Little Known Facts: Prepayment Premiums

It is not unusual for a commercial loan agreement to include a provision which requires the borrower to pay a penalty in order to prepay the loan prior to maturity.  But would such a prepayment premium be considered "interest" under Texas usury law?

No.  Section 306.005 of the Texas Finance Code specifically excludes prepayment premiums from the definition of interest for the purpose of commercial loans in Texas.  The full text of the provision reads as follows:

“§306.005. PREPAYMENT PREMIUMS AND SIMILAR AMOUNTS.  With respect to a loan subject to this chapter, a creditor and an obligor may agree to a prepayment premium, make-whole premium, or similar fee or charge, whether payable in the event of voluntary prepayment, involuntary prepayment, acceleration of maturity, or other cause that involves premature termination of the loan, and those amounts do not constitute interest.”

Section 306.001(5) of the Texas Finance Code defines a “commercial loan” as “a loan that is made primarily for business, commercial, investment, agricultural, or similar purposes.  The term does not include a loan made primarily for personal, family, or household use.”

I hope everybody has a safe and happy Halloween.  My daughters are dressing up as a pirate and a Greek goddess.  I'm counting on sneaking one or two pieces of candy from their bags - but please don't tell them!

LLC: The Most "Famous" Entity in Texas

Last year, my daughter got her ears pierced for the first time.  She was very excited to be getting earrings, but she was disappointed that the pair of earrings that she initially selected were out-of-stock.  "My favorite earrings were too famous," she explained.  Well, using my daughter's definition, the limited liability company (LLC) is clearly to most famous entity in Texas.

Accordingly to the Texas Secretary of State's office, almost 87,000 new LLC's were formed in Texas in 2011, compared to 24,000 for-profit corporations and 6,000 limited partnership (LPs) during the same year.

As of June 1, 2012, there were almost 464,000 active LLCs, 369,000 for-profit corporations, and 128,000 LPs in Texas.

That's pretty amazing considering that Texas did not adopt its Limited Liability Company Act (since replaced by the Texas Business Organizations Code) until August 26, 1991!

Stinky Restaurant Revisited

Today I saw a great presentation that Laura Elkind gave to the Corporate Counsel Section of the Tarrant County Bar Association titled "Disclaimer of Reliance in Settlement Agreements, Leases and Other Contracts."  The presentation stressed the importance of disclaimers of reliance in contracts as a result of the 2011 Texas Supreme Court case of Italian Cowboy vs. Prudential (a/k/a the Stinky Restaurant case).  I previous wrote about this case here. Besides being a very important case under Texas contract law, the Stinky Restaurant case also involves a very interesting set of facts (including "ungodly" smells!).  You can read the Court's opinion here.