LLC v. KH Blake Street, LLC

          Certiorari to the Colorado Court of Appeals Court of Appeals Case No. 16CA1096

          Attorneys for Petitioner: Reilly Pozner LLP John M. McHugh Denver, Colorado

          Attorneys for Respondents: Moye White LLP David A. Laird Denver, Colorado

          Attorneys for Amici Curiae The Hispanic Chamber of Commerce of Metro Denver and The Colorado LGBTQ Chamber of Commerce: Childs McCune, LLC Kyle W. Brenton Denver, Colorado

          OPINION

          HART JUSTICE.

         ¶1 We granted certiorari to clarify the proper method for determining the effective rate of interest charged on a nonconsumer loan to ascertain whether that rate is usurious under Colorado law.^[1] We hold that the effective interest rate should be calculated by determining the total per annum rate of interest that a borrower is subjected to during a given extension of credit. Here, where a forbearance agreement was entered into after an event of default, all charges that accrued during the period of forbearance must be totaled and then annualized using only that timeframe as the annualization period. Such includable interest must then be combined with any interest that continued to accrue pursuant to the original loan terms to determine the effective rate of interest subject to the 45% ceiling set by Colorado's usury statute, section 5-12-103, C.R.S. (2018).

         I. Facts and Procedural History

         ¶2 On April 25, 2013, Blooming Terrace No. 1 ("Blooming Terrace") obtained an $11 million loan from KH Blake Street, LLC ("KH Blake Street"), a special purpose entity organized by Kresher Holdings, LLC. The loan was secured by a deed of trust and memorialized by promissory note. Blooming Terrace paid a $220, 000 origination fee upon execution of that note. The note specified that interest would accrue on the outstanding principal at a rate of 11% per annum. In the event of default, the note provided for a higher default interest rate of 21% per annum. The note required monthly interest payments in the amount of 8% per annum throughout the term of the loan, though these periodic payments did not apply to reduce the principal balance of the loan. In the event of any late monthly payment, a 5% late fee was applicable to the overdue amount. The note was to mature on May 1, 2014. However, KH Blake Street reserved the right to accelerate Blooming Terrace's full loan repayment obligation upon an event of default.

         ¶3 Prior to paying down any portion of the principal, Blooming Terrace defaulted on its monthly payment obligation. KH Blake Street consequently issued notices of default on April 2, 2014, and April 17, 2014. The parties entered into a forbearance agreement on April 22, 2014. At that time, the parties stipulated that the accrued charges due and owing to KH Blake Street under the original loan agreement were $778, 583.33. In exchange for KH Blake Street's agreement not to pursue collection of that sum, or any other remedies, until May 1, 2014, Blooming Terrace agreed to pay a $110, 000 fee. Payment of this new fee did not substitute for any other charges that continued to accrue during the forbearance period, including, but not necessarily limited to, default interest and late fees. Instead, a condition of the forbearance was Blooming Terrace's compliance with all of the original loan terms.

         ¶4 On May 13, 2014, the parties executed a document titled "First Amendment to Forbearance Agreement." This amendment extended the original 9-day forbearance period by an additional 15.5 days. The amended forbearance agreement specified that all loan-related sums were due on or before 1 p.m. on May 16, 2014. As consideration for 15.5 more days of forbearance, 12 of which had already passed, Blooming Terrace agreed to pay KH Blake Street an additional $110, 000. Cumulatively, 24.5 days of forbearance cost Blooming Terrace a total fee of $220, 000.

         ¶5 On May 15, 2014, Blooming Terrace paid the loan principal ($11 million) and all other outstanding charges ($1, 507, 333.53) in full. Two years later, Blooming Terrace sued KH Blake Street and Kresher Holdings, LLC, alleging that the fees, interest, costs, and expenses that accumulated during the post-default forbearance period were usurious in violation of section 5-12-103.

         ¶6 KH Blake Street and Kresher Holdings, LLC filed a motion to dismiss the complaint pursuant to C.R.C.P. 12(b)(5), arguing that the complaint failed to state a claim upon which relief could be granted because the effective interest rate charged was well below the maximum allowable rate of 45% set by Colorado's usury statute. To assess the merits of this argument, the district court conducted a three-step calculation of the effective interest rate. First, it divided the entire amount of charges assessed over the life of the loan ($1, 507, 333.53) by 387 days-the length of both the initial loan term and the period of forbearance-to arrive at a daily rate of $3, 894.91. Second, it multiplied that daily rate by 365 days to come up with a yearly rate of $1, 421, 645.32. And finally, it divided this yearly rate by the unpaid principal balance of $11 million to arrive at an effective interest rate of 12.924%. The court therefore dismissed Blooming Terrace's complaint.

         ¶7 A division of the court of appeals affirmed in a split decision. Blooming Terrace No. 1, LLC v. KH Blake St., LLC, 2017 COA 72, ¶¶ 20-22, ___ P.3d ___. The division majority generally agreed with the district court's calculation method but arrived at a slightly higher (yet still legally enforceable) effective interest rate due to its inclusion of additional charges in its calculation of total interest. Id. at ¶¶ 6, 20-22. Rejecting Blooming Terrace's argument that the forbearance fee should be annualized during the period of forbearance alone, and not over the entire life of the loan, the majority concluded that Colorado's usury statute and our opinion in Dikeou v. Dikeou, 928 P.2d 1286 (Colo. 1996), require courts to "determine whether the effective interest rate is usurious by retrospectively applying it to the entire principal over the life of the loan." Id. at ¶ 19. In other words, the majority interpreted Dikeou as compelling identification of the average rate of interest charged over the life of a loan, and then comparing it with the maximum statutorily-permitted rate of 45%. The majority's approach led it to conclude that the effective rate of interest at issue here was 17.6%-again, well below the statutory usury rim. Id. at ¶ 22. Thus, the majority affirmed the district court's judgment of dismissal. Id. at ¶ 39.

         ¶8 Judge Navarro dissented and presented a different computational approach. Id. at ¶¶ 40-50 (Navarro, J., dissenting). He began by annualizing the total per-day forbearance fee using only the period of forbearance as the annualization period. Id. at ¶¶ 44-45. He then concluded that the resultant per annum rate of interest must be added to the default rate of interest required by the original note since that, too, was accruing during the period of forbearance. Id. at ¶ 45. These two rates, when combined, exceeded the 45% maximum ...