Justice James Sullivan
In response to a certified question from the 5th Circuit, the Texas Supreme Court has ruled that Texas usury law requires use of the actuarial method to calculate whether an interest rate is usurious.
American Pearl Group, L.L.C., a Texas Limited Liability Company; John Sarkissian; Andrei Wirth v. National Payment Systems, L.L.C. (No. 24-0759) arose from a dispute over whether a loan and option agreement violated Texas usury law. NPS loaned Pearl about $375,000 for 42 months, obliging Pearl to pay back nearly $685,000 on a prescribed schedule of increasing monthly payments. The agreement incorporated an option under which NPS could pay Pearl a “five-figure sum in exchange for a six-figure slice of Pearl’s residuals portfolio, allegedly worth some multiple of the scheduled interest charges.” In 2022 Pearl sued NPS in a Texas federal court to invalidate the deal. NPS moved to dismiss.
The trial court granted the motion, concluding that the interest payments were not usurious. Pearl appealed to the Fifth Circuit on the basis that the trial court applied the wrong method of “spreading” the interest over the term of the loan (the court applied the “equal parts” method). Instead, Pearl argued, the court should have applied the actuarial method “and make calculations based on declining principal balances for each payment period. This method would make the total permissible interest just over $207,277 rather than the $309,865 in interest under the agreement. The Fifth Circuit declared that Texas law governed the usury claims, but then puzzled over what Texas law is. Instead of making an Erieguess, the court punted to SCOTX in the form of a certified question.
In an opinion by Justice Sullivan, the Court ruled that Texas law requires the actuarial method propounded by Pearl. The operable statute, § 306.004, Finance Code, requires spreading “using the actuarial method during the stated term of the loan, all interest at any time contracted for, charged, or received in connection with the loan.” As Justice Sullivan pointed out, however, nowhere does the Finance Code define “actuarial method.” Turning to the dictionary and to the term’s usage in other statutes, decisions, and similar authorities, Justice Sullivan observed that the Texas Department of Banking, federal Truth in Lending Act, and other states define the actuarial method as calculating the interest on a commercial loan based on the declining principal balances. NPS argued that Texas law prescribes the “equal parts” method, which the Court had held applied under the previous Texas usury statute.
That may be true, Justice Sullivan responded, but in the late 1990s the Legislature changed the law, replacing the “equal parts” language in the 1975 statute to the “actuarial method” in current law. The Court thus held that “if the loan provides for periodic principal payments during the loan term, ‘using the actuarial method’ requires courts to base their interest calculations on the declining principal balance for each payment period.” In this case, “NPS Loan’s total lawful interest amount is the sum of each payment period’s interest amount, calculated based on the declining principal balance resulting from each of Pearl’s principal payments.”
The case now goes back to the Fifth Circuit, which will presumably kick the case back to the trial court for a new calculation. In this case, the relevant maximum lawful interest rate is 28% a year, pursuant to § 303.009(c), Finance Code.
