase tractors and an
open account constituted interest).