Appendix — Walters v. First Tennessee Bank, N. A.

In the Supreme Court of the United States

OCTOBER TERM, 1988

WILLIAM S. WALTERS, JR.,

Petitioner,

VS.

FIRST TENNESSEE BANK,

N.A. MEMPHIS,

Respondent.

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

Larry E. Parrisu, P.C.

Larry E, PARRISH

The Crescent Center

6075 Poplar Avenue

Suite 400

Memphis, Tennessee 38119

(901) 767-8000

Attorney for Petitioner

January 1989

E. L. MENDENHALL, INCc., 926 Cherry Street, Kansas City, Mo. 64106, (816) 421-3030

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INDEX TO APPENDIX

Opinion of the United States Court of Appeals, Sixth

Circuit in Walters v. First Tennessee Bank, N.A.

Memphis, 855 F.2d 267, (6th Cir. 1988) -................... Al

Judgment of United States District Court, Western

District of Tennessee, Western Division (Filed Au-

I ee ch eilenasihitnended cadets inp enmennnnicisednonion A25

Order Directing Entry of Judgment in United States

District Court, Western District of Tennessee, West-

ern Division (Filed August 15, 1986) —.......200000202.... A28

Ruling on Post-Trial Arguments and Motions in

United States District Court, Western District of

Tennessee, Western Division (Filed June 4, 1986) ....A31

Civil Docket Continuation Sheet .....0.02..0000000 ee A46

hi han sdnnentnceannnsanaian A49

Order of United States Court of Appeals, Sixth Circuit

CO I cs iecoeniancnscntinnns A59

a ia iceneseeniahianiicnioanionesbiuions A60

Opening Brief of Appellant, William S. Walters, Jr. ....A67

Appellant’s Petition to Rehear —......0.2000000000e eee A86

Joint Brief of Appellee, First Tennessee Bank N.A.

ee ol ahal cinco sll tadinensisechniasocblanaleslnincueccadanie A94

Reply Brief of Appellant, William S. Walters, Jr. ....A105

UI I Sa sich nase Moccacblevabllennch lensing A115

Constitutional Provisions and Statutes Involved ........ A120

Response of Walters to First Tennessee Motion to

Dispose of Pending Motion for Summary Judgment,

and to Apply Collateral Estoppel to Usury Issues

in Cause Nos. 82-2391-H and 82-2783-H _...000000000...... A125

Al

APPENDIX

William S. WALTERS, Jr.,

Plaintiff-Appellant,

es

FIRST TENNESSEE BANK, N.A. MEMPHIS, et al.,

Defendants-Appellees.

Nos. 86-6031 to 86-6033.

United States Court of Appeals,

Sixth Circuit.

Argued Oct. 8, 1987.

Decided Aug. 16, 1988.

Rehearing Denied Oct. 14, 1988.

Borrower brought action individually and for himself

and other shareholder of corporation against bank in

connection with loans extended by bank to borrower

personally and to corporation, alleging usury, breach of

contract, and fraudulent conduct in violation of federal

racketeering statutes. The United States District Court

for the Western District of Tennessee, McRae, J., entered

judgment in favor of bank, and borrower appealed. The

Court of Appeals, John W. Peck, Senior Circuit Judge,

held that: (1) borrower could not recover from bank

under federal usury statute; (2) bank did not perpetrate

fraud or breach loan agreement by charging borrower

and borrower’s corporation announced public prime rate

that was higher than unannounced lower rate charged

to other short-term borrowers; and (3) under Tennessee

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law, note bearing variable interest rate was not too in-

definite to be enforceable.

Affirmed.

1. Federal Courts (Key) 616

Issue of whether statute of limitations had been tolled

with regard to usury claim could not be raised for first

time on appeal. National Bank Act, 12 U.S.C.A. § 86.

2. Bankruptcy (Key) 2395

Limitation of Actions (Key) 110

Shareholders’ derivative action against bank in which

usury claim was raised and bankrupt corporation was

named as nominal defendant was not action against

debtor’s estate subject to Bankruptcy Code’s automatic

stay provision, so that two-year limitations period appli-

cable to usury claim was not tolled. National Bank Act.

12 U.S.C.A. § 86; Bankr.Code, 11 U.S.C.A. §§362, 362 (a)

(1), (¢) (2).

3. Banks and Banking (Key) 181

Evidence was insufficient to establish that bank vio-

lated federal usury statute, absent showing that over-

charges on side notes secured by preferred ship mortgage

were intentional, rather than as result of miscalculation

caused by changes in federal discount rate. National

Bank Act, 12 U.S.C.A. §§ 85, 86; Ship Mortgage Act,

1920, 30, Subsec. H, 46 U.S.C.A.App. § 926.

4. Banks and Banking (Key) 100, 181

Bank did not perpetrate fraud or breach loan agree-

ment by charging borrower and borrower’s corporation

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announced public prime rate that was higher than un-

announced lower rate charged to other short-term bor-

rowers; bank presented evidence that certain categories

of loans were routinely excluded in industry in deter-

mining bank’s prime rate, and there was no evidence

that bank ever represented that prime rate would be

lowest rate it offered. 18 U.S.C.A. §§ 1341, 1962.

5. Bills and Notes (Key) 28

Under Tennessee law, note bearing variable interest

rate was not too indefinite to be enforceable; interest

rate was set according to fluctuation in prime rate, was

redetermined as rate changed, and applied to all sim-

ilarly situated bank customers.

6. Banks and Banking (Key) 181

Maximum interest under note bearing variable in-

terest rate was not limited by usury laws in force as

of date borrower obtained loan from bank, but rather

was limited by usury laws on date interest was collected:

terms of note permitted bank to charge interest limited

by rate ceilings and usury laws in effect as they changed

“from time to time.”’ National Bank Act, 12 U.S.C.A.

§ 86.

7. Banks and Banking (Key) 187

Evidence was insufficient to establish that bank in-

tentionally overcharged borrower on his personal loan

bearing variable interest rate, in violation of federal usury

statute; evidence indicated that overcharges resulted when

bank employee inadvertently failed to enter lower usury

ceiling on computer when federal discount rate dropped.

National Bank Act, 12 U.S.C.A. § 86.

Larry E. Parrish, Parrish & Shaw, Hal Gerber

(argued), Gerber, Gerber and Agee, Memphis, Tenn.,

Lewie R. Polk, III, for plaintiff-appellant.

Leo Bearman (argued), Robert Mark Glover, Frank

Glankler, Memphis, Tenn., for defendants-appellees.

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Before NELSON and NORRIS, Circuit Judges, and

PECK, Senior Circuit Judge. |

JOHN W. PECK, Senior Circuit Judge. |

This is an appeal from actions brought by appellant |

William Walters, Jr., individually and for himself and |

the other shareholder of Ten Tex Marine, Inc. (“Ten |

Tex”) against appellee First Tennessee Bank (“the Bank”)

in connection with loans extended by the Bank to Walters

personally and to Ten Tex, in which Walters was a 50%

shareholder. The actions alleged usury, breach of con-

tract, and fraudulent conduct in violation of federal rack-

eteering (RICO) statutes. After various pre-trial orders

and a directed verdict, only Walters’ usury claim was

considered by the jury. Although the jury found in

Walters’ favor, the district court entered a judgment not-

withstanding the verdict for the Bank. For the reasons

stated below, we affirm the judgment of the district court.

I.

Inasmuch as the factual background of this litigation

is lengthy and complex, a relatively brief summary fol-

lows. More specific facts are detailed in the course of

the discussion of the individual issues on appeal.

In May 1979 Walters obtained a personal loan for

$475,000.00 from the Bank evidenced by a promissory

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note which provided that the interest would be at a

floating rate pegged to 130% of the Bank’s prime rate.

The loan was secured by a promissory note from Fischer

Lime & Cement Co. (“Fischer”), of which Walters was

the payee. When Walters later defaulted, the Bank as-

serted its right under the security agreement to receive

payments from Fischer.

In 1979 Walters also negotiated with the Bank for

loans to capitalize Ten Tex and to construct a port facil-

ity on the Mississippi River in Tennessée. Initially the

Bank made several loans to Ten Tex, totaling $1,521,000.00,

the principal loan being for $1,341,000.00 and containing

interest rate provisions identical to that of Walters’ per-

sonal loan. Two subsequent loans for $100,000.00 and

$80,000.00 were made at 15% and 16% interest respec-

tively. An agreement was also reached between Ten

Tex and the Bank to finance the port facility project

through the issuance of industrial revenue bonds.

In November 1979 the Industrial Revenue Bond Board

of Shelby County, Tennessee issue $1,425,000.00 in bonds.

When the bond issue closed in December 1979, Walters

executed an industrial revenue bond indenture which

transferred all of the assets of Ten Tex to the Industrial

Revenue Bond Board. The Bank was appointed trustee

to hold Ten Tex assets and to receive payments under

a lease by which Ten Tex leased back the port facilities.

The Bank purchased all of the bonds.

At the time the bond indenture was signed, the Bank

advised Walters that certain pieces of marine equipment

could not be financed under the bond issue until pre-

ferred ship mortgages could be executed on the equip-

ment. Walters alleges that he was told that the needed

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documentation could be accomplished in a matter of a

few weeks and that the marine equipment could then

be financed through the bond issue. In order to complete

Ten Tex’s capitalization pending the financing of all assets

under the bonds, a $376,000.00 note (hereinafter “the

side note’) was executed by Ten Tex. The note was

secured by marine equipment and was subject to the

same interest rate provisions as the $1,341,000.00 note.

The principal amounts on the $1,341,000.00, $100,000.00

loan, and $80,000.00 loan were retired with proceeds from

the bond issue. The proceeds of the sale of certain items

of marine equipment upon which preferred ship mort-

gages had been executed were applied to interest re-

maining on those loans.

In September 1980 Ten Tex was unable to make its

lease payment of $152,166.66. The Bank terminated the

lease and, as trustee, declared its intent to repossess the

premises. The Bank also accelerated payment on. the

side note and Ten Tex declared bankruptcy. Ten Tex

has alleged that on September 15, 1980, the Bank, as

trustee, held more than $185,000.00 in bond issue funds

which it could release, but did not release, to Ten Tex,

a factor that heavily contributed to its bankruptcy.

In May i982 Walters filed an action on his own

behalf against the Bank under the Racketeer Influenced

and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961,

et seq., and under the National Bank Act, 12 U.S.C.

§§ 85, 86. He also alleged pendent state claims for mis-

representation, breach of contract, and common law fraud.

The gravamen of the complaint was that the Bank com-

mitted “prime rate fraud” by charging excessive and

usurious interest on the $475,000.00 loan. In November

1982 Walters also filed a shareholder derivative action

air oe ng iar Pe EN a A

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on his own behalf and that of Ten Tex’s other 50%

shareholder. This action raised essentially the same claims

with regard to the $1,341,000.00 loan, side note, and bond

issue. An interpleader action was filed by Fischer in

October 1982 in an effort to protect itself from multiple

liability due to conflicting demands for payment by

Walters and the Bank. Fischer’s note payments were

thereafter paid into the registry of the court.

In August 1984 the district court consolidated the

three actions for trial. On September 20, 1984, the dis-

trict court granted summary judgment in favor of the

Bank on certain issues. The court ruled that the interést

due on the $1,341,000.00 loan was paid on November 2,

1979, and thus any usury claim on that loan was barred

by the two year statute of limitations set forth in 12

U.S.C. § 86. The bond issue was alleged to have been

“tainted” because Walters claimed that Ten Tex paid not

only the 9% bond rate of interest but also the under-

lying 15% and 16% interest on two of the notes during

the period from November 1 to December 5, 1979; how-

ever, the court ruled that the undisputed affidavit of

the trust officer of the Bank indicated that the 9%

interest due on the bond issue was paid by the Bank,

and thus no double interest was paid by Ten Tex. As |

for the claims concerning the $346,000.00 side note, the

district court ruled that the statute of limitations had

not run. The court determined, however, that that note

was subject to a preferred ship mortgage; under the

Preferred Ship Mortgage Act, such a mortgage “may

bear such rate of interest as is agreed by the parties

thereto.” 46 U.S.C.App. § 926. The court ruled that

the Preferred Ship Mortgage Act superceded the National

Bank Act because

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[Section] 926 was intended to be the exclusive word

on loans subject to preferred ship mortgages. The

policy behind the P.S.M.A. was to encourage invest-

ment by lending concerns in a unique commercial

area fraught with risk. A contrary holding, as urged

by plaintiff, would contravene congressional policy

and make lenders susceptible to a double interest

penalty heretofore thought inapplicable.

The court also reasoned that in any event there could

be no substantive usury violation of 12 U.S.C. § 86 be-

cause the essential element of intent was missing.

At jury trial in September 1985, the district court

granted a directed verdict for the Bank on the RICO

and fraud claims alleged in both lawsuits. The only

remaining issue presented to the jury was whether the

Bank knowingly charged Walters usurious interest on

the $475,000.00 note. As noted above, the jury found

in Walters’ favor, but the district court entered judg-

ment NOV for the Bank. The district court’s decision

was based on its finding that Walters failed to prove

that the excess interest charge was knowingly assessed.

The only testimony on the issue was from the Bank’s

witness, Charles Dudley, who admitted two periods of

overcharges, but who testified that they (as well as

certain undercharges) were inadvertent errors due to

manual computer programming oversights. Walters pre-

sented no contradictory evidence tending to show that

the overcharges were anything but the result of negli-

gence.

Walters, on behalf of himself and as_a shareholder

of Ten Tex, timely appealed. Walters has raised nu-

merous issues on appeal, which we will address seriatim.

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II.

The Summary Judgment Order

[1, 2] Walters argues that the district court erred

in dismissing the usury claim filed on behalf of Ten Tex

in the derivative action. He urges that, contrary to

the district court’s conclusion, the usury claim on the

$1,341,000.00 note was not barred by the two-year statute

of limitations in 12 U.S.C. § 86 which governs such

claims. Walters maintains that Ten Tex’s filing of a

Chapter 11 petition on September 30, 1980, triggered the

automatic stay provision of 11 U.S.C. § 362' before the

statute of limitations had run. He theorizes that since

Ten Tex, the debtor, was a named party defendant in

the derivative action, the automatic stay provision would

have prohibited initiation of the derivative action until

disposition of the bankruptcy case, which had not oc-

curred as of November 1982. We reject Walters’ con-

tention. First, Walters did not raise this point before

the district court. It is well established that where a

plaintiff fails to assert in district court that the statute

of limitations has been tolled, he cannot raise it for the

first time on appeal. Roberts v. Berry, 541 F.2d 607,

610 (6th Cir.1976). Even if we were to reach the merits

of the issue, we would determine that this is not “an

action against the debtor” stayed by 11 U.S.C. § 362. As

noted by the Bank, Ten Tex is merely a nominal defen-

dant in the derivative action; the Bank is the party

charged with usury. This is sufficient to take the deriv-

1. 11 U.S.C. § 362(a)(1) establishes an automatic stay

against the “commencement .. . of other proceeding against the

debtor that was or could have been commenced before the com-

mencement of the case under this title.” The stay continues

until the earliest of the time the case is closed, is dismissed, or

discharge is granted or denied. 11 U.S.C. § 362(c) (2).

A10

ative action out of the scope of the automatic stay pro-

vision. See, e.g., Price & Pierce Int'l, Inc. v. Spicers

Int’l Paper Sales, Inc., 50 B.R. 25 (S.D.N.Y. 1985) (inter-

pleader action, which named bankrupt debtor as defen-

dant, was not subject to automatic stay, because the

bankrupt was only a nominal defendant). See also NLT

Computer Services Corp. v. Capital Computer Systems,

Inc., 31 B.R. 960, 961 (M.D.Tenn.1983), vacated on other

grounds, 755 F.2d 1253 (6th Cir.1985).

[3] Walters also challenges the district court’s ruling

that the usury provisions of 12 U.S.C. § 85 and § 86 were

not applicable to Ten Tex’s side note. The district court

determined that because the side note was secured by

a preferred ship mortgage, the Preferred Ship Mortgage

Act, 46 U.S.C.App. § 911 et seq., not the National Bank

Act, controlled. Because 46 U.S.C.App. § 926(d) pro-

vides that “a preferred mortgage may bear such rate of

interest as is agreed by the parties thereto,” the district

court reasoned that the parties could agree to any rate

of interest, even one which exceeded the limits of 12

U.S.C. § 85.

Walters argues that the district court erred in making

this determination. He observes that the side note pro-

vided for “[a] floating rate which is equal to 130% of

the Bank’s prime rate and changes the same day that

the Bank’s prime rate changes, but such floating rate

shall in no event exceed the maximum rate allowed by

applicable law.” Moreover, he stresses that preferred

ship mortgages were not recorded on two vessels securing

the note until several weeks or months after the loan

was made and after the charging and receipt of interest

occurred. Thus, Walters raises questions of significance

in this regard. First, can the side note constitute a pre-

All

ferred ship mortgage and gain the protection of the Pre-

ferred Ship Mortgage Act, which has strict execution

and recording requirements for preferred mortgage status,

see 46 U.S.C.App. §§ 921, 922, when the preferred ship

mortgages were not executed and recorded on vessels

partially securing the side note until long after the note’s

execution? Second, even if the side note were controlled

by the Preferred Ship Mortgage Act, does the note’s

above interest rate provision evidence an intent of the

parties to be bound by applicable federal and/or state

usury laws which can be incorporated by reference into

preferred ship mortgages? See C.I.T. Corp. v. M/V Miss

Eileen, 447 F.2d 761, 763 (5th Cir.1971). However, we

need not reach these legal issues, which the district court

apparently did not consider,” in light of our determina-

tion that the district court’s alternative ground for dis-

missal was correct. The district court found with regard

to both the side note and the $1,341,000.00 loan that

there could be no possible substantive violation of 12

U.S.C. § 86 because Walters failed to show any evidence

of intent, a requisite element of usury.

Section 86 provides a penalty for “[t]he taking, re-

ceiving, reserving, or charging a rate of interest greater

than is allowed by the preceding section [12 U.S.C. § 85]

when knowingly done... .” (emphasis added). The

Ninth Circuit has held that the standard for determining

intent under § 86 is that (1) the act of charging excess

interest is intentional, and that (2) the bank knew its

2. We note that Walters did not raise these particular argu-

ments before the district court. He apparently agreed at that

time that the Preferred Ship Mortgage Act was applicable to the

side note; he argued that he did not agree to be overcharged

interest and, therefore, that § 926 of the Preferred Ship Mortgage

Act should not protect the Bank.

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policy would result in receipt of more than the legal

rate. American Timber & Trading Co. v. First Nat'l Bank

of Oregon, 690 F.2d 781, 788 (9th Cir.1982). We find

this standard helpful. Implicit in this standard is that

an honest mistake of fact, e.g., a mistake in computation,

is not usurious. See, e.g., White v. Kaminsky, 196 Tenn.

180, 185, 264 S.W.2d 813, 815 (1954). See also cases

collected at 51 A.L.R.2d 1087. :

Our review of the record shows that the district court

properly found that Walters presented no evidence of

intent. The only evidence regarding intent, or lack

thereof, was provided by the affidavit of Charles Dudley,

submitted to support the Bank’s motion for summary

judgment. In that affidavit Mr. Dudley thoroughly and

concisely explained how the overcharges and undercharges

occurred. He stated that at all relevant times the interest

rate ceiling applicable to the thousands of notes held by

the Bank was set on computer by manual process. Mr.

Dudley stated that during the time the Ten Tex notes

were in effect, the prime rate and Federal discount rate

changed on a weekly basis. As such, the interest rate

and usury ceiling rate under 12 U.S.C. § 85, which is

pegged to the discount rate were also changing weekly.

When the usury ceiling thus changed, the account officer

had to report the new ceiling to the Bank’s Loan and

Discount Division, where a clerk programmed into the

computer the new usury ceiling for the particular note.

Mr. Dudley averred that approximately 98 such changes

occurred during the relevant time period and that only

five errors occurred on the Ten Tex notes. Of these

five, three were favorable to Ten Tex and resulted in

a net undercharge to Ten Tex. Dudley attributed the

errors solely to negligence and inadvertence.

er Oe Tg OAT ee Cee a ae

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In response Walters presented no evidence tending

to show that the Bank acted other than negligently or

by mistake. As such, there was a complete failure of

proof concerning intent, a required element of Walters’

usury case. Summary judgment for the Bank was there-

fore proper. See Celotex Corp. v. Catrett, 477 U.S. 317,

323-24, 327, 106 S.Ct. 2548, 2553, 2555, 91 L.Ed.2d 265

(1986).

We also find unpersuasive Walters’ argument that

there was evidence of usury due to the Bank’s failure

to modify its claims against Ten Tex in the bankruptcy

proceeding to take into account the overcharges of which

it was by then aware. Walters was granted leave to

amend his complaint in the derivative action in order

to allege that two of the Bank’s claims in bankruptcy

court were fraudulent because they were based on usu-

rious interest rates, and because the Bank had received

payments from the bankruptcy court after receiving

knowledge of the uSurious nature of the interest. How-

ever Walters voluntarily dismissed this new count on the

first day of trial; he is therefore estopped from raising

it on appeal.

The Directed Verdict

[4] Walters argues that the district court also erred

in directing a verdict for the Bank on the RICO and

common law fraud claims, as well as on the breach of

contract claims. Central to these claims is the theory

that the Bank perpetrated a fraud and breached the loan

agreement by charging Walters and Ten Tex an announced

published prime rate that was higher than an unannounced

lower rate charged to certain other short-term borrowers.

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Walters argues that “prime rate” as used in the loan

agreements and as generally understood means the best,

i.e., lowest, rate given by a bank to its customers.

In order to state a valid RICO claim, a plaintiff must

prove that the defendant committed an illegal predicate

act. See 18 U.S.C. § 1962. Walters relied on the federal

mail fraud statute, 18 U.S.C. § 1341, in both the individual

and derivative actions. As stated by this court in Bender

v. Southland Corp., 749 F.2d 1205 (6th Cir.1984):

[t]he crime of mail fraud has two elements: a

scheme or artifice to defraud and a mailing for the

purpose of executing the scheme. Pereira v. United

States, 347 U.S. 1, 8, 74 S.Ct. 358, 362, 98 L.Ed. 435

(1954); United States v. Talbott, 590 F.2d 192, 195

(6th Cir.1978); United States v. Schilling, 561 F.2d

659, 661 (6th Cir.1977). This court has held that

the scheme to defraud must involve:

[I]ntentional fraud, consisting in deception in-

tentionally practiced to induce another to part

with property or to surrender some legal right,

and which accomplishes the end designed. |A

scheme to defraud] requires intent to deceive or

defraud. [Emphasis supplied. ]

Epstein v. United States, 174 F.2d 754, 765 (6th Cir.

1949). See also Schilling, 561 F.2d at 662. This court

has also held that the scheme to defraud must in-

volve “misrepresentations or omissions reasonably

calculated to deceive persons of ordinary prudence

and comprehension.” United States v. Van Dyke,

605 F.2d 220, 225 (6th Cir.), cert. denied, 444 U-S.

994, 100 S.Ct. 529, 62 L.Ed.2d 425 (1979).

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Id. at 1215-16. There was no evidence that the Bank

published a false rate. Although there were admittedly

lower interest rates charged to some other short-term

borrowers, the Bank presented evidence that certain cat-

egories of loans are routinely excluded in the industry

in determining a bank’s prime rate. Walters’ own expert,

Mr. Auerbach, agreed on cross-examination that numerous

categories of loans were properly excluded by the Bank.

‘He also responded to the Bank’s questioning as follows:

Q: Let me ask you this question, Mr. Auerbach.

If in determining the lowest rate in the bank, which

you call the actual prime rate, the bank, this hypo-

thetical bank, takes a look at all of its loans that fit

the category of the prime and it excludes from that

group all of the loans that are in other categories

for whatever reason and it determines on making

that calculation that the lowest rate that it charges

in the prime rate category that remains after elim-

inating the exclusions is in fact its announced prime,

then it has done nothing in your eyes that’s wrong,

right?

A: That’s correct.

Q: Nobody’s been defrauded; nobody has been mis-

represented and nobody has been deceived?

A: That’s right.

The Bank further presented the testimony of one of its

officers that the Bank had conducted a search of all

its 90-day loans of $100,000.00 or more to corporate bor-

rowers for commercial purposes, and that, according to

its findings, the Bank made no loans below its announced

prime rate in categories that Walters and Auerbach be-

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lieved to be proper in determining the “true” prime rate.

Moreover, the Bank also established that of the fourteen

loans highlighted by Walters as evidence that the Bank

sometimes charged less than the announced prime rate,

nearly one-half were required by Tennessee law at that

time to have a 10% interest rate ceiling as they were

single payment loans of $1,000.00 or less, see Tenn.Code

Ann. § 47-14-104(a)(1), and/or they fell into the cat-

egories that were inappropriate for determining the

“prime rate.” Finally, there was no evidence that the

Bank ever represented that the prime rate would be

the lowest rate; rather, Walters, an experienced business-

man and member of the board of another national bank,

who negotiated his own loan and the Ten Tex loans,

proceeded on the basis of his own assumption of what

“prime rate” meant.

Given this, the district court properly directed a

verdict on the fraud claims. Giving Walters and Ten

Tex the benefit of every fair and reasonable inference,

there simply was an absence of proof of an intent to

defraud, deception, or misrepresentations or omissions

reasonably calculated to deceive Walters as required. for

mail fraud. See Bender, supra, 749 F.2d at 1216. As

stated by this Court regarding a RICO-mail fraud case

decided subsequent to the district court’s disposition of

this case:

The fact that the parties take different positions

under the contract as to the appropriate prime rate,

or the fact that the defendant charged too high a

“prime rate” and thereby concealed or refused to

disclose what the plaintiff considers the true prime

rate called for under the contract, does not give rise

to a valid claim for fraud.

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Blount Financial Services, Inc. v. Walter E. Heller & Co.,

819 F.2d 151, 152 (6th Cir.1987). Similarly, the common

law fraud claims also premised on the prime rate fraud

theory were properly disposed of by way of the directed

verdict. See Gold v. Nat'l Savings Bank of the City of

Albany, 641 F.2d 430, 435 (6th Cir.), cert. denied, 454

U.S. 826, 102 S.Ct. 116, 70 L.Ed.2d 100 (1981) (applying

Tennessee law) .*

In the derivative action Walters also claimed that

the Bank committed fraud in three other instances: 1)

by extending the dur’tion of the side note so that it

could collect higher interest than that provided by the

industrial bond issue; 2) by withholding bond issue funds

on which Ten Tex had paid interest and thereby con-

tributing to its cash shortage, which led to bankruptcy;

and 3) by collecting interest upon interest and assessing

penalty charges for late payments. Having carefully re-

viewed these allegations and the record, we conclude that

the district court properly rendered a directed verdict

for the Bank with regard to these claims.

As the Tennessee Supreme Court has noted in Jones

v. Seal, 56 Tenn.App. 593, 409 S.W.2d 382 (1966),

3. In connection with the prime rate fraud portion of the

trial, the district court excluded evidence of a 1978 criminal

conviction of the Bank which apparently resulted from improper

campaign contributions. The district court reasoned that the

risk of prejudice substantially outweighed any probative value

the conviction had for attacking a small portion of a bank of-

ficer’s testimony that the Bank would not hire dishonest persons.

See Fed.R.Evid. 403. The district court’s determination can only

be reversed for an abuse of discretion. United States v. Feldman,

136 F.2d 394, 399 (2d Cir.1943), aff'd, 322 U.S. 487, 64 S.Ct.

1082, 88 L.Ed.. 1408 (1944). Based upon our review of the

record, we are not prepared to say that the district court abused

its discretion in excluding this “other crimes” evidence, which

may be admissible under the terms of Fed.R.Evid. 404(b).

Al8

“the facts and circumstances proved [at trial] must

clearly establish the inference of fraud.” 409 S.W.2d

at 385. See also Anderson v. Nichols, 39 Tenn.App.

503, 286 S.W.2d 96 (1955). A jury cannot render

a verdict on the basis of speculation, surmise or

conjecture. See Dayton Veneer & Lumber Mills v.

Cincinnati N.O. & T.P. Railway Co., 132 F.2d 222

(6th Cir.1942); Cecil Corley Motor Co., Inc. v. Gen-

eral Motors Corp., 380 F.Supp. 819 (M.D.Tenn.1974),

and Groves v. Witherspoon, 379 F.Supp. 52 (E.D.

Tenn.1974).

Gold, 641 F.2d at 435. The evidence presented on these

three allegations of fraud would at most have allowed

a jury to reach a verdict based on sheer speculation or

conjecture.

Walters also alleged that the Bank breached its con-

tract by charging interest on the basis of its announced

prime rate rather than its alleged lowest “unannounced”

prime rate. The facts and evidence recounted above

which permitted the district court to enter a directed

verdict on the prime rate fraud theory also supported

the directed verdict on the related breach of contract

claim. Walters alleged three other state law breach of

contract theories, which we believe were also properly

the subject of a directed verdict for the Bank.

[5] Walters argued that the $475,000 note was too

indefinite to be enforceable because it allowed the Bank

to charge interest based on a prime rate that it set uni-

laterally. As a general principle, the law does not favor

declaring contracts void for indefiniteness. Williston,

Law of Contracts, 3 ed., Vol. 1 § 37. Although we could

find no Tennessee cases directly addressing the enforce-

Alg

ability of monetary obligations bearing a variable form

of interest rate, the overwhelming, if not unanimous,

weight of authority upholds the validity of such variable

rate contracts, provided the lender’s power to vary the

interest rate is tied to some objective or marketplace

factor. As stressed by the Connecticut Supreme Court

in Constitution Bank & Trust Co. v. Robinson, 179 Conn.

232, 425 A.2d 1268 (1979),

The essential characteristic that distinguishes enforce-

able from unenforceable variable interest rates is the

extent of discretion retained by the lender. If the

lender may arbitrarily adjust the interest rate with-

out any standard whatsoever, with regard to this

borrower alone, then the note is too indefinite as to

interest. If however the power to vary the interest

rate is limited by the marketplace and requires peri-

odic redetermination, in good faith and in the ordi-

nary course of business, of the price to be charged

to all of the bank’s customers similarly situated, then

the note is not too indefinite.

Id. at 237, 425 A.2d at 1270-71. Accord Bank of Maine,

N.A. v. Weisberger, 477 A.2d 741, 744 (Me.1984); Powell

v. Central California Federal Savings & Loan Ass’n, 59

Cal.App.3d 540, 549, 130 Cal.Rptr. 635, 640-41 (1976);

Restatement 2d of Contracts, § 34(1) and comment a.

Certainly, the evidence submitted by the Bank and tes-

timony of the bank officer unequivocally show that the

interest rate was set according to the fluctuation in the

prime rate, was redetermined as the rate changed, and

did apply to all similarly situated bank customers, i.e.

those customers with loans in the same category. The

Bank did not have unfettered discretion in setting the

A20

interest rate on Mr. Walters’ loan. As such, we believe

that Tennessee courts would conclude that the terms of

the note were sufficiently definite to be enforced.

[6] Walters also advanced the argument that even

if the collection of interest in certain instances was not

usurious, it nonetheless breached the contract because

the maximum interest rate under his promissory note

was limited by usury laws in force as of May 3, 1979,

the date he obtained the $475,000 loan, and not as of

the date the interest was collected. The plain language

of the note is contrary to Walters’ interpretation:

The rate of interest on the unpaid principal balances

of the indebtedness hereby evidenced shall be ad-

justed as of each day that the prime rate is changed;

provided, always, however, that notwithstanding any

changes in said prime rate, the rate of interest hereon

prior to maturity shall never be more than the mazx-

imum lawful contract rate which a national bank,

having its principal place of business in the State

of Tennessee, may lawfully charge from time to

time. ... It is the intention of the maker and the

bank to contract in strict compliance with the usury

laws as set forth at 12 U.S.C. § 85, and the law of

the State of Tennessee incorporated therein by ref-

erence; and, accordingly, in no event and upon no

contingency shall the bank ever be entitled to re-

ceive, collect, or apply as interest any interests, fees.

other payment equivalent to interest, in excess of

the maximum contract rate which may, from time

to time, be lawfully charged to the maker hereof

under the applicable law by a national bank having

its principal place of business in the State of Ten-

nessee. (emphasis added).

[PDN ERS 0s

A21

Clearly, the Bank was not limited by the maximum rate

in effect on the day of signing, but could charge interest

limited by the rate ceiling and usury laws in effect as

they changed “from time to time.” Our conclusion on

this issue also necessarily disposes of Walters’ remaining,

related claim that by charging interest in excess of that

allowed under usury laws in effect on May 3, 1979, the

Bank committed an anticipatory breach of the contract

which excused Walters from fulfilling his obligations

under the note.*

The Judgment NOV

[7] Although all of the usury claims in the deriv-

ative action were dismissed in the summary judgment

order, certain of Walters’ usury claims on his personal

loan did go to the jury. The district court had ruled

that the two year statute of limitations barred Walters’

usury claims prior to May 22, 1980, a ruling which Walters

has not challenged. The district court also ruled during

the course of the trial that as a matter of law any usury

claims after October 8, 1980, on the personal loan nec-

essarily failed based upon the court’s construction of

certain state and federal interest rate statutes.* Conse-

4. Assuming, arguendo, that the Bank did so violate the

contract, Walters still would have no claim for anticipatory

breach, because the Bank had substantially performed under

the contract. See Constitutional Bank & Trust Co., 425 A.2d at

1270.

5. Walters superficially challenges the district court’s con-

struction of Pub.L. No. 96-221 and Pub.L. No. 96-399 in its

appellate brief by simply referencing its trial memorandum. We

cannot countenance this attempt to circumvent Fed.R.App.P.

28(g) and its limitation on appellants’ briefs to 50 pages. As

stated in Katz v. King, 627 F.2d 568 (1st Cir.1980): “If counsel

(Continued on following page)

A22

quently, the jury was presented with usury claims on

the personal loan based on overcharges totalling $337.06

between May 29, 1980 through June 8, 1980, and from

September 8, 1980 through September 25, 1980.

Specifically, the district court submitted the issue to

the jury by means of the following special interrogatory:

Did the defendant First Tennessee Bank knowingly

take or receive from or charge to the plaintiff Wil-

liam S. Walters, Jr. interest in excess of the lawful

rate on the $475,000.00 note signed May 3, 1979, be-

tween the date of its signing and December 2, 1980?

The district court further instructed the jury that:

The word “knowingly” means intentionally receiving

interest in excess of the amount authorized by appro-

priate laws. Knowingly does not include collecting

interest above the lawful amount due to a mistake

of fact or by an unintentional error of fact.

The jury responded “yes” to the special interrogatory.

We believe that the district court properly rejected

the jury’s verdict fer Walters and entered judgment NOV.

Footnote continued—

desires our consideration of a particular argument, the argument

must appear in the four corners of the brief filed in this court.”

Id. at 575. Insofar as Walters argues that this federal legislation,

which preempted state usury ceilings and granted interest rate

relief to banks during and after 1980, constitutes an unconstitu-

tional impairment of the contract, we note that no court has ever

declared these statutes unconstitutional. Moreover, the contract

Walters signed expressly contemplated that the interest rate

charged and allowed by law would or could fluctuate from

“time to time,” which negates his contention that the rate in ef-

fect on the date of signing of the contract was the maximum

rate that could ever be charged.

i iri a

A23

The only testimony at trial regarding the Bank’s over-

charge was that of Mr. Dudley. His testimony at trial

with regard to the $475,000.00 loan corroborated and mir-

rored his affidavit, discussed above in conjunction with

the summary judgment for the Bank on the Ten Tex

loan usury claims. As in his affidavit, Dudley testified

that the two overcharges resulted from inadvertent cler-

ical oversight, ic. a Bank employee’s failure to enter the

lower usury ceiling on the computer when the federal

discount rate dropped. In addition, similar programming

oversights occurring when the discount rate and usury

ceilings rose resulted in the Bank’s undercharging Walters

more than it ever overcharged him. Indeed, the Bank’s

undercharges preceded any overcharges. In face of this

evidence which at most established negligence on the

part of the Bank, Walters presented no contradictory

testimony or evidence. His argument on appeal centers

around a theory that the Bank committed usury because

it “knowingly” made a choice to use a computer system

which permitted such errors to occur. However, this

argument only permits one to conclude that the Bank

was negligent. As such, the district court correctly en-

tered a judgment NOV. Viewing the case in a light most

favorable to Walters, and drawing all reasonable infer-

ences in his favor, there simply was an absence of proof

of knowing conduct by the Bank, an essential element

of usury under 12 U.S.C. § 86 which Walters had the

burden of proving “convincingly,” Wheeler v. Union Na-

tional Bank of Pittsburgh, 96 U.S. 268, 270, 24 L.Ed. 833

(1878).

A24

Il.

We have thus considered the numerous issues in this

appeal, and conclude that the district court’s judgment

was correct in all respects. In so doing, we carefully

and fully reviewed all of the arguments raised by the

parties and the voluminous record in this case. Accord-

ingly, the judgment of the district court is hereby AF-

FIRMED.

A25

(Filed August 15, 1986)

This document entered on docket in compliance with

Rule 58 and/or Rule 79(a), F.R.Civ.P., on 8/18/86

IN THE

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT

OF TENNESSEE

WESTERN DIVISION

CIVIL ACTION

NO. 82-2391-M

WILLIAM S. WALTERS, JR.,

Plaintiff,

V.

FIRST TENNESSEE BANK, N.A. MEMPHIS and

DOES 1 Through 99,

Defendants.

and

CIVIL ACTION

NO. 82-2783-M

FISCHER LIME AND CEMENT COMPANY, INC.,

Plaintiff,

V.

WILLIAM S. WALTERS, JR., and FIRST TENNESSEE

BANK, N.A. MEMPHIS,

Defendants.

A26

JUDGMENT

In accord with the Order Directing Entry Of Judg-

ment heretofore filed in the instant case, it is

ADJUDGED that, upon directed verdict, all claims,

except that portion of the crossclaim submitted to the

jury, made by plaintiff/crossclaimant/counterdefendant,

William S. Walters Jr., shall be and the same hereby

are dismissed. It is

FURTHER ADJUDGED that that portion of the cross-

claim of plaintiff/crossclaimant/counterdefendant, William

S. Walters, Jr., submitted to the jury, upon the court’s

judgment notwithstanding the jury’s verdict, shall be and

the same hereby is dismissed. It is

FURTHER ADJUDGED that the Counter-Complaint

filed by defendant/counterclaimant/cross-defendant, First

Tennessee Bank N.A. Memphis, the claims being made

thereby having become moot and non-justiciable, should

be and the same hereby are dismissed.

ENTERED this 15th day of August 1986.

Approved for entry

/s/ Robert M. McRae, Jr.

US Dist Judge

Clerk United States

District Court for the

Western District of

Tennessee

By: /s/ Donna L. Russell

A27

Approved As to Form:

Parrish & Mulrooney, P.C.

By: /s/ Larry E. Parrish

Larry E. Parrish

Attorneys for Plaintiff/

Counterdefendant, William S.

Walters, Jr.

and

Heiskel, Donelson, Bearman, Adams,

Williams & Kirsch

Attorneys for Defendant/Counterclaimant,

First Tennessee Bank N.A. Memphis

A28

(Filed August 15, 1986)

This document entered on docket in compliance with

Rule 58 and/or Rule 79(a), F.R.Civ.P., on 8/18/86

IN THE

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT

| OF TENNESSEE

WESTERN DIVISION

CIVIL ACTION

NO. 82-2391-M

- WILLIAM S. WALTERS, JR.,

) Plaintiff,

DOES 1 Through 99,

Defendants.

and

|

Vv

FIRST TENNESSEE BANK, N.A. MEMPHIS and

CIVIL ACTION

NO. 82-2783-M

FISCHER LIME AND CEMENT COMPANY, INC.,

| Plaintiff,

v.

WILLIAM S. WALTERS, JR., and FIRST TENNESSEE

BANK, N.A. MEMPHIS,

Defendants.

A29

ORDER DIRECTING ENTRY OF JUDGMENT

At the close of all the proof at trial, defendant/

counterclaimant/ cross-defendant, First Tennessee Bank

N.A. Memphis (hereinafter “First Tennessee’), made a

motion for directed verdict with respect to all claims,

including cross-claims made in No. 82-2783-M by plaintiff/

crossclaimant/counterdefendant, William S. Walters, Jr.

(hereinafter “Walters”) and the First Tennessee counter-

claim against counterdefendant, William Walters. Upon

consideration of the aforesaid motion for directed verdict

at the close of proof, the court directed a verdict against

Walters on all claims, of plaintiff, except part of the

claim for usury, which was submitted, by interrogatory,

for jury verdict, and against Walters on the counterclaim

of First Tennessee. As to the portion of the usury claim

of Walters submitted for jury verdict, the jury returned

a verdict in favor of Walters. Upon argument of counsel

and the entire record in the cause, including the jury’s

verdict in the form of an answer to an interrogatory,

and, for the reasons set forth in the court’s ore tenus

order in open court and the court’s “Ruling on Post-Trial

Arguments and Motions” entered on June 5, 1986, it is

ORDERED, ADJUDGED AND DECREED that judg-

ment be entered by the Clerk in favor of First Tennes-

see, based on the ore tenus order directing a verdict at

the close of all of the proof at trial. It is

FURTHER ORDERED, ADJUDGED AND DECREED

that judgment in favor of First Tennessee and against

Walters, on the usury claim of Walters submitted to the

jury, be entered by the Clerk notwithstanding the jury’s

verdict. It is

FURTHER ORDERED, ADJUDGED AND DECREED,

with regard to the Counter-Compliaint filed by First Ten-

A30

nessee against Walters because $697,809.21, representing

an amount equal to what First Tennessee claimed as

principal and interest through January 13, 1986, has here-

tofore been delivered by Walters and accepted by First

Tennessee, in full satisfaction of the claim of debt forming

the basis for the counterclaim, pursuant to an agreement

___ between First Tennessee and Walters dated January 10,

1986,-the purpose of which was to allay any claim by

First Tennessee that further interest was accruing and

to alleviate any need for a supercedeas bond, the claims

made by First Tennessee in the Counter-Complaint are

now moot and non-justiciable; therefore, the Counter-

Complaint should be dismissed, and the Clerk shall enter

a judgment dismissing same.

ENTERED: This 15th day of August 1986.

/s/ Robert M. McRae, Jr.

Robert M. McRae, Jr.,

Judge

$$$

Approved As to Form:

Parrish & Mulrooney, P.C.

By: /s/ Larry E. Parrish

Larry E. Parrish

Attorneys for Plaintiff/

Counterdefendant, William S.

Walters, Jr.

and

Heiskel, Donelson, Bearman, Adams,

Williams & Kirsch

Attorneys for Defendant/Counterclaimant,

First Tennessee Bank N.A. Memphis

A31

(Filed June 4, 1986)

This document entered on docket in compliance with

Rule 58 and/or Rule 79(a), F.R.Civ.P., on 6-5-86

IN THE

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT

OF TENNESSEE

WESTERN DIVISION

No. 82-2391-M

WILLIAM S. WALTERS, JR.,

Plaintiff,

vs.

FIRST TENNESSEE BANK, N.A. MEMPHIS, and

DOES 1 through 99,

Defendants.

No. 82-2783-M

FISCHER LIME & CEMENT CO., INC.,

Plaintiff,

Vs.

WILLIAM S. WALTERS, JR. and FIRST TENNESSEE

BANK N.A. MEMPHIS,

Defendants.

A32

No. 82-2869-M

WILLIAM S. WALTERS, JR., Individually and for him-

self and the other Shareholders of TEN TEX MARINE,

INC., Similarly Situated,

Plaintiffs,

vs.

FIRST TENNESSEE BANK, N.A. MEMPHIS, DOES 1

through 99, and TEN TEX MARINE, INC.,

Defendants.

RULING ON POST-TRIAL ARGUMENTS

AND MOTIONS

In the matter of these cases, the attorneys for Walters

and the First Tennessee Bank (Bank) have raised con-

tradictory positions after a jury trial wherein the Court

presented to the jury an interrogatory to determine

whether the Bank had knowingly taken or received from

Walters interest in excess of the lawful rate on a $475,000

note signed May 3, 1979. The jury answered the ques-

tion “yes,” and the Court directed counsel to present

proposed judgments in the light thereof: This prompted

Plaintiff’s Memorandum of Law in Support of Plaintiff’s

Proposed Judgment and defendant’s Memorandum of

First Tennessee Bank National Association in Support of

Its Proposed Judgment. Counsel for the plaintiff pro-

posed a judgment which granted the plaintiff relief (1)

in the amount of $975,966.86 because there had been a

usurious interest charge and (2) a forfeiture of all in-

terest accrued and unaccrued on the $475,000 note. On

the defendant Bank’s counterclaim the plaintiff proposed

A33

that the judgment provide that the Bank recover the

principal balance of $474,784 on the $475,000.

Background Facts

William S. Walters, the plaintiff, is a young man

whose maternal forebears founded and developed a very

successful business known as Fischer Lime & Cement

Company in Memphis, Tennessee. Probably through the

theory of primogenitor, the plaintiff became the CEO

of Fischer at a relatively young age. He and his mother,

an active participant and large stockholder in the busi-

ness, differed on how the business should be run. He

sold his stock to the company evidenced by a promissory

note payable over a period of years. He then undertook

to conquer the world and make his fortune through a

series of improvident ventures which have managed to

consume the money he inherited from the family busi-

ness. The immediate improvident venture which prompted

his borrowing from the Bank was an ill-advised, poorly

timed marine enterprise with an incompatible partner or

associate. In the process, he put up the balance of his

nest egg note from Fischer for his inherited interest in

the family business. Therefore, when his marine adven-

ture failed, the Bank began collecting its money from

the payments on the Fischer note.

The proof reflects that plaintiff had developed sc me

acumen in banking by virtue of having been (by inher-

itance) a member of the board of directors of a Memphis,

Tennessee bank which competed with the Bank. Even

so, the plaintiff signed a note with the Bank whereby

the interest fluctuated with the prime interest rate. Con-

sequently, the plaintiff who was used to the finer things

in life found himself in a meager to unsuccessful means

A34

of acquiring income, and the monthly payment on the

Fischer note was not even paying the interest on his

$475,000 note then in default.

This Lawsuit and the Post-Trial Issues

In case number 82-2391, Walters sued the list Ten-

nessee Bank and certain John Doe individuals under the

relatively new Racketeer Influenced and Corrupt Orga-

nization Act (RICO) and the usury laws applicable to

national banks, 12 U.S.C. §§ 85 and 86. It was the theory

of the plaintiff that officials of the bank had committed

violations of RICO because the loan was pegged to the

bank’s prime interest rate which the plaintiff thought

was the very best interest rate. Plaintiff further con-

tended that communications concerning the note were

violations of the criminal law pertaining to mail or wire

fraud. At the end of the plaintiff’s proof, the Court

ruled that there was no proof whatsoever to support

RICO violations and dismissed those charges from the

complaint. After the RICO claims were dismissed, coun-

sel for the plaintiff concentrated on the usury claims

and also asserted a bizarre breach of contract claim.

Case number 82-2783 was an interpleader action

whereby Fischer Lime and Cement Co. tendered into

the Court as they became due the payments on its note

payable to the plaintiff who in turn had pledged it to

the Bank. An agreement was reached to deposit these

proceeds in an interest-bearing deposit arrangement.

Case number 82-2869 is styled a stockholders deriv-

ative action filed by Walters as a stockholder of Ten

Tex Marine Inc., the ill-fated marine venture which went

into bankruptcy. Walters claims the Bank is liable to

A35

the bankrupt corporation under numerous complex claims,

including RICO, usury and bankruptcy fraud. Walters,

whose joint venturer refused to join the suit, seeks re-

covery because he was a stockholder and had guaranteed

certain Ten Tex obligations. This case was dismissed

on all grounds prior to or during the trial.

Usury Claims

As previously indicated the Court submitted an in-

terrogatory to the jury on the usury issue. That inter-

rogatory read as follows:

Did the defendant First Tennessee Bank knowingly

take or receive from or charge to the plaintiff Wil-

liam S. Walters, Jr. interest in excess of the lawful

rate on the $475,000.00 note signed May 3, 1979,

between the date of its signing and December 2, 1980?

The jury answered the interrogatory by responding

“Yes.”

Also, as previously indicated, because there were

numerous questions of law which might affect the judg-

ment, the Court directed counsel for the parties to pre-

pare proposed judgments in view of the jury’s response.

Counsel for the plaintiff seeks double interest in the

amount paid and forfeiture of all accrued and unaccrued

interest on the $475,000 note which he asserts calls for

a judgment of $975,966.85. On the Bank’s counterclaim,

the plaintiff’s proposed judgment provides for payment

by Walters to the Bank of the unpaid principal on the

note in the amount of $474,784 and no more. The plain-

tiff’s proposed judgment aiso provides that the breach

of contract claim asserted in plaintiff’s original complaint

A36

based upon an overcharge of interest is moot and there-

fore withdrawn.

On the other hand, the Bank proposes a judgment on

plaintiff’s complaint which grants the motion for a directed

verdict made by the Bank at the end of all of the proof.

The proposed judgment provides that the Bank have a

judgment on the counterclaim for the unpaid principal

and interest on the note in the total amount due.

A hearing was held upon the proposed judgments and

the memoranda relied upon in support of the respective

contentions.

The Bank primarily attacks the jury’s verdict that the

Bank knowingly charged interest at a rate in excess of

the legal rate, the amount allowed by the federal discount

rate plus five percentage points. The Bank admits that

its personnel did make excessive charges during two

periods while it was charging and collecting interest on

the Walters’ $475,000 note. Those periods were May 29,

1980 through June 8, 1980, and September 8, 1980 through

September 25, 1980.

The Bank asserts that there is no evidence to establish

that the Bank knowingly made the admittedly excessive

charges. Charles B. Dudley, III, the Bank officer who

handled the plaintiff’s account, including the loan involved

in this case, was questioned about the cause of the over-

charge. While the actual steps taken to make the ex-

cessive charges and record them were not done by him nor

under his supervision, he opined that the overcharges

were an “inadvertent” failure to lower the Bank’s usury

ceiling on the computer when the federal discount rate

dropped. He testified that the Bank was undergoing a

conversion in its computer systems which made it im-

eee

arms

A37

possible to add enhancements to the existing system;

therefore it was necessary to input changes in the usury

ceiling with regard to each variable rate note. As in-

dicated above, the above procedures were not within the

department in which Mr. Dudley had expertise, specific

knowledge or authority.

This Court instructed the jury as follows:

The word knowingly means intentionally receiving

interest in excess of the amount authorized by appro-

priate laws. Knowingly does not include collecting

interest above the lawful amount due to a mistake

of fact or by unintentional error of fact.

It must be remembered that this was one of many

issues raised by the proof of this case which was presented

primarily as a RICO case. Therefore the jury was of-

fered in-depth testimony about the relationship between

the Bank and Walters as follows:

The nature of the note gave the Bank full con-

trol over the rate of interest to be charged and the

record keeping on how the plaintiff’s payments were

to be credited. In the first place, the Bank absolutely

determined its prime rate to which the note interest

was pegged. Additionally, the federal discount rate

was a matter which the bank unilaterally applied.

The Bank also prepared the note and inserted in

‘its terms a provision that if the Bank ever received

any excessive interest it would not be considered

usurious interest, and it would be applied to prin-

cipal. This was not done through the time of the

trial.

The note was also secured by all of plaintiff’s

stock in Ten Tex Marine, and a note of Ten Tex

A38

Marine in the amount of $350,000 payable to plaintiff

as well as Fischer Lime and Cement Company’s stock

sale agreement which originally bound Fischer to

pay plaintiff $1,378,500.

Furthermore the Bank was heavily involved with

Ten Tex Marine including serving as a Trustee for the

disbursement of funds which Ten Tex borrowed via

an Industrial Development Bond Issue in the amount

of $1,425,000.

Additionally, there is proof to show that the

plaintiff made more than one demand for a record

of the charges and payment of his note account and

that the same was considerably delayed in being

furnished.

All of the above undoubtedly creates sympathy for the

plaintiff as a defeated and defenseless individual against

a Bank which handled the transaction literally so that

the Bank would not lose money or would lose as little

as possible regardless of the overall consequences to the

plaintiff. Even though the plaintiff was experienced in

business and banking practices, he was a victim of the

Bank’s policies of protecting itself in every conceivable

way. This Court has spent many hours in consideration

and contemplation of the post-trial positions of the par-

ties and has concluded that the most difficult and the

primary issue is whether there was evidence sufficient

to submit the questions of whether the Bank acted know-

ingly in its overcharges of interest as the term “knowingly”

is used in 12 U.S.C. § 86. After much difficulty, the Court

has determined that there was insufficient evidence to

support the jury’s response to the interrogatory and that

the Court should have directed a verdict for the defendant.

A39

This case was prepared and presented as a RICO

case. In the opinion of this Court, counsel for the plain-

tiff. presented a RICO theory that was bizarre and woe-

fully inadequate. In addition, counsel asserted a breach

of contract claim based upon a theory that the Bank first

breached the contract evidenced by the promissory note

so the plaintiff wins. Similarly, there was the plaintiff’s

stockholders derivative action which required reconstruc-

tion of all of the actions taken between Ten Tex and the

Bank prior to and during Ten Tex’s bankruptcy. There-

fore the usury issues played a very minor role in the

trial of the case until the Court dismissed all other claims

of the plaintiff. The record will reflect that the Court

received memos on usury which were prepared during

recesses of the trial. Consequently the Court and the

jury did not have the benefit of proof thoroughly devel-

oped by discovery on the issues of the Bank’s intent in

its overcharge.

In submitting the issue to the jury the Court failed to

observe its earlier observations and finding in the Ten

Tex case, No. 82-2869. In dismissing the usury claim in

that case the Court stated:

It has been consistently held by courts considering

the issue of usurious intent that inadvertent er-

rors in bookkeeping or mathematical computations,

when not mistakes of law, are insufficient to show

intent. Ford Motor Credit Corp. v. Catalavi, 238

Ark. 561, 583 S.W.2d 99 (1964); See Cases collected

at 11 Am.Jur.2d 1498. In the instant case, there is

no usurious intent evident on the face of the note

which distinguishes it from typical usury cases. See

Mutual Protective Corp. v. Polatnick, 118 Conn. 1, 169

A40

A. 917 (1934). Thus, this Court holds that the

requisite intent required under 12 U.S.C. § 86 was

lacking and for that reason there was no violation

of the statute. (Order on Motions for Summary

Judgment, entered September 20, 1984. P. 7)

The plaintiff failed to offer his own proof with re-

gard to the issue of whether the charging of $337.06 in

“excess” interest on the $475,000.00 promissory note was

“knowingly done” as required to subject First Tennessee

to the forfeiture and penalty provisions of 12 U.S.C. § 86.

The focus of the inquiry by the Court in addressing

this question must be, as the Court has ruled, whether

there was evidence that the overcharges were made

“knowingly” since First Tennessee admitted that the in-

terest charges occurred.

The plaintiff must prove that the taking of excess

interest was “knowingly done.” The plaintiff has offered

no direct or sufficient circumstantial proof on the issue

of “knowingly done.” The only specific testimony at the

trial concerning this issue came from the Bank’s wit-

ness, Charles B. Dudley, III. As heretofore indicated,

he speculated that First Tennessee inadvertently and

mistakenly charged Mr. Walters in excess of the amount

allowed by the federal discount rate plus five percentage

points on two occasions (May 29, 1980 through June 8,

1980, and September 8, 1980 through September 25, 1980).

Mr. Dudley testified that he thought that in each of

those two instances, the overcharge resulted from an

inadvertent failure to lower the Bank’s usury ceiling on

the computer when the federal discount rate (and there-

fore the usury ceiling) dropped even though he had

nothing to do with the overcharge. Mr. Dudley testified

A4l

that the Bank was undergoing a conversion in its com-

puter systems which he understood and believed made

it impossible to add enhancements electronically to the

existing system and therefore it was necessary at the

relevant times manually to input the changes in the usury

ceiling with regard to each variable rate note. He spec-

ulated that on these two occasions, there was simply

a failure to reduce the interest ceiling on the computer

with regard to Mr. Walters’ note, just as there had been

a failure to increase interest charges when a greater

amount of undercharges were made.

Mr. Dudley testified that the usury ceiling or the

prime rate changed over ninety times during the period

covered by this lending transaction. He also testified that

on three occasions the Bank undercharged Mr. Walters

due to the same type of “inadvertent” errors in setting

the rate on the computer that caused the “overcharges.”

Mr. Dudley’s testimony indicated that these undercharges

preceded and exceeded the amount of the overcharges,

so that at all times First Tennessee, on a cumulative

basis, charged Walters less than allowed by law. While

this Court does not conclude that a usurious lender may

avoid usurious charges knowingly made by netting them

out against undercharges, the fact that the same system

which created the overcharges created undercharges may

be considered upon the question of whether the over-

charges were knowingly made.

Although counsel for Mr. Walters attempted to im-

peach Mr. Dudley’s testimony by suggesting in his ques-

tions that the overcharges were or may have been in-

tentional, he produced no witness to testify on this point

and presented no other evidence which would tend to

A42

prove any such intent. Mr. Dudley’s trial testimony,

his deposition testimony, and his affidavit in this case

all reflect that the “overcharges” were unintentional and

inadvertent.

There is substantial case law which provides that

“the burden to plead and prove usury which does not

appear on the face of an instrument rests on the party

seeking to avoid the instrument.” Maestro Music, Inc.

v. Rudolph Wurlitzer Co., 354 P.2d 266, 271 (Ariz. 1960);

and Murphy Finance Co. v. Fredricks, 127 N.W.2d 924

(Neb. 1964). This includes the element of intent. Sum-

ner v. Investment Mortgage Company of Florida, 332 So.2d

103 (Fla. App. 1976).

Usury cannot be established by mere inference or

conjecture. See cases collected at 51 ALR2d 1087, in-

cluding the United States Supreme Court case of Ewing

v. Howard, 19 L.Ed. 293, 7 Wall 499 (1869) wherein

the court stated:

Usury is a defense that must be strictly proved, and

the court will not presume a state of facts to sustain

that defense where the instrument is consistent with

correct dealing. 19 L.Ed. at 296.

In First National Bank in Mena v. Nowland, 509 F.2d

872, 876 (8th Cir. 1975), the United States Court of Ap-

peals for the Eighth Circuit, on appeal from the Arkansas

District Court stated, that the primary principle used in

the construction of 12 U.S.C. § 85 “is that the Federal

act adopts the entire case law of the state interpreting

the state’s limitations on usury .. .” Tennessee law would

not support a charge of usury created by an inadvertent

error by the Bank. See, for example, White v. Kaminsky,

196 Tenn. 180, 264 S.W.2d 813 (1954), in which the Supreme

A43

Court of Tennessee cites with approval the following

language:

It is generally conceded that the exaction of more

than legal interest through an honest mistake of

fact, as, for example, because of a mistake in com-

putation, or a scrivener’s mistake in drawing an in-

strument, is not usurious.

Although counsel for the plaintiff has argued that

defendant’s deck of cards falls in because the Bank used the

discount rate of the Atlanta Federal Reserve District as

opposed to the St. Louis District, which was a mistake of

law, it is clear from the testimony at trial that at the

very most: mistakes of fact were involved. No intent

to knowingly collect usurious interest can be found from

the proof in the record, and a judgment for defendant must

be entered.

By way of alternate defenses the Bank asserts that

the overcharges were not usurious because the: under-

charges preceded and exceeded the overcharges. Al-

though the Court has found for the defendant on the

issue of knowingly, the Court does note that it does not

agree with the Bank’s net theory. If a lending institution

knowingly charges usurious interest, it may not justify

its unlawful conduct by reliance on prior or subsequent

undercharges to cover up. Citizens National Bank v.

Donnel, 195 U.S. 369 (1904).

Similarly there is no de minimis non curat lex ap-

plication when usury is shown. Haas v. Pittsburgh Na-

tional Bank, 526 F.2d 1083 (3rd Cir. 1975).

Similarly, this Court would and does reject the de-

fense of the Bank based upon the “savings clause” in the

A44

note. This clause reduced to its simplest meaning says

the parties do not intend to violate the usury laws but if

they do, they did not mean to and the excess interest will

be credited to the principal. If the Bank had knowingly

violated the usury laws, that clause would not save it, espe-

cially since they had not at trial time credited the excess

interest charges to principal.

If the Court were finding for the plaintiff, the Court

agrees that the measure of damages would be forfeiture

of all accrued and unaccrued interest and twice the amount

of all interest paid.

As the Supreme Court stated in First National Bank

of Lake Benton, Minnesota v. Watt, 184 U.S. 475, 476

(1902):

The first sentence of the section provides that ‘the

taking, receiving, reserving, or charging a rate of

interest greater than is allowed, . . . [omission by

Supreme Court] when knowingly done, shall be

deemed a forfeiture of the entire interest which the

note, bill, or other evidence of debt carries with it,

or which has been agreed to be paid thereon.’ This,

without the slightest ambiguity, provides for the for-

feiture, not of the amount by which the usurious has

exceed the lawful rate, but the entire interest. When

the statute then proceeds, in the very next sentence,

to say, ‘in case the greater rate of interest has been

paid, the person by whom it has been paid, or his

legal representatives, may recover back . . . [omis-

sions by Supreme Court] twice the amount of the

interest thus paid,’ it cannot in reason be held that

the words, the interest thus paid, refer to any other

sum than the entire interest as provided in the pre-

vious sentence. (emphasis added) 184 U.S. at 476.

A45

Summary

Based upon the foregoing, a final judgment in favor of

the defendant and counter-claim plaintiff should be pre-

pared by counsel for the: First Tennessee Bank, N.A.,

Memphis, in cause number 82-2391. Said judgment per-

taining to the counterclaim shall reflect the transactions

agreed upon and made since the trial.

Counsel are also directed to see that appropriate

judgments are entered in the other two cases, 82-2783 and

82-2869, to the end that all issues may be appealed si-

multaneously.

IT IS SO ORDERED.

ENTER: This 4th day of June, 1986.

/s/ Robert M. McRae, Jr.

Robert M. McRae, Jr.

United States District Judge

A46

CIVIL DOCKET CONTINUATION SHEET

DOCKET NO. 82-2391

WALTERS

Plaintiff

FIRST TN BANK

Defendant

Proceedings

Larry Parrish appeared for the plaintiff and

Leo Bearman, Jr. appeared for the defen-

dant. 9:45 A.M. 8 jurors present. Court

discussed statutes as to maximum interest

rates, RICO, etc. Court reversed former

position and says that the interpretation

of the bank is correct from 12/2/80 until

7/1/81. This is an adverse ruling to the

plaintiff. The remaining issue-overcharges

made prior to 12/2. usury. 1:50 P.M. Clos-

ing arguments of attorneys and rebuttal.

Court charged the jury at 3:20 P.M. after

which the jury retired to deliberate. The

jury requested certain exhibits. The Court

conferred with the attorneys and he said

regardless of how the jury rules, Court

would to direct counsel to file proposed

judgment on what he did and include ap-

plication for attorneys’ fees for collecting

and set on a Friday afternoon the proposed

judgment and invite Fisher’s Attorney and

should go first. 4:25 P.M. Court gave jury

Date NR.

10/85

A47

Proceedings

Ex. #5 and #14 through 12/2 and then

retired to resume deliberation. 5:05 P.M.

Court called jury in as to whether to stay

or come back tomorrow and they retired

to decide. The jury elected to resume on

9/10/85 and court therefore adjourned until

9:00 A.M.

MINUTES: Larry Parrish appeared for the

plaintiff and Leo Bearman, Jr. appeared

for the defendant. Jury resumed their de-

liberation at 8:52 A.M. with exhibits #5

& 14 and verdict form. 10:45 A.M. Jury

inquired of court to read definiation of the

work knowingly- Court re-read the appli-

cable part of his charge, and the jury re-

sumed deliberation. 2:12 P.M. Jury re-

turned verdict that deft. charged the pltf.

interest in excess of lawful rate. Jury polled

on Court’s own motion and asked each one

individually that their verdict was based

soley on evidence applicable to the issue.

Court did not want the jurors interviewed

unless there is an application frorm the at-

torneys. Larry Parrish is to prepare judg-

ment in the individual cases (including the

Ten-Tex Corp.) which would award double

the amount of dollars, etc. Deft. to prepare

judgment on counterclaim. There are to be

done within 10 days. Court will hear oral

arguments on judgment FRIDAY, SEPTEM-

BER 27, 1985, at 2:00 P.M.

10/85

9-85

9/85

120

121

A48

Proceedings

Plaintiff William S. Walters, Jr., special

requests for jury instructions-marked by

Court “Refused as submitted, intimely, after

argument and charge”

VERDICT- Jury answered “Yes” to ques-

tion whether the lst Tenn. Bank knowingly

charged the plaintiff interest in excess of

the lawful rate on the $475,000.00 note signed

May 3, 1979, between that date and De-

cember 2, 1980

HEARING SET for Fri., 9-27-85 at 2:00 p.m.

on Oral Arguments on Judgments

REQUEST FOR JURY INSTRUCTION +#1-

submitted by plaintiff - marked by Court

“Refused” 9/9/85 (filed in C-82-2391-M)

A49

IN THE

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT

OF TENNESSEE

WESTERN DIVISION

NO. 82-2391-H

WILLIAM S. WALTERS, JR.,

Plaintiff,

VS.

FIRST TENNESSEE BANK, N.A. MEMPHIS

and DOES 1 THROUGH 5,

Defendants,

AND

NO. 82-2783-H

FISHER LIME AND CEMENT CO., INC.,

Plaintiff,

VS.

WILLIAM S. WALTERS, JR. and FIRST

TENNESSEE BANK, N.A.

MEMPHIS,

Defendants,

AND

A50

NO. 82-2869-M

WILLIAM S. WALTERS, JR. AND OTHER SHARE-

HOLDERS OF TEN TEX MARINE, INC.,

SIMILARLY SITUATED,

Plaintiffs,

VS.

FIRST TENNESSEE BANK, N.A. MEMPHIS

and DOES 1 THROUGH 99,

Defendants.

* * * [1174] involves some of the same questions

or some of the same proof—is pertinent to the RICO

matters and the fraud question. But, I want to hear

the defendant’s proof on that even though we’ve heard

the position of the defendant during the plaintiff’s proof

because they used three officials or the testimony of

three officials.

Now, on the usury I’m going to grant the motion,

not for a directed verdict, but grant the motion on a

legal question about the statutory construction so that

any usury charges by surcharge or otherwise are sub-

ject to—to be submitted to the jury for the Federal

cause usury through July 1, 1981.

I deny any motion for a directed verdict on the

Fifth Amendment grounds asserted by the plaintiff and,

therefore, any usury based upon the National Banking

Act after that date is not allowed. The bank’s position

is well taken as far as relying on that surcharge or

other matters based upon the interpretation of the Na-

tional Banking Act.

A51

What I’m holding is that I’m agreeing with the plain-

tiff’s position through July 1, 1981 [1175] and disagreeing

with the argument on the constitutional question. I’m

not making this as a final ruling but I need some more

authority for the fact that a mistake of law is not a

defense for usury. If you’ve got a question of willful-

ness or intent to establish usury, I think a mistake of

law is at least a question that a defense that can be

asserted in so far as whether or not something was will-

ful or intentional.

Now, on the general motion and the more specific

ones on RICO and others I overrule the defendant’s

motions. Well, [ll reserve my ruling on the alleged

ambiguity, which to me it does seem ambiguous on that

nine percent versus a hundred thirty percent of prime.

On the RICO I’m prepared to hold, I don’t know that

I need to rule this, that the enterprise, if there is one

in this case, is the First Tennessee Bank and that there

must be proof of some person other than the legal entity

of the bank that is proven guilty of the acts of mail

fraud.

I invite the attorney for the defendant to renew the

motions except to the extent I ruled on them which

isn’t very much, I agree, because I think a trial judge

who is in this position with this kind * * *

* * x

* * * [1728] point. I'll go on while we’re at that.

The third point, my inclination is that the position

of the plaintiff is well taken. that is, that after March 23

First Tennessee continued to administer the loan pre-

cisely and exactly as it had prior to March 23 with

respect to the charging and collection of interest. It

A52

seems to me once they did that they did not accelerate

the loan. The letter says we will ask our attorney to

take whatever action is appropriate or something like

that, and they certainly in later calculating didn’t take

that action. Whether that would have benefitted Mr.

Walters or not I don’t know. I put a note on that. It

seems to me that this is the same—it’s analogous to the

procedure that Mr. Dudley said the bank followed when

they found a loan that had below prime interest rate

in it by error. Before they corrected it the note was

paid off. Therefore, they were bound—they certainly

didn’t go back and correct that and change it after the

note was paid and I think that’s analogous.

Now, the thing that I need to address next—I’ve been

working at night. I started working on the charge books

and the digest on [1729] fraud. This is my reaction—-

I’m saying this for the benefit of counsel—the attorneys

in this case, I believe for both sides, have recognized

that in common law fraud, and I’m saying that means

misrepresentation, fraud and inducement, the lawyers

have used the terms clear and convincing or cogent,

clear and convincing to prove fraud. Fraud in its basic

definition, raw fraud, is a false statement knowingly

made relied upon by the other to his injury.

I remember the case that I tried—and I think it’s

of some help on this—of course, these claims are diver-

sity claims. This is Freddy Gold and wife, Goldie Gold

versus the National Savings Bank of the City of Albany.

I don’t know whether anybody in this room is familiar

with the case, but I am because we tried it with Mr.

Charles Black representing the Golds and the Martin-

Tate firm by Mr. Marston and Mr. Piovarcy. This was

a construction loan commitment and it had a very un-

A53

usual—it wasn’t so unusual, it said that the bank got

to send its representative down and examine the prop-

erty and that if their representative found it wasn’t built

in accordance with the plans and specifications, then they

[1730] didn’t have to make the loan. They did that.

I found a case that was decided in 1895 that said

that when this sort of discretion is given to one party,

then the test is whether or not the representative acted

in bad faith. That’s the question I put to the jury and

the jury answered that the man had acted in bad faith

which surprised a number of people including Mr. Black,

but in any event, that’s what the jury found. I adjusted

the verdict, knocked out the punitive damages and ad-

justed the compensatory damages, denied a motion for

verdict—an NOV. The court of appeals reversed and

went into a discussion. I don’t mean to say the facts

of this case or the nature of the fraud were the same

although there is a slight analogy because I think at

least it’s charged that the right to determine what is

prime rate is a unilateral matter with the bank and it

certainly is as between these parties.

Anyway, this is something that dawned on me and

it says, without considering the substantial countervailing

evidence supporting the bank’s view of the transaction

and taking the evidence introducing by Gold in the light

most favorable to him there is still inadequate [1731]

evidentary support for a judgment in favor of the plain-

tiffs. This is where Judge Keith made a mistake or

his law clerk did. He says as the Tennessee Supreme

Court noted in Jones versus Seale (spelled phonetically),

and that’s a Tennessee Appeals report, so it was not the

Supreme Court. He says, the facts and circumstances

proved at trial must clearly establish the inference of

A54

fraud. A jury cannot render a verdict on the basis of

speculation, surmise or conjecture. Therefore, the Dis-

trict Court should have granted defendant’s motion for

judgment NOV with respect to the award of compen-

satory damages, which was in effect throwing the whole

thing out.

Now, it seems to me that in this case there’s only

one factual—well, I shouldn’t say that. Mr. Walters is

the primary factual witness for the plaintiffs, and I’m

calling him a plaintiff in behalf of Tentex. The plain-

tiffs, of course, used Mr. Dudley and. Mr. Whitsett as

some fact witnesses although Mr. Whitsett was hardly

a fact witness with regard to the details of this. But

Mr. Walters was, therefore, cast in a role which he was

not able to speak with knowledge [1732] about some

of the things that might shed some light on the intent

of whoever is supposed to have committed the fraud

whether it was Mr. Dudley, Mr. Whitsett, Mr. Bloom.

Fraud requires specific intent. It requires it in the

degree of proof more than just prima facie or getting

it to the jury on preponderance of the evidence. The

active parties for the defendant in my opinion just have

not been shown to have acted with falsity, doing things

falsely and with the intent to deceive or with intent

to injure, knowingly doing that. I just don’t believe

it’s fair. Fraud is a serious thing particularly when the

next fraud we are going to get to is criminal fraud.

It’s not brought as criminal fraud but that’s what it’s

accused of. |

It dawned on me after hearing all of this whether

you’re talking about how the prime was decided, how

the notes were picked up and whether there was a Sub-

chapter S corporation or whether there wasn’t, that

A55

doesn’t have anything to do with any inducement to

sign these notes or with any inducement to give up any-

thing by Mr. Walters or Tentex. So much of this proof

is addressed to trying to get some little nick in the accuracy

of [1733] the bank officials that really is not enough to

meet the basic test of knowing false statements to the

injury of somebody else.

There are a couple of places where the simpler form

of fraud or the more serious kind of the breach of a

fiduciary duty might have been brought up but it seems

to me that these duties—now, the duty to sell the note.

I don’t think the bank had any duty in the total cir-

cumstances to sell that note particularly since they had

to get the permission of Fischer. They were consulted

about it. Obviously par was going to be very hard to

come by and it wasn’t a very realistic thing, but this

was a very complex deal. And we also have to recog-

nize that Mr. Walters many times was vague in his

statements and, gosh, the number of times he testified

what prime rate meant to him, you could just—that went

on and on. He never did say it the same way twice

for a long time. Finally he admitted that the way it

was defined in the 475 note was his idea of fraud if

you would give 90 days a little leeway. I think pos-

sibly it was meant to.

It seems to me that when you get down to it this

Court is faced with the same thing that * * *

* * *

* * * [1794] you'll allow me to try to explain, I’m

going to read part of this. I think I'll just—so the argu-

ments will be more meaningful I’m going to read a por-

tion of what I intend to re-read later. I think I have—

A56

ladies and gentlemen, I think I have tried to tell you,

I know I have tried to tell you. I think I have told

you that we’ve been wrestling over some questions of

law on the multitude of issues that came up in this case

that have some relatively new principals (sic) of law in the

history of the common law or even the statutory law.

But, that’s not for you to say.

Let me just read what I’m going to re-read later

before the attorneys start their closing arguments. I

think maybe I'll just tell you what the closing argu-

ments—at this stage of the case when before we submit

to you any matters for you to resolve the attorneys get

to argue the case, that is to summarize the proof perti-

nent to the issues that are being submitted.

As I’ve told you from the beginning, the plaintiff

has the burden of proof [1795] by a preponderance of

the evidence to establish his claim. Because that burden

of proof is placed by the law on the plaintiff in this

phase of the case the plaintiffs lawyer gets to open and

close the summaries. That is to say Mr. Parrish will

address you first and then Mr. Bearman will address

you. After Mr. Bearman has addressed you Mr. Parrish

may again address you but this time he is limited to

what—undertaking to reply to what Mr. Bearman said.

Obviously it wouldn’t be fair to let a plaintiff’s lawyer

come in after the defendant’s lawyer has addressed you

and bring up something new. So, these lawyers under-

stand that rule.

Although we sometimes have objections to the scope

of the argument, that’s the reason that one lawyer gets

to address you twice and the other one only one time.

Mr. Bearman, of course, will have to reply to Mr. Par-

A57

rish’s first remarks and then call to your attention such

matters as he thinks are appropriate.

Now, there’s only one phase of this case which re-

quires your assistance. The * * *

* * *

* * * [1868] defendant, First Tennessee Bank, know-

ingly take or receive from or charge to the plaintiff,

William S. Walters, Jr., interest in excess of the lawful

rate on the $475,000.00 note signed May 3, 1979 between

the date of its signing and December 2, 1980? Yes or no.

This part of the case was brought pursuant to the

United States laws applicable to national banks, more

particularly Title 12 of the United States Code, Sections

85, 86 and 86A. These laws make it unlawful for a

national bank knowingly to take, receive or charge in-

terest at a rate in excess of the amount set forth in the

federal laws, which laws refer to and for some purposes

adopt the maximum rate of lawful interest under the

laws of the state where the national bank is located.

The penalty provided for taking usurious interest is

repayment of double the amount of usurious interest

paid within two years of the suit being filed and for-

feiture of all interest which the debt covers or which

has been agreed to be paid. Usury under the federal

law is knowingly taking, receiving or [1869] charging

more than the maximum lawful rate of interest. The

word knowingly means intentionally receiving interest in

excess of the amount authorized by appropriate law.

Knowingly does not include collecting interest above the

lawful amount due to a mistake of fact or by an unin-

tentional error or fact.

Oe

A58

The charges which are claimed to be knowingly ex-

cessive before December 2, 1980 are the ones which have.

been sometimes referred to as overcharges. The bank

admits that it made some erroneous overcharges but it

contends they were unintended errors and not excessive

interest charges which were knowing.

Of course, the plaintiff contends otherwise and claims

that the question submitted to you should be answered

yes. In a case of this kind the law imposes upon the

plaintiff the burden of proving the essential elements

of his claim by a preponderance of the evidence. In this

case that means the plaintiff must prove by a prepon-

derance of the evidence that it is more likely that the

answer to the question submitted to you is yes than

an * ¢ #

A59

(Filed October 14, 1988)

CASE NOS. 86-6031/32/33

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

WILLIAM S. WALTERS, JR., et al.,

Plaintiffs-Appellants,

vs.

FIRST TENNESSEE BANK, N.A. MEMPHIS

AND DOES 1 THROUGH 99,

Defendants-Appellees.

ORDER

Before: NELSON, NORRIS, CIRCUIT JUDGES, PECK,

SLNIOR CIRCUIT JUDGE

Upon consideration of the petition for rehearing filed

by the appellant, the court concludes that the issues raised

therein were fully considered upon the original oral argu-

ment and decision of this case.

It is therefore ORDERED that the petition for rehear-

ing be and it hereby is denied.

ENTERED BY ORDER OF THE COURT

/s/ Leonard Green/snt

Leonard Green, Clerk

A60

12 U.S.C. § 85

Any association may take, receive, reserve, and charge

on any loan or discount made, or upon any notes, bills

of exchange, or other evidences of debt, interest at the

rate allowed by the laws of the State, Territory, or Dis-

trict where the bank is located, or at a rate of 1 per

centum in excess of the discount rate on ninety-day

commercial paper in effect at the Federal reserve bank

in the Federal reserve district where the bank is located,

or in the case of business or agricultural loans in the

amount of $25,000 or more, at a rate of 5 per centum

in excess of the discount rate on ninety-day commercial

paper in effect at the Federal reserve bank in the Fed-

eral reserve district where the bank is located, which-

ever may be the greater, and no more, except that where

by the laws of any State a different rate is limited for

banks organized under State laws, the rate so limited

shall be allowed for associations organized or existing

in any such State under this title. When no rate is

fixed by the laws of the State, or Territory, or District,

the bank may take, receive, reserve, or charge a rate

not exceeding 7 per centum, or 1 per centum in excess

of the discount rate on ninety-day commercial paper in

effect at the Federal reserve bank in the Federal re-

serve district where the bank is located, or in the case of

business or agricultural loans in the amount of $25,000

or more, at a rate of 5 per centum in excess of the

discount rate on ninety-day commercial paper in effect

at the Federal reserve district where the bank is lo-

cated, whichever may be the greater, and such interest

may be taken in advance, reckoning the days for which

the note, bill, or other evidence of debt has to run. The

maximum amount of interest or discount to be charged

ag SEW SO

eee s

= SIME

Peace CaaS | tins SP da hs SY RT age

A61

at a branch of an association located outside of the States

of the United States and the District of Columbia shall

be at the rate allowed by the laws of the country, ter-

ritory, dependency, province, dominion, insular posses-

sion, or other political subdivision where the branch is

located. And the purchase, discount, or sale of a bona

fide bill of exchange, payable at another place than the

place of such purchase, discount, or sale, at not more

than the current rate of exchange for sight-drafts in

addition to the interest, shall not be considered as taking

or receiving a greater rate of interest.

(R. S. § 5197; June 16, 1933, c. 89, § 25, 48 Stat. 191;

Aug. 23, 1935, c. 614, Title III, § 314, 49 Stat. 711;

Oct. 29, 1974, P. L. 93-501, Title II, § 201, 88 Stat. 1558.)

12 U.S.C. § 86. Usurious interest; penalty for taking;

statute of limitation

The taking, receiving, reserving, or charging a rate of

interest greater than is allowed by the preceding section

[12 USCS § 85], when knowingly done, shall be deemed

a forfeiture of the entire interest which the note, bill,

or other evidence of debt carries with it, or which has

been agreed to be paid thereon. In case the greater

rate of interest has been paid, the person by whom it

has been paid, or his legal representatives, may recover

back, in an action in the nature of an action of debt,

twice the amount of the interest thus paid from the

association taking or receiving the same: provided such

action is commenced within two years from the time

the usurious transaction occurred.

(R. S. § 5198 in part.)

A62

12 U.S.C. § 86a. Business or agricultural loans, rate

limitation

(a) If the applicable rate prescribed in this section ex-

ceeds the rate a person would be permitted to charge

in the absence of this section, such person may in the

case of a business or agricultural loan in the amount

of $1,000 or more, notwithstanding any State constitu-

tion or statute which is hereby preempted for the pur-

poses of this section, take, receive, reserve, and charge

on any such loan, interest at a rate of not more than

5 per centum in excess of the discount rate, including

any surcharge thereon, on ninety-day commercial paper

in effect at the Federal Reserve bank in the Federal

Reserve district where the person is located.

(b) For the purpose of this part [12 USCS § 86a and

note ]—

(1) the term “loan” includes all secured and un-

secured loans, credit sales, forbearances, advances, re-

newals or other extensions of credit made by or to any

person or organization for business or agricultural

purposes;

(2) the term “interest” includes any compensation,

however denominated, for a loan;

(3) the term “organization” means a corporation,

government or governmental subdivision or agency,

trust, estate, partnership, cooperative, association, or

other entity; and

(4) the term “person” means a natural person or

organization.

(c) If the rate prescribed in subsection (a) exceeds

the rate such person would be permitted to charge in

A63

the absence of this section, and such State imposed rate

is thereby preempted by the rate described in subsec-

tion (a), the taking, receiving, reserving, or charging

a greater rate than is allowed by subsection (a), when

knowingly done, shall be deemed a forfeiture of the

entire interest which the loan carries with it, or which

has been agreed to be paid thereon. If such greater

rate of interest has been paid, the person who paid it

may recover, in a civil action commenced in a court of

appropriate jurisdiction not later than two years after

the date of such payment, an amount equal to twice

the amount of interest paid from the person taking, re-

ceiving, reserving, or charging such interest.

(Mar. 31, 1980, P. L. 96-221, Title V, Part B, § 511, 94

Stat. 164; Oct. 8, 1980, P. L. 96-399, Title III, § 324(b)

(d), 94 Stat. 1648.)

Tenn. Code Ann. § 47-14-103(2) (1979)

(2) For all written contracts, signed by the party

to be charged, and not subject to subparagraph (1) of

this Section, the applicable formula rate; provided, how-

ever, that in no event shall the applicable formula rate

exceed eighteen percent (18%) per annum; and

Public Law 96-161-Dec. 28, 1979, 93 Stat. 1237-1238,

§ 205

Sec. 205. (a) In order to prevent discrimination

against any financial institution chartered pursuant to

the statutes of the United States with respect to interest

rates, if the applicable rate prescribed in this section

exceeds the rate such federally chartered financial insti-

tution would be permitted to charge in the absence of

A64

this section, the federally chartered financial institution

may in the case of business or agricultural loans in the

amount of $25,000 or more, notwithstanding any State

constitution or statute, which is hereby preempted for

the purposes of this section, take, receive, reserve, and

charge on any loan, interest at a rate of not more than

5 per centum in excess of the discount rate on ninety-

day commercial paper in effect at the Federal Reserve

bank in the Federal Reserve district where the federally

chartered financial institution is located.

(b) If the rate prescribed in subsection (a) exceeds

the rate such federally chartered financial institution

would be permitted to charge in the absence of this

section, and such State fixed rate is thereby preempted

by the rate described in subsection (a), the taking, re-

ceiving, reserving, or charging a greater rate than is

allowed by subsection (a), when knowingly done, shall

be deemed a forfeiture of the entire interest which the

loan carries with it, or which has been agreed to be

paid thereon. If such greater rate of interest has been

paid, the person who paid it may recover, in a civil

action commenced in a court of appropriate jurisdiction

not later than two years after the date of such payment,

an amount equal to twice the amount of interest paid

from the federally chartered financial institution taking

or receiving such interest.

Public Law 96-161-Dec. 28, 1979, 93 Stat. 1240, § 213

Sec. 213. Notwithstanding any other provision of

this title, subject to sections 207 (2) and (3) and 211

(2) and (3) of this Act and section 308(h)(3)(B) and

(C) of the Small Business Investment Act of 1958, the

provisions of this title shall continue to apply until July 1,

A65

1981, in the case of any State having a constitutional

provision regarding maximum interest rates.

Public Law 96-221-March 31, 1980, 94 Stat. 164, § 512

Sec. 512. The provisions of this part shall apply only

with respect to business or agricultural loans in amounts

of $25,000 or more made in any State during the period

beginning on April 1, 1980, and ending on the earlier of—

(1) April 1, 1983; or

(2) the date, on or after April 1, 1980, on which

such State adopts a law or certifies that the voters

of such State have voted in favor of any provision,

constitutional or otherwise, which states explicitly

and by its terms that such State does not want the

provisions of this part to apply with respect to loans

made in such State,

except that such provisions shall apply to any loan made

on or after such earlier date pursuant to a commitment

to make such loan which was entered into on or after

April 1, 1980, and prior to such earlier date.

Public Law 96-221-March 31, 1980, 94 Stat. 168, § 529

Sec. 529. Effective at the close of March 31, 1980,

Public Law 96-104, section 105(a)(2) of Public Law

96-161, and the amendments made by and the provisions

of title II of Public Law 96-161 are hereby repealed,

except that the provisions of such Public Law, the pro-

visions of such section, the amendments made by such

title, and the provisions of such title shall continue to

apply to any loan made, any deposit made, or any obli-

gation issued in any State during any period when those

provisions or amendments were in effect in such State.

A66

Public Law 96-399-Oct. 8, 1980, 94 Stat. 1648, § 512

(c)(1) Section 512 of such Act is amended—

(A) by inserting “(a)” after “Sec. 512.”; and

(B) by adding at the end thereof the following:

“(b) A loan shall be deemed to be made during the

the period described in subsection (a) if such loan—

*(1)(A) is funded or made in whole or in part

during such period, regardless of whether pursuant

to a commitment or other agreement therefor made

prior to April 1, 1980;

“(B) was made prior to or on April 1, 1980,

and bears or provides for interest during such pe-

riod on the outstanding amount thereof at a variable

or fluctuating rate; or

A67

IN THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

NO. 86-6031

WILLIAM S. WALTERS, JR.,

Plaintiff/ Appellant,

Vv.

FIRST TENNESSEE BANK, N.A. MEMPHIS, et al.,

Defendants/ Appellees.

Appeal From the United States District Court

for the Western District of Tennessee,

Western Division, at Memphis

United States District Judge Robert M. McRae, Jr.

OPENING BRIEF OF APPELLANT,

WILLIAM S. WALTERS, JR.

ORAL ARGUMENT REQUESTED

Larry E. Parrish

PARRISH & MULROONEY, P.C.

Twenty-First Floor

First Tennessee Building

165 Madison Avenue

Memphis, Tennessee 38103

(901) 526-7777

A68

STATEMENT OF THE ISSUES

I. Did the district court err in granting a judgment

notwithstanding the jury’s verdict?

II. Did the district court err in its ruling that sur-

charge statutes permit the Bank to collect more

interest than permitted by a contract?

III. Did the district court err in reversing its initial

ruling that surcharge statutes did not take ef-

fect in Tennessee until 1981?

IV. Did the district court err in ruling that Walters

was not entitled to the benefit of the first breach

rule?

V. Did the district court err in ruling that the

promissory note was a contract?

VI. Did the district court, by directing a verdict,

err in taking from the jury whether the an-

nounced prime rate of the Bank was higher than

the Bank’s prime rate?

VII. Did the district court, by directing a verdict,

err in taking from the jury whether the Bank

possessed the requisite intent to be liable under

18 U.S.C. §1964(c)?

STATEMENT OF THE CASE

William S. Walters, Jr. (“Walters”) made a loan

(R. 113(W): Jt. P-T Order at p. 11(e)] for $475,000

from First Tennessee Bank (“the Bank’) on May 3, 1979

(Walters at TR 104, 1. 12-21), evidenced by the Note

[Exh. 3; R. 113(W): Jt. P-T Order at p. 12(f) and (g)]

which provided:

:

i

i

;

¢

.

A69

The term “prime rate” shall be deemed to mean that

rate of interest per annum charged by the Bank on

90 day borrowings by corporate borrowers with the

highest credit standing for commercial loans, such

“prime rate” being, as of the date hereof, eleven and

3/4 percent (11.75%) per annum.

The Bank publishes a rate which it calls “prime rate,”

and it fluctuated [R. 113(W): Jt. P-T Order at p. 14(1)

and [2*] (m); Exh. 10]. On May 3, 1979, the rate pub-

lished! was 11.75% (Exh. 10; Walters at TR 148, 1. 22-25;

149, 1. 1-12; 723, 1. 6-10; 625-625 (sic); 877-879).

The $475,000 was advanced on May 3, 1979, imme-

diately after execution of the Note, to TenTex Marine,

Inc. (Walters at TR 169-170, 1. 1-2; 175, 1. 4-9; 193, 1.

11-25; 322, 1. 18-24; 469, 1. 18-25; Exh. 6a). Walters

pledged a note (the “Fischer note”) from Fischer Lime

and Cement (“Fischer”), which had a balance far in

excess of $475,000 (Walters at TR 76, 1. 3-21; 190, 1. 14-

25; 191, 1. 1-2). The Bank collected the Fischer note

and applied what it collected to the Note (Walters at

TR 191-193, 1. 1-10).

The Fischer note yielded a $9,556.53 payment each

month with $10,000 payment, in addition, on January 26,

1981. From the first Note payment through Septem-

ber 17, 1982, the Bank collected $287,664.76 [R. 113(W):

*Numbers in brackets are the original typed page numbers.

1. When reading this brief, “the Bank’s prime rate” and

“what the Bank published as its prime rate” are different thoughts.

The tendency is to read the words with the underlying premise

that, when the Bank publishes a rate, that rate is its prime

rate. The prime rate fraud theory rests on the proposition that

what the Bank publishes is a rate different from and higher than

the Bank’s prime rate.

A70

Jt. P-T Order at p. 28] and credited it as if it were

interest (Exh. 5; Walters at TR 157-161). There was

one credit of $215.84 to principal, on October 18, 1982

Exh. 5; Walters at TR 160).

The Note’s detailed repayment schedule provided that

the first interest payment was due June 25, 1979, and

the twenty-fifth day of each September, December, March

and June thereafter. The first principal payment was

due March 25, 1980, and the twenty-fifth day of each

June, September, December [3] and March thereafter

with liquidation on March 25, 1987.

The March 1980 principal payment was not paid.

Prior to March 1980, Walters was in full compliance

with each term of the Note. On May 23, 1980, the Bank

wrote to Walters declaring a default for non-payment

of the March 1980 principal payment, though interest

continued to be collected monthly from Fischer. The

Bank made no attempt to accelerate [R. 107(W): Pf.’s

Mem., Ex. A; Walters at TR 212, 1. 22-25; 213, 1. 1-16].

Accrued interest was to zero on occasion (Exh. 6h; Walters

at TR 218-220; 22, 1. 15-23).

The Fischer companies (businesses owned by Walters’

family) are prime rate borrowers of the Bank (Walters

at TR 54, 1. 2-17), and Walters accompanied his father

many times in the negotiation of commercial loans (Walt-

ers at TR 50, 1. 4-10). Upon the death of his father,

Walters assumed the position reserved for the Fischer

companies on the Board of the National Bank of Com-

merce and served actively for ten years (Walters at TR

91, 1. 3-25; 1. 3-25 (sic); 92, 1. 1-120; Exh. 7).

The term “prime rate” was as familiar to Walters

as the most common words used in everyday parlance

ASAE ALM RRA GSE ERIS HMM R IS

{Ata eh RESEDA PA READ UE NRT I RHEL OMRS OPAC

3

i

A71

(Walters at TR 99, 1. 20-25; 100 1. 1-11; 147, 1. 16-20;

148, 1. 12-21; 149, 1. 6-12; 379-380; 619-620; 475, 1. 15-20),

and, to him, its meaning was clear. When used in the

Note, Walters testified that it conveyed to him that the

index, by whatever terminology, (i.e., the base, the bench-

mark, or the reference rate) for the rate (130% x the

Bank’s prime) was the lowest rate outstanding, at the

time of any variance, at which the Bank extended short-

term business loans.

[4] Proof introduced by Walters supported that the

definition of “prime rate” is, and has been since its in-

ception, consistent with what Walters testified (Walters

at TR 99, 1. 20-25; 100, 1. 1-11; 147, 1. 16-20; 148, 1. 12-21;

149, 1. 6-12; 379-380; 619-620; 475, 1. 15-20). The testi-

mony of a money and banking expert (Auerbach at TR

763-794) was confirmation of Walters’ definition. Dr.

Auerbach testified that the qualifiers in the Note are

terms of art used in commercial lending to do no more

than further explicate how the Bank determines which

is its lowest short-term commercial loan rate (Auerbach

at TR 843, 1. 16-851, 1. 16)., The prime rate is defini-

tionally (Auerbach at TR 907-933) tied to “short term

commercial loans” (Auerbach at TR 907-933; Exhs. 62-70).

The Bank calculated the interest it claimed was owed

using, as the base, the rate published. This rate was

not tied in any way to the lowest rate (Dudley at TR

1504-1514). The Bank consistently contended that the

“prime rate” terminology in the Note did not convey a

promise that the Bank would charge Walters a rate based

on its lowest rate (Dudley at TR 1504-1514). The Bank

considered there to be no contractual constraints on it

governing what it published as its prime (R. 108(W):

Pf.’s Mem. at p. 3).

AT2

The Bank admitted full responsibility for calculating

the amount of interest (Walters at TR 311, 1. 20-25; 312,

1. 1-5) owed by Walters and advising him thereof by

United States mails [R. 113(W): Jt. P-T Order at pp.

13-14(k)]. The Bank was the exclusive repository for

the information revealing the lowest rate (Walters at

TR 310-312) for a short-term [5] commercial loan by

it. Walters testified that he depended completely on

the Bank to honestly calculate and advise him of the

amount owed as interest (Walters at TR 311, 1. 20-25;

312, 1. 1-5).

The instant case was commenced by complaint, with

usury [R. 1(W): Cmplt.], filed on May 28, 1982, indi-

vidually. On July 19, 1982, the Bank filed its answer

and counterclaim [R. 17(W): Answer] to the First

Amended Complaint [R. 9(W)] which, when filed on

June 28, 1982, dropped the usury claim. The Bank denied

liability on all claims [R. 17(W): Answer]. Walters

denied default (R. 22(W): Answer).

As a stakeholder, Fischer instituted an interpleader

on October 19, 1982 naming as defendants Walters and

the Bank. On November 23, 1982, Walters answered

[R. 4(F): Answer] and included a crossclaim against

the Bank alleging usury. Thus, the usury claim was

made initially on May 28, 1982 and repled, as a cross-

claim in the interpleader, on November 23, 1982.

On December 23, 1983, Walters filed a Motion to

Consolidate [R. 46(W)] three simultaneously pending

causes of action between Walters and the Bank. On Jan-

uary 3, 1984, an order [R. 48(W)] was entered consol-

idating. On October 1, 1984, the Bank filed a motion

A773

[R. 75(W): Mot. to Dispose] which, among other things,

urged that the usury crossclaim be barred by the statute

of limitations. Walters responded [R. 80(W): Supp.

of Walters to Mem.] in opposition on October 31, 1984,

and with a motion-to amend [R. 83(W): Mot. for

Leave]. On August 9, 1985, the district court ordered

[R. 101(W): Order] that the statute of limitations

barred only those acts of [6] usury occurring prior to

May 22, 1980.

Walters’ crossclaim for usury was tried resulting in

a verdict for Walters [R. 120(W): Verdict] and judg-

ment notwithstanding the verdict [R. 130(W): Judg-

ment] was entered against Walters. Walters’ non-usury

claims, and the usury claims for collections after Octo-

ber 8, 1980, were disposed of by directed verdict (9-4-85

Min. Ent.; 9-6-85 Min. Ent.).

On January 13, 1986, Walters paid money to the

Bank, pursuant to an agreement [1-9-86 Min. Ent.; R.

98(W): Consent Order]. This mooted the Bank’s coun-

terclaim [R. 98(F): Consent Order]. The Bank has not

appealed.

On January 7, 1983, Walters filed a motion for sum-

mary judgment with an affidavit [R. 16(F): Aff.] and

memorandum of law [R. 14(F): Mem.] seeking a judg-

ment against the Bank for usury. The Bank opposed

[R. 26(F): Resp. to Mot.] with an affidavit [R. 28(F):

Aff.] and a memorandum [R. 27(F): Mem.). Walters

attempted to refute the Bank’s affidavit with the depo-

sition of the affiant [R. 31(F): Dep. of Dudley] and

a reply memorandum [R. 30(F): Reply]. The court

denied the motion because whether the overcharging was

“knowingly” done was in dispute [R. 101(W): Order].

AT4

Walters claimed that the Bank lost all rights under

the Note (Exh. 3) when the Bank first breached the

the Note by overcharging (Exh. 5; Exh. 12) before March

1980, when Walters was in full compliance. Walters

filed a memorandum [R. 107(W): Pf.’s Mem.] explaining

the first breach. This was [R. 113(W): Jt. P-T Order

at p. 18(r), p. 19(t)] a contested issue.

The district court reacted to the first breach theory

[7] with the comment that it had no application except

to anticipatory breaches (TR 1780, 1. 1-7). The district

court noted that the prime rate practices of the Bank

constituted an arguable breach of contract (TR 1740, 1.

1-2) and invited further argumentation on the first breach

(TR 1746, 1. 22-1749, 1. 3) but remained firm in its re-

fusal to deem it relevant (TR 1727, 1. 14-18).

Also among the contested issues was whether the

Note (Exh. 3) is so indefinite that it fails as a contract

[R. 113, p. 18(n), p. 21(d), p. 24(r), p. 35(eee)]. This

issue was injected by the Bank (Auerbach at TR 907-

933) and arose because of Walters’ contention with re-

spect to “prime rate” [R. 113(W): Jt. P-T Order at

subsection 1, pp. 48-51; p. 24(s); p. 20(a); p. 8; R. 39

(T): Aff.; R. 16(F): Aff.; Walters at TR 99, 1. 20-25;

100, 1. 1-11; 147, 1. 16-20; 148, 1. 12-21; 149, 1. 6-12; 379-

380; 612-620; Auerbach at TR 843-851].

In response, the Bank asserted that the words “prime

rate” communicated nothing more than that rate which

the Bank wished to choose as a benchmark irrespective of

what its lowest short-term commercial rate might, at

the time, be. According to the Bank, there existed no

rate so high which, if chosen by the Bank as its “prime

rate” and made use of to calculate Walters’ interest,

AT

would breach the Note [R. 108(F): Pf.’s Mem. at pp.

2-3; R. 113(W): Jt. P-T Order at p. 10}.

The one person responsible for selection of a rate

to be published as the Bank’s prime rate admitted that

the rate represented his subjective (Whitsett at TR 1256-

1262) evalu- [8] ation of economic conditions he deemed

significant in light of the business objectives of the Bank

[R. 34(W): Dep. of Whitsett at pp. 46, 50, 75, 76].

The district court noted that the prime rate was the

rate for the most creditworthy borrowers (TR 1738, 1.

20-22). The Bank testified that the Bank’s prime rate

borrowers were “very sizable highest creditworthy cus-

tomers”- (Dudley at TR 1450) and that “the names...

would be easily recognizable.” The Bank testified:

“They’re large, obviously large corporate borrowers” (Dud-

ley at TR 1451). They were described as borrowers who

“pay our prime rate” (Dudley at TR 1452). Oath was

made that the rate at which some borrowed was some-

times less than what the Bank announced (Exhs. 96, 97,

98, 99). The Bank testified that most, though a super-

lative, did not identify the one which stood out because

of its uniqueness in comparison with those with which

it was being compared (Dudley at TR 1589-1599).

Walters does not claim to be in the prime rate cat-

egory, but merely that the base rate by which his variable

rate fluctuates is the rate extended to the “most” credit-

worthy borrower with the “highest” creditworthiness.

The increment between that rate and the rate charged

Walters represents the degree by which Walters’ credit-

worthiness is less than the borrower with the “highest”

creditworthiness.

A76

When asked whether a prime rate of a bank could

ever be nothing more than a rate a bank announces,

the only money and banking expert who testified re-

sponded as follows at TR 945:

[9] I don’t see how you put something in a con-

tract which you can’t define (Auerbach at TR 839-

841) to me.

The Bank never modified this position. In light of

this, Walters urged the district court to rule that the

Note failed to meet the essential minimum requirement

of definiteness to constitute a contract. Walters sup-

ported his position with memoranda explicating the re-

quirements of law [R. 108(W): Pf.’s Mem.; R. 114(W):

Pf.’s Reply], and the Bank responded [R. 115(W): Def.’s

Mem. }.

The district court made the following pertinent ob-

servations at TR 280, 1. 20 - 281, 1. 3:

This . . . establishes that . . . there is no way a

borrower could figure out what prime was from the

four corners of that instrument. ... I think that is

pretty indefinite.

Next, as follows at TR 652, 1. 17 - 653, 1. 14:

. you all wouldn’t tell him who the corporate

borrowers were. ... How in the world is some-

body suppose to test that definition?

Well, . . . you are convincing me pretty thoroughly

that . . . that thing was so indefinite, . .

AT77

Next, as follows at TR 1071. 1. 19 - 1072, 1. 1:

... they are on the way to being honest about what

prime means. I looked up prime in the dictionary

last night. ... Prime, as an adjective, means among

the best. And that is what you take it to mean.

The district court stated as follows at TR 174, l. 11-19:

‘Well, this is a good ole’ boy. We're not going to

lose any money. Let’s forget the prime. Let’s get

[10] his business. Or, we might get his daddy’s busi-

ness or somebody else’s.’

The district court made the following observation at

TR 1141, 1. 9-14:

.. . there is a very, very, very strong issue on the

law question of indefiniteness because of the nature

of this relationship and what the thing says, the defini-

tion. (emphasis added)

The district court foreshadowed its ultimate ruling

with the following words at TR 1173, 1. 12-21:

You’ve got to find out some more about how prime

was calculated to find out whether or not this was

. so indefinite that it should be stricken from the

contract.

Finally, the district court ruled as is recorded at TR

1724, 1. 22 - 1725, 1. 16:

... threshold ... is this motion ... as to whether

or not the note ... was so indefinite that it did not

constitute a contract .... {mJy reaction to it... is

that I don’t believe that this note triggers this unusual

and bold apprvach for me to void this contract .. .

A78

The final words are at TR 1727, 1. 11-13:

This takes care of the . . . indefiniteness question . .

Usury was [R. 113(W): Jt. P-T Order at p. 3, pp.

8-9, p. 20(y), p. 28(ff), p. 31 (qq), p. 32(tt), p. 33(zz),

p. 34(bbb), p. 34 (ccc), p. 34(ddd), p. 35(eee), p. 37(jjj) ]

contested, and the trial proceeded on all usury claims for

any acts of usury which occurred after May 27, 1980 [R.

101(W): Order at p. 12; R. 113(W): Jt. P-T Order at

p. 5(b)].

The district court explicitly considered the claim of

Walters that, if the surcharge statute permitted the Bank

to [11] increase the amount it could exact to an amount

higher than the Note rate, the right of Walters not to have

property taken from him without the due process [R. 116

(W): Walters’ Trial Mem. at pp. 21-22] would be vio-

lated. The district court rejected this (TR 1174, 1. 15 -

1175, 1. 2).

Once the district court ruled out all usurious charges

over 18% after October 8, 1980 (surcharge exemptions),

the only thing left for resolution were charges for 32 days

at over 18% between May 28, 1980 and October 8, 1980.

(Exh. 12; Walters at TR 390-403).

The only contested issue submitted to the jury was

whether the Bank “knowingly” charged the excessive in-

terest on those 32 days. The jury was instructed that

“knowingly” was defined as follows at Tr. 1868:

These laws make it unlawful for a national bank

knowingly to take, receive or charge interest at a

rate in excess of the amount set forth in the federal

laws.

git

OS

A79

[at TR 1869] The charges which are claimed to be

knowingly excessive before December 2, 1980 are the

ones which have been sometimes referred to as over-

charges. The bank admits that it made some errone-

ous overcharges but it contends that they were un-

intended errors and not excessive interest charges

which were knowing.

* * *

{at TR 1874] The means of knowledge are ordinarily

the equivalent in law to knowledge. That is to say

the law will charge a person with notice and knowl-

edge of whatever he would have learned upon making

such inquiry as it would have been reasonable to

expect him to make under the circumstances. You

may consider it reasonable to draw the inference and

find that a person intends the natural and probable

consequences of acts knowingly done or knowingly

omitted.

7” +. *

[13] On or about September 27, 1982, Walters pro-

vided the Bank with his recapitulation (Exh. 89 I.D.) of

a day-by-day breakdown, specifying the exact amount of

overcharge by the Bank. Ten days earlier, the Bank had

received the monthly payment of $9,556.53 but had not

made its final posting.

On October 18, 1982, the Bank posted the $9,556.53

payment received on September 17, 1982. The posting

reflected that the money collected was credited to inter-

est. This credit resulted in there being no unpaid interest

(Exh. 5).

Thus, after receipt of the detailed information about

the overcharges subsequently found by the jury to have

A80

been knowingly made, the Bank continued to collect in-

terest and make credits, without any corrective entries

for the 32 days.

Between October 18, 1982 and August 26, 1985, the

deposition of the Bank was taken on three separate occa-

sions [R. 31(F); R. 109(W): R. 38(T): Dep. of Dudley]

and, on each of those occasions, the day-by-day breakdown

of overcharges was a subject of detailed inquiry [R. 31

(F); R. 109(W): R. 38(T): Dep. of Dudley]. On Sep-

tember 27, 1983, the Bank provided an affidavit [R. 28(F):

Aff.] attempting to justify the overcharges but never of-

fering to make any corrective entries. Subsequently [R.

30(F): Reply], Walters filed a memorandum addressing

every point raised by the Bank attempting to show that

the posited reasons supposedly excusing the overcharges

were not well found [R. 78(W): Resp. of Walters at pp.

6-18; pp. 26-39].

On August 26, 1985, [R. 113(W): Jt. P-T Order at

p. 10] the Bank stated what it claimed was owing and

included all of [14] the overcharges (including the 32

days) previously detailed to the Bank.

The Bank made affidavit [R. 29(F): Aff.] and re-

peatedly testified that there were thousands of promissory

notes like the Note. An exhibit (Exh. 9) listed over

6,500 separate short-term commercial loans, for $50,000 or

more, at rates less than the then announced prime rate.

This showed numerosity. Proof [R. 31(F): Dep. of Dud-

ley at p. 62, i. 2] stressed that Walters was treated no

differently than the other prime based borrowers.

As concerns the 208 days of overcharges commencing

December 4, 1980, the Bank did not attempt to defend

on the basis of lack of knowledge. The Bank claimed that

A81

these overcharges were knowingly exacted but justified

by its interpretation of the law [R. 78(W): Resp. of Wal-

ters at pp. 12-15, 17-18; R. 31(F): Dep. of Dudley at pp.

65-66]. With respect to the 32 days of overcharges, the

Bank defended on the basis that these overcharges, in

addition to being the result of a mistake of fact, were

excused because, on other occasions, the Bank charged

less than the law permitted in a sufficient amount to off-

set the overcharges (Dudley at TR 1556-1557).

The Bank never identified who at the Bank made the

mistake of fact (Dudley at TR 1541, 1. 7-11). The Bank

made oath that it is impossible to know that information

(Dudley at TR 1541-1546). The loan officer admitted that

he had no knowledge concerning computers (Dudley at

TR 1537, 1. 20-25) but did not hesitate to make oath that

the mistake was an error by the computer (Dudley at TR

1537, 1. 1-15). What [15] kind of computer error, when

the computer error was made and who was responsible

for making the computer error were subjects which the

Bank testified were unknowable (Dudley at TR 1350, 1.

11-12, 23-25; 1538, 1. 22-23).

When asked how he knew that a mistake had been

made, the Bank spokesman testified that he worked for

an honest employer which would not hire employees who

would violate the law [R. 31(F): Dep. of Dudley at pp.

59-60; R. 78(W): Resp. of Walters at p. 8]. The dis-

trict court refused to admit tendered evidence (TR 1655-

1657; Exh. 90 and 91 I.D.) that, in 1978, the Bank had

been convicted, after jury trial, of a federal felony in-

volving dishonesty to cover up illegal bribe payments

(TR 1656).

The representative testified [R. 31(F): Dep. of Dud-

ley at p. 34] that these overcharges occurred during a

A82

time when the Bank made many announcements at close

intervals stating, as its prime rate, a rate different from

the rate which it had stated in the previous announce-

ment. The witness admitted (Dudley at TR 1346, 1.

18-22) that he was the person designated by the Bank

to make certain that the correct amount of interest was

charged and collected (Dudley at TR 1601, 1. 6-24; 1651,

]. 9-27). He further made oath that the computer used

by the Bank was antiquated and, because of this, unable

to effectively record the necessary changes. He testified

that his travel schedule and the frequency of the changes

meant that it was impossible for him to perform more

efficiently (Dudley at TR 1564, 1. 5-18).

Walters claimed that the Bank engaged in a scheme,

the object of which was to obtain from Walters, with-

out his know- [16] ledge, more money than Walters agreed

to pay as interest by deceiving Walters into believing

that the Bank was entitled to the money charged and

received by the Bank [R. 113(W): Jt. P-T Order at

p. 22(j)].

By way of common law claims, Walters alleged tor-

tious misrepresentation [R. 113(W): Jt. P-T Order at

p. 21(c); R. 113(W): Jt. P-T Order at p. 20(a); R. 113

(W): Jt. P-T Order at p. 19(x)] and that the Bank

breached a confidential relationship and a trust with

Walters [R. 113(W): Jt. P-T Order at p. 26(aa); R.

113(W): Jt. P-T Order at p. 27(bb); R. 113(W): Jt.

P-T Order at p. 27(cc); R. 113(W): Jt. P-T Order at

p. 33(vv); R. 113(W): Jt. P-T Order at p. 33(ww);

R. 113(W): Jt. P-T Order at p. 21(f); R. 113(W): Jt.

P-T Order at p. 21(e); R. 113(W): Jt. P-T Order at

p. 14; R. 113(W): Jt. P-T Order at p. 9-10: R. 113(W):

Jt. P-T Order at p. 27(dd); R. 113(W): Jt. P-T Order

A83

at p. 33(uu); R. 113(W): Jt. P-T Order at p. 20(a);

R. 113(W): Jt. P-T Order at p. 20(b); R. 113(W): Jt.

P-T Order at p. 24(s); R. 113(W): Jt. P-T Order at

p. 27(dd); pp. 48-51; R. 113(W): Jt. P-T Order at p. 113

p. 20(a)]. The breach of confidential relationship and

trust is predicated on the allegation that the Bank failed

in its obligation to honestly compute the interest owed

and accurately advise Walters thereof.

The district court directed a verdict on all RICO and

ancillary claims (9-6-85 Min. Ent.). As to the misrepre-

sentation allegations, the district court explicitly cited

United States v. Schilling, 561 F.2d 659 (6th Cir. 1977)

[TR 1737, 1. 17-21] and Gold v. National Savings Bank

of the City of Albany, 641 F.2d 430 (6th Cir. 1981) [TR

1729-1731] as its [17] mandate (TR 1778) to direct a

verdict.

The absence of a scheme was found because absence

of prerequisite intent was found. There were mailings

which furthered the activity (TR 1735, 1. 2-5), which was

characterized as an “arguable breach of contract” (TR

1740, 1. 1-2), but, for lack of intent, not in violation of

$1341.

On intent, the district court remarked at TR 1732,

]. 5-8, 12-16:

The law requires specific intent. It requires it in the

degree of proof more than just prima facie or getting

it to the jury on preponderance of the evidence.

The district court continued at TR 1733, 1. 2-3:

[t]he basic test of knowing false statements to the

injury of somebody else.

A84

The district court stated at TR 1742, 1. 11-12:

But there is no authority anywhere that gets away

from the criminal intent to violate the law and that

has to be something wicked, unlawful and deliberate.

The ruling is based on the absence of intent in the

specific individuals by its remarks at TR 1732, 1. 2-4:

[t]he intent of whoever is supposed to have com-

mitted the fraud whether it was Mr. Dudley, Mr.

Whitsett, Mr. Bloom.

The district court continued at TR 1732, 1. 8-12:

The active parties . . . just have not been shown

to have acted with falsity, doing things falsely and

with the intent to deceive or . . . to injure, knowingly

doing that.

The district court said of the individuals at TR 1742,

1, 1-5:

But I can’t find any fraudulent act on [18] the part

of these individuals, ....

The district court most pointedly said at TR 1738,

1. 6-12:

Those men thought they were doing the right thing.

They believed this was what the bank was supposed

to do .. . I’m talking about Mr. Whitsett and Mr.

Dudley ...

The intent was seen as missing in the individuals

because the prime rate was viewed as nothing more than

what the Bank announced (TR 1737, 1. 12; 1739, 1. 9;

1726, 1. 15-23). It was stated that the Bank’s prime rate

ee

A85

could not be interpreted as the “lowest” rate. Early, the

district court used a dictionary (supra at 9) to illustrate

that “prime rate” meant the “best.” Later, the district

court stated that “there’s only one prime rate,” (nobody

ever claimed that there was more than one prime rate)

and used the dictionary to support that “prime” and

“lowest” could not be the same at TR 139, 1. 10-25:

Prime rate, I looked it up .. . - Webster’s Dictionary,

Prime does mean first in excellence, of highest

quality, as prime wheat, a prime quality cloth... .

There’s another one that’s akin to it, that’s first in

degree, rank, dignity or employment.

The district court remarked, concerning Dr. Auer-

bach, at TR 1726 1. 24, 1727, |. 6:

. . my reaction is that that’s a matter for Congress

and I wish him [Dr. Auerbach] well in his efforts

to try to have some ... . legislation adopted because

I think it’s ... unfair .. . invites problems when

.. . loans are keyed to this prime rate and... you

get into something like Mr. Walters did... .

* * *

A86

IN THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

NO. 86-6031

WILLIAM S. WALTERS, JR.,

Plaintiff/Appellant,

V.

FIRST TENNESSEE BANK, N.A.

MEMPHIS, et al.,

Defendants/Appellees.

Appeal from the United States District Court

for the Western District of Tennessee,

Western Division, at Memphis

United States District Judge Robert M. McRae, Jr.

APPELLANT’S PETITION TO REHEAR

Larry E. Parrish

LARRY E. PARRISH, P.C.

6077 Primacy Parkway

Suite 332

Memphis, Tennessee 38119

(901) 767-8000

eT

A87

IN THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

NO. 86-6031

WILLIAM S. WALTERS, JR.,

Plaintiff/Appellant,

v.

FIRST TENNESSEE BANK, N.A.

MEMPHIS, et al.,

Defendants/ Appellees.

APPELLANT’S PETITION TO REHEAR

ISSUE ONE

From all that can be gleaned from this court’s slip

opinion, it appears that, for a reason not able to be sub-

stantiated in the record, this court failed to review that

portion of the decision of the trial court relative to usury

charged by the Bank for 208 consecutive days as to which

the Bank fully admitted full knowledge and intent to

charge that which it charged and collected. The Bank

did not even attempt to argue that the rate charged and

the amount collected was the result of a mistake of fact.

The Bank conceded that if what it charged was usury, it

was a usurious overcharge based on a mistake of law but

did not admit that its interpretation of the law was error.

A88

It, likewise, is undisputed that usury charged as a result

of a mistake of law is unexcused. In other words, a mis-

take of law which results in exacting usury is irrelevant.

In his opening brief, on page 14, Walters, as a part of

his statement of the case, noted as follows:

[2*] As concerns the 208 days of overcharges com-

mencing December 4, 1980, the Bank did not attempt

to defend on the basis of lack of knowledge. The

Bank claimed that these overcharges were know-

ingly exacted but justified by its interpretation of

the law [R.78(W): Resp. of Walters at pp.12-15, 17-

18; R.31(F): Dep. of Dudley at pp.65-66).

Subsequently, in his brief, Walters discussed the sec-

ond enumerated issue with the following references at

pp. 31-32:

Subsequently, federal legislation, purporting to over-

ride state law, was enacted purporting to permit the

Bank to charge interest in excess of the maximum

which the Bank could charge on May 3, 1979.

[O]f specific importance here are the charges by the

Bank commencing on December 4, 1980 for 208 con-

secutive days (supra at 14). The Bank admitted full

knowledge and intent so to do and collected from

Walters $25,000 in interest in excess of 18%.

In this court’s slip opinion, the issue concerning the

208 days on which usury was admittedly knowingly

charged and collected is addressed as follows:

“Numbers in brackets are the original typed page numbers.

A89

The district court also ruled during the course of the

trial that as a matter of law any usury claims October

8, 1980, on the personal loan necessarily failed based

on the court’s construction of certain state and fed-

eral interest rate statutes.°®

x * *

‘Walters superficially challenges the district court’s

construction of Pub.L.No.96-221 and Pub.L.No.96-399

in its appellate brief by simply referencing its trial

memorandum. We cannot countenance this attempt

to circumvent Fed.R.App.P.28(g) and its limitation

on appellants’ briefs to 50 pages.

Walters did not reference his trial memorandum. In-

stead, [3] his reference was to a response made to a mo-

tion for summary judgment filed by the Bank. The

necessity of Walters to refer to his response did not have

as its purpose an intent to circumvent the 50 page limit

on appellants’ briefs. Rather, the necessity was to make

it clear that Walters did not concede the motion of the

Bank or any contention made in support of the motion.

Walters chose not to explicate, in detail, the error of

the district court in its misinterpretation of the governing

surcharge law because it was unknown to what extent, if

at all, the Bank would argue from or seek to justify the

ruling of the district court on this basis. Had the Bank

elected, in its brief, to avoid an attempt to justify the

judgment below on grounds other than what it purported

to be its right under the surcharge statutes, Walters would

have been left with his decision to provide this court with

no further explanation.

However, the Bank chose, in its brief, to devote 10 pages

(Bank brief pp. 33-43) of argument on the surcharge stat-

A90

utes. In order to assist the court in not being misled

by the error in interpretation being prulmugated (sic)

by the Bank in its brief, Walters was forced to discuss,

in detail, the error in the reasoning being suggested by

the Bank which, in turn, is the exact same error of the

district court used to reduce to insignificance the $25,000

usurious overcharge on 208 consecutive days and subse-

quent collection of the overcharged interest. Thus, from

the first page through the fifth page of the Walters reply

brief, Walters explains the import and proper [4] inter-

pretation of the surcharge statutes in a way which would

hardly seem subject to categorization as “superficial.”

Respectfully, it appears that this court, with a bit of

consternation, simply refused to review the district court’s

misinterpretation of the surcharge statutes on what ap-

pears to be a mistaken belief that Walters had not provided

this court with sufficient guidance on the subject. Walters

pleads with the court to reconsider its apparent refusal

to review carefully this matter of pure law based on un-

disputed facts.

It further appears from this court’s slip opinion that

court may have failed to understand the full significance

of this law question. The 208 days on which the usury

was exacted were well within the limitations period estab-

lished by the district court. Also, the position of Walters

concerning the $25,000 in usury exacted on the 208 days

presupposes, arguendo only, that the statutes permitting

the surcharge were constitutional. It seems necessary to

point this out because the slip opinion leaves room to

doubt whether the court presumed that the position of

Walter (sic) on this point was dependant on the success of

Walters’ argument concerning the unconstitutionality of

the surcharge statutes.

Agi

The question of law is: When did the surcharge

statutes come effective in Tennessee the Bank’s charging

more than the otherwise controlling usury ceiling of 18%?

The district court quite cordially confessed: ‘I must con-

fess that I’m still confused about what usury law we are

working under.” (App. Vol.V. [5] p.1643) It is unques-

tionable that the surcharge statutes did not become ef-

fective in Tennessee on the date when those statutes

became effective in most other states. For the purpose

of argument only, Walters concedes that there existed a

period during which the surcharge statutes were effective

in Tennessee.

Without question, the surcharge statutes are perhaps

the epitome of inartfulness draftsmanship and, because

of this, their interpretation is not easy. Any attempt to

rightly divide the surcharge statutes, with respect to

their effective dates in Tennessee, without meticulous

care and an inordinate amount of study is sure to be

truly superficial and unreliable. However, a first blush

interpretation, like a hard and meticulous study, is ben-

eficial to Walters because both yield the same conclusion,

i.e., that, during the 208 day period in question, the sur-

charge statutes were not effective in Tennessee; thus, as

a matter of law, the Bank could not exact from Walters

in excess of the 18% usury ceiling.

It is only that middle range of study of the surcharge

statutes, apparently relied on by the Bank during those

208 days, trying to make the statutes justify a predis-

position (ie., that the Bank could charge interest in

excess of the 18% usury ceiling) that the interpretation

advocated by the Bank begins to appear plausible.

ooo

A92

Below, the Bank successfully persuaded the district

court that the effective date of the surcharge statutes

in Tennessee was October 8, 1980. As a matter of law,

the surcharge statutes, [6] on their face, make them-

selves applicable in Tennessee on, but not before, July 1,

1981. If Walters is correct, a directed verdict in favor

of Walters and against the Bank for charging and col-

lecting $25,000 in usury is a foregone conclusion.

ISSUE TWO

The slip opinion is replete with the substantively

same statement made over and over. To whit (sic), the

following appears at slip opinion 5:

[Walters failed to prove that the excess interest

charge was knowingly assessed. The only testimony

on the issue was from the Bank’s witness .. . who

admitted . . . overcharges, but who testified that

they .. . were inadvertent errors due to manual

computer programming oversights. Walters presented

no contradictory evidence tending to show that the

overcharges were anything but the result of negli-

gence.

continuing at slip opinion 8:

[Walters failed to show any evidence of intent, a

requisite element of usury.

* a *

[Walters presented no evidence of intent.

kes Ati Duan) Be beet E yo do Ah

A93

continuing at slip opinion 9:

[W]Jalters presented no evidence tending to show that

the Bank acted other than negligently or by mistake.

As such, there was a complete failure of proof con-

cerning intent,....

continuing at slip opinion 18:

The only testimony at trial regarding the Bank’s

overcharge was that of Mr. Dudley.

* * *

[I]n face of this evidence which at most established

negligence on the part of the Bank Walters presented

no contradictory * * *

* 7 -

A94

IN THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

NO. 86-6031

WILLIAM S. WALTERS, JR..,

Plaintiff/Appellant,

V.

FIRST TENNESSEE BANK N.A.

MEMPHIS, et al.,

Defendants/Appellees.

NO. 86-6033

WILLIAM S. WALTERS, JR., Individually and For Him-

self and Other Shareholders of TEN TEX MARINE, INC.,

Similarly Situated,

Plaintiffs/Appellants,

V.

FIRST TENNESSEE BANK N.A. MEMPHIS,

DOES 1 THROUGH 99 and

TEN TEX MARINE, INC.,

Defendants/Appellees.

JOINT BRIEF OF APPELLEE

FIRST TENNESSEE BANK N.A. MEMPHIS

A95

APPEALS FROM THE UNITED STATES DISTRICT

COURT FOR THE WESTERN DISTRICT OF

TENNESSEE WESTERN DIVISION,

AT MEMPHIS

LEO M. BEARMAN

R. MARK GLOVER |

HEISKELL, DONELSON, BEARMAN,

ADAMS, WILLIAMS & KIRSCH

2000 First Tennessee Building

Memphis, Tennessee 38103

(901) 526-2000

Counsel for Appellee First Tennessee Bank N.A. Memphis

ORAL ARGUMENT REQUESTED

A96

¢ * 2

* * * [33*] unless the bank can prove negligence on

the part of the customer. It did not involve a statute re-

quiring a finding of “knowledge” or “scienter” on the part

of the bank. It involved a statute imposing a standard

of strict liability on the financial institution without re-

gard to “knowledge.” It is respectfully submitted that

the usury statutes are significantly different, in terms of

the type of proof required for the imposition of liability

on the financial institution, and for that reason the case

is clearly distinguishable.

First Tennessee respectfully submits that the trial

court was correct in finding that there was absolutely no

proof in the record of the intent element necessary to find

a violation of the usury statute.

II.

(WALTERS ISSUES NO. II AND IIT)

THE TRIAL COURT WAS CORRECT IN HOLDING

THAT UNDER APPLICABLE LAW, INCLUDING THE

SURCHARGE AMENDMENTS TO 12.U.S.C. §§85 AND

86, FIRST TENNESSEE’S CHARGES ON THE

$475,000 NOTE WERE PROPER

In Issues II and III raised in the Walters Brief, it is

first argued that in executing a promissory note on May

3, 1979, even though that note provided for a floating rate

of interest, Mr. Walters was receiving a contractual guar-

antee [34] that he would never be charged more interest

than the maximum rate chargeable on the date of signing.

Mr. Walters goes on to argue that federal preemption leg-

*Numbers in brackets are the original typed page numbers.

A97

islation which granted interest rate relief during and after

1980, if applied to the Walters note, would constitute an

unconstitutional impairment of this contract.

First, it should be noted that the interest preemption

statutes referenced by Mr. Walters have not been declared

unconstitutional by any Court. More importantly, the

contract embodied in the $475,000 promissory note ob-

viously anticipated, because of its floating rate of inter-

est, that it might in the future exceed the rate which was

the maximum legal rate on the date of signing. This

recognition is evidenced by the following language in the

note [TR. Ex. 3]:

The rate of interest on the unpaid principal balances

of the indebtedness hereby evidenced shall be ad-

justed as of each day that the prime rate is changed;

provided, always, however, that notwithstanding any

changes in said prime rate, the rate of interest hereon

prior to maturity shall never be more than the maxi-

mum lawful contract rate which a national bank, hav-

ing its principal place of business in the State of Ten-

nessee, may lawfully charge from time to time.

It is the intention of the Maker and the Bank to

contract in strict compliance with the usury laws as

set forth at 12 U.S.C. §85, and the laws of the State

of Tennessee incorporated therein by reference; and,

accordingly, in no event and upon no contingency

shall [35] the Bank ever be entitled to receive, collect,

or apply as interest any interests, fees, other payment

equivalent to interest, in excess of the maximum con-

tract rate which may, from time to time, be lawfully

charged to the Maker hereof under the applicable law

A98

by a national bank having its principal place of busi-

ness in the State of Tennessee .... (Emphasis sup-

plied.)

Clearly, the parties contemplated that the maximum rate

allowed under the law would fluctuate with time, thus

the language “from time to time” throughout the note.

If it had been the intention of the parties to simply pro-

vide an absolute 18% ceiling, that would have been sim-

ple enough to insert; and it is respectfully submitted that

the absence of that language, together with the inclusion

of the language quoted above, makes the construction

urged by Walters illogical.

Mr. Walters raises the issue of whether the trial court

correctly ruled that First Tennessee was entitled to the

benefit of the preemptive “surcharge” statutes in the case

of this note. Mr. Walters, however, did not brief that

issue, choosing instead to attempt to incorporate by refer-

ence a brief filed with the trial court. First Tennessee’s

position on this issue, and the position correctly adopted

by the trial court, is as follows:

[36] The $475,000 loan was made and the note was

signed on May 3, 1979. The usury law on which First

Tennessee relied at that time and until December 2, 1980,

was the Tennessee usury law. (Tenn. Code Ann. §$§47-14-

102 & 103). First Tennessee complied with that law.

First Tennessee, as a national bank, was entitled to

rely on the Tennessee usury law during the period May 3,

1979 to December 2, 1980 by virtue of 12 U.S.C. §85,

which allows a national bank to charge the greater of

(i) the rate permitted by state law or (ii) 1% over

the Federal Reserve discount rate in effect in the re-

serve district in which First Tennessee is located.

A99

Tennessee law permitted an interest rate of 5% over

the discount rate of the Federal Reserve Bank in Atlanta,

with a maximum of 18%. Except for the two inad-

vertent errors testified to by Mr. Dudley, which did not

occur during the period of the Federal Reserve sur-

charge, during the period when First Tennessee relied

on Tennessee law, it never exceeded the rate permitted

by state law. This fact is not disputed by Walters.

[37] On April 1, 1980, at a time when First Ten-

nessee was relying on state law and the rate charged

Walters was within the state law ceiling, Congress

adopted Pub. L. No. 96-221.

Pub. L. No. 96-221 [codified at 12 U.S.C. §86(a) ]

amended 12 U.S.C. § 85 to:

(a) Preempt any state law, whether statutory or

constitutional, to the extent state law imposed a rate

ceiling lower than Pub. L. No. 96-221 imposed;

(b) Permit national banks to charge (on loans of

the type to Plaintiff) up to “5% in excess of the

discount rate, including any surcharge thereon, . .

in effect at the Federal Reserve Bank in the Federal

Reserve District where the person is located”;

(c) Apply only with respect to business .. . loans

in amounts of $25,000 or more made in any state

during the period beginning on April 1, 1980, and

ending on the earlier of -

(1) April 1, 1983; or

(2) [The date such state expressly opts out

of the effect of Pub. L. No. 96-221 (which Ten-

nessee never did) ]

aia

A100

(d) Provide that where the amendments in para-

graphs (a), (b) and (c) above and “any other pro-

vision of law . . . apply with respect to the same

loan ... such loan . . . may be made at the highest

applicable rate”; and

(e) Repeal as of March 31, 1980, Pub. L. No. 96-104

and parts of Pub. L. No. 96-161 [neither of which

were relied on. by FTB for Walters’ loan].

Pub. L. No. 96-221 by its express terms did not apply

to Walters’ loan on April 1, 1980 because the loan was not

[38] made “during the period beginning April 1, 1980 and

ending April 1, 1983.” At that time (April 1980), First

Tennessee continued to rely on Tennessee law and its rate

was within the Tennessee ceiling.

Pub. L. No. 96-221 nonetheless becomes important to

this issue because Pub. L. No. 96-399 on October 8, 1980

amended Pub. L. No. 96-221 to add a provision that per-

mitted Pub. L. No. 96-221 (with its provision for a sur-

charge) to apply to Walters’ loan by adding to Pub. L.

No. 96-221 the following language:

(b) A loan shall be deemed to be made during the

period described in subsection (a) [April 1, 1980 to

April 1, 1983] if such loan -

* ~ *

r

(B) was made prior to or on April 1, 1980, and bears

or provides for interest during such period on the

outstanding amount thereof at a variable or fluctuat-

ing rate. (Emphasis added.)

A101

Pub. L. No. 96-399 further provided:

(2) The amendments made by paragraph (1) [those

amendments discussed above] take effect on April 1,

1980.

[39] Pub. L. No. 96-399 thus made Pub. L. No. 96-221

applicable to Walters’ loan because that loan was “made

prior to April 1, 1980, and [bore] interest during such

period on the outstanding amount thereof at a variable

or fluctuating rate... .”

At the time Pub. L. No. 96-399 was adopted, First

Tennessee was continuing to rely on Tennessee law for

the rate ceiling. It was not until December 2, 1980 that

First Tennessee first relied on federal law for the appli-

cable interest rate ceiling. At that time, Pub. L. No. 96-

221 as supplemented by Pub. L. No. 96-399:

(a) Preempted any state usury law, whether statu-

tory or constitutional, to the extent state law imposed

a rate ceiling lower than Pub. L. No. 96-221 imposed.

(b) Permitted national banks to charge (on loans

of the type to Plaintiff) up to “5% in excess of the

discount rate, including any surcharge thereon, .. .

in effect at the Federal Reserve bank in the Federal

Reserve district where the person is located.”

(c) Applied to loans made between April 1, 1980

and April 1, 1983 and to loans made prior to April

1, 1980 which provided for interest during such period

on the outstanding balance thereof at a variable or

fluctuating rate; and

(d) Provided that where the amendments in para-

graph (a), (b) and (c) above and “any other pro-

A102

vision of law . . . apply with respect to the same loan

. .. such loan may be made at the highest applicable

rate.” (Emphasis added.)

[40] 12 U.S.C. §86(a), as amended by Pub. L. No.

96-211 and Pub. L. No. 96-399, thus applied to the May

3, 1979 loan. It is on that statute that First Tennessee

justifiably relied after December 2, 1980 and consequently,

the application of the surcharge to the federal discount

rate does not constitute usury.

Walters contends that reliance by First Tennessee on

12 U.S.C. §86(a) was incorrect. Although he does not

address the issue in his brief, the trial brief which he

attempts to incorporate by reference claims an earlier

amendment to 12 U.S.C. §86(a), ie., Pub. L. No. 96-161,

exempted Tennessee from the preemptive federal usury

legislation until July 1, 1981. This is an incorrect reading

of the statute.

Pub. L. No. 96-161 permitted national banks to charge

5% over the discount rate of the Federal Reserve Bank

in the district where the bank is located on business loans

in excess of $25,000. It did not provide a surcharge. The

amendment was effective from December 28, 1979 and

expired on the earliest of (1) July 1, 1980 (in states where

there was a statutory usury provision); or (2) July 1,

1981 (in states where there was a constitutional usury pro-

vision); or (3) the date when the state specifically and

by reference rejected the federal usury law. As stated

earlier, FTB [41] never relied on this statute, as the loan

in question was made prior to its effective date.

It is evidently Walters’ position that in states with

a constitutional provision regarding usury the federal en-

actments did not become effective until July 1, 1981.

A103

Walters reaches this conclusion on the wording of §213

to Pub. L. No. 96-161, which reads as follows:

Notwithstanding any other provision of this title, sub-

ject to Sections 207(2) and (3) [the opt out pro-

visions], the provisions of this title shall continue to

apply until July 1, 1981, in the case of any state

having a constitutional provision regarding maximum

interest rates. (Emphasis added.)

It is clear that this provision gives the expiration date

of the amendment, and not its effective date. Only by

interpreting the emphasized phrase “this title” in the

above quoted portion of §213 to mean all of 12 U.S.C.

§85 and 12 U.S.C. §86 does Walters’ argument logically

proceed to the conclusion urged by him. Apparently,

Walters reads §213 to mean that the provisions of 12 U.S.C.

§85 (Walters’ interpretation of the meaning of “this title”)

as they existed prior to the amendments contained in Pub.

L. No. 96-161 would continue in effect until July 1, 1981

in those [42] states having a constitutional provision re-

garding maximum interest rates. Under Walters’ inter-

pretation, the preemptive provisions of Pub. L. No. 96-161

become effective in those states having constitutional

usury provisions beginning July 1, 1981. This interpreta-

tion leads to a curious result in that Pub. L. No. 96-161

ceases to be effective in those states having statutory

usury provisions on July 1, 1980, a full year before they

would become effective in states having constitutional

usury provisions. Obviously such an interpretation makes

no sense and must be deemed to be without merit.

Walters’ argument on this issue and any refutation

of it is unnecessary because First Tennessee never relied

on Pub. L. No. 96-161, as that enactment in no way ap-

A104

plied to the Walters loan. The effective date of Pub. L.

No. 96-161 was December 28, 1979 and the Walters loan

was made on May 3, 1979. There is nothing in Pub. L.

No. 96-161, unlike Pub. L. No. 96-221, as amended by Pub.

L. No. 96-399, that permits retroactive application. In the

absence of applicable federal legislation during that period,

First Tennessee continued to operate under state usury

law. The proof showed that during the period that First

Tennessee was operating under state law, it never ex-

ceeded the 18% ceiling [43] (except for the two inad-

vertent errors testified to by Mr. Dudley and addressed

previously in this brief).

The first of the federal usury laws that applied to

First Tennessee and to the Walters loan is found in Pub.

L. No. 96-221 as amended by Pub. L. No. 96-399, codified

at 12 U.S.C. §86(a). By its terms, this enactment, effec-

tive April 1, 1980, repealed Pub. L. No. 96-161, and pre-

empted any state law, whether statutory or constitutional,

that would prohibit the charging of a rate equal to 5%

over the discount rate of the Federal Reserve Bank, in-

cluding any surcharge. The amendments found in Pub.

L. No. 96-399, enacted October 8, 1980, made that rate

applicable to variable rate loans made prior to April 1,

1980. First Tennessee correctly relied on this statute,

as amended, because that statute preempted state law,

and because it applied to the Walters loan, which was a

variable loan made before April 1, 1980. The rates

charged Walters from December 2, 1980 to November 16,

1981, although over the 18% usury ceiling of Tennessee,

were not usurious because state law had been effectively

preempted by the federal statute that allowed the higher

rate.

* ” a

A105

IN THE

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

NO. 86-6031

WILLIAM S. WALTERS, JR..,

Plaintiff/Appellant,

v.

FIRST TENNESSEE BANK, N.A.

MEMPHIS, et al.,

Defendants/Appellees.

Appeal from the United States District Court

for the Western District of Tennessee,

Western Division, at Memphis

United States District Judge Robert M. McRae, Jr.

REPLY BRIEF OF APPELLANT,

WILLIAM S. WALTERS, JR.

ORAL ARGUMENT REQUESTED

Larry E. Parrish

PARRISH & MULROONEY, P.C.

Brinkley Plaza

80 Monroe, Suite 410

Memphis, Tennessee 38103

(901) 526-7777

A106

Surcharges

On page 5 of the the (sic) Bank brief, the comment is

made that Walters did not address the surcharge issue.

Walters notes that $25,000 of the interest taken from

Walters the Bank justified on no other basis than federal

law (Walters Brief p. 32). Walters contended that the

$25,000 was taken based on a mistaken interpretation of

law (Walters Brief pp. 30-32; 32 n. 15, 34).

The Bank attempts to explain (Bank Brief pp. 33-43)

its reasoning in concluding that the surcharge law per-

mitted the $25,000 to be taken. In point of fact, this is

simply an explanation of how the bank made the mis-

takes of law resulting in the $25,000 overcharge.

There are controlling facts which must underlie

meaningful analysis of the congressional intent as ap-

plied to the May 3, 1979 loan. First, and foremost, there

has never been a time when Tennessee has not had an

effective “constitutional provision regarding maximum in-

terest rates.” Tennessee Constitution Article 11, §7. In

1977, Tennessee was one of only 13 states which enjoyed

such a provision as a part of its constitutional law. Cum-

berland Capital Corporation v. Patty, 556 S.W.2d 516, 519-

520 (Tenn. 1977).

Next, at all relevant times, the maximum non-usuri-

ous interest chargeable in Tennessee, for loans evidenced

by the “written contract” was 18%. T.C.A. §47-14-103(2).

Prior to November 5, 1979 [Arkansas only, Public Law

96-104 §301, 93 Stat. 791, 792; Cong.Rec. Oct. 29, 1979

p. 29908] and after April 1, 1983, the maximum non-usuri-

ous interest chargeable by any national bank (in Ten-

nessee or not) was the maximum allowable non-usurious

interest chargeable by state banks. For Walters, this

A107

means that the Bank could charge no [2*] more than

18%.’ However, the 208-day period of time in dispute

here falls after November 5, 1979 and before April 1, 1983.

Laying aside the doubts expressed in Congress by the

Senate sponsors (Walters brief p. 33 n. 15) concerning the

constitutionality of the statute, between November 5,

1979 and April 1, 1983, speaking legislatively only, some

national banks were legislatively (even if not constitu-

tionally) authorized to charge some amount greater than

the various state usury ceilings on some loans. However,

the Walters loan is not a loan on which the Bank, even

legislatively, could charge and collect interest greater than

the Tennessee usury ceiling of 18%.

Of absolute cardinal importance to this conclusion is

remembrance of the fact that, “during .. . period” from

December 28, 1979 up through and including March 31,

1980, no national bank in Tennessee could charge any

borrower interest calculated at a rate greater than 18%.

This is true irrespective of whether the loan was nego-

tiated with a variable or a fixed rate of interest.

The statutory language which requires this conclu-

sion reads as follows in Public Law 96-161 - December 28,

1979, 93 Stat. 1240, §213:

Notwithstanding any other provision of this title, .. .

the provisions of this title shall continue to apply

until July 1, 1981, in the case of any State having

*Numbers in brackets are the original typed page numbers.

1. Evans v. National Bank of Savannah, 251 U.S. 108

(1919); Northway Lanes v. Hackley Union National Bank and

Trust Company, 464 F.2d 855 (6th Cir. 1972); Ray v. American

Bank and Trust Company of Chattanooga, 443 F.Supp. 883

(E.D. Tenn. 1978); Meredith v. American National Bank of

Sparta, 127 Tenn. 90, 153 S.W. 479 (1912).

A108

a constitutional provision regarding maximum inter-

est rates. (emphasis added)

[3] And Public Law 96-221 - March 31, 1980, 94 Stat.

168, §529:

Effective at the close of March 31, 1980 . . . amend-

ments made by and the provisions of title II of Public

Law 96-161 are hereby repealed, except that the pro-

visions of such Public Law, the provisions of such

section, the amendments made by such title, and the

provisions of such title shall continue to apply to

any loan made .. . in any State during any period

when those provisions or amendments were in effect

in such State. (emphasis added)

Title II, §205 of Public Law 96-161 - December 28,

1979, 93 Stat. 1237-1238 purported to change the rela-

tionship between state usury laws and federal usury

laws by allowing national banks to charge 5 percentage

points over the Federal Reserve discount rate even if

the result was a rate which exceeded the usury ceiling

in the state. Before this statute, 12 U.S.C. §85 per-

mitted a 5 point additur if so doing did not exceed the

state usury ceiling. This statute remained in effect, with-

out modification, through March 31, 1980, because Title

II of Public Law 96-161 - December 28, 1979, §13, 93

Stat. 1240, Public Law 96-161 was effective to affirma-

tively maintain the Tennessee usury ceiling of 18% in

Tennessee until July 1, 1981.

Therefore, any borrower who made a variable rate

loan from a national bank in Tennessee between De-

cember 28, 1979 and April 1, 1980 would rightly expect

that the Tennessee usury law placed an 18% cap on

A109

the variance of his/its varying interest rate up through

and including June 30, 1981.

Public Law 96-221 - March 31, 1980, §511(a), 94 Stat.

164, enacted a statute which permitted national banks,

allowed by Public Law 96-161 to charge 5% over the Fed-

eral Reserve discount rate, irrespective of whether that

rate exceeded the state’s usury ceiling, to charge, in addi-

tion, a surcharge announced by the Federal Reserve [4]

Bank. This statute had absolutely no application to banks,

like First Tennessee, not allowed by Public Law 96-161

to charge more than the state’s usury ceiling. Public Law

96-221 - March 31, 1980, §512, 94 Stat. 164 explicitly pro-

vided that the surcharge would be applied only to loans

made on or after April 1, 1980. Section 529 of Public

Law 96-221, quoted above, explicitly re-affirmed the pro-

visions of Public Law 161 affirmatively exempting loans

made in Tennessee up through and including June 30, 1981.

Public Law 96-221 remained continuously in effect,

without modification, through October 8, 1980. Signif-

icantly, Congress amended a small portion of Public Law

96-221 on October 8, 1980. It is very important to note

that Public Law 96-221 remained in full force and effect

after October 8, 1980 except, and only, to the extent

modified on October 8, 1980. The amendment reads, in

pertinent part, as follows in Public Law 96-399 - Octo-

ber 8, 1980, 94 Stat. 1648:

(c) (1) Section 512 of such Act is amended — (A)

by inserting ‘(a)’ after ‘Sec. 512.’; and (B) by adding

at the end thereof the following: ‘(b) A loan shall

be deemed to be made during the period described in

subsection (a) if such loan —...‘(b) was made prior

to or on April 1, 1980, and bears or provides for in-

A110

terest during such period on the outstanding amount

thereof at a variable or fluctuating rate; ... (em-

phasis added)

It is quite important to note that nothing in Public

Law 96-399 - October 8, 1980 in any way disturbs, mod-

ifies, repeals or changes any part of Public Law 96-221

§529 - March 31, 1980, 94 Stat. 168, which explicitly

reaffirmed the provisions of Public Law 96-161 - De-

cember 28, 1979, 93 Stat. 1240 exempting loans made

by national banks in Tennessee from the provisions of

both Public Law 96-162 $205, 93 Stat. 1237 [5] - 1238

and Public Law 96-221, §511(a) until July 1, 1981.

What the October 8, 1980 amendment did was make

all of what had been §512 of Public Law 96-221 subsec-

tion (a) of the amended §512. The language of the Octo-

ber 8, 1980 amendment, which is of critical significance

to the instant question, is “during the period” and “dur

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