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Agreements That Are Not Loans Are Not Subject to New York’s Usury Statutes

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  • Posted on: Dec 22 2021

By: Jeffrey M. Haber

“A transaction … is usurious under criminal law when it imposes an annual interest rate exceeding 25%.”1 General Obligations Law § 5–521 bars a corporation from asserting usury in any action, except in the case of criminal usury as defined in Penal Law § 190.40, and then only as a defense to an action to recover repayment of a loan, and not as the basis for a cause of action asserted by the corporation for affirmative relief.2 

As the Appellate Division, First Department explained three decades ago:3

While the statute expressly prohibits only the interposition of usury as a defense, this court has employed the principle that a party may not accomplish by indirection what is directly forbidden to it and has accorded the rule a broader scope. Thus, it is well established that the statute generally proscribes a corporation from using the usury laws either as a defense to payment of an obligation or, affirmatively, to set aside an agreement and recover the usurious premium. The statutory exception for interest exceeding 25 percent per annum is strictly an affirmative defense to an action seeking repayment of a loan and may not, as attempted here, be employed as a means to effect recovery by the corporate borrower. 

As noted, the “rudimentary element of usury is the existence of a loan or forbearance of money.”4 Thus, “where there is no loan, there can be no usury, however unconscionable the contract may be.”5 

To determine whether a transaction constitutes a usurious loan, it “must be ‘considered in its totality and judged by its real character, rather than by the name, color, or form which the parties have seen fit to give it.’”6 The court must examine whether the plaintiff “is absolutely entitled to repayment under all circumstances.”7 “Unless a principal sum advanced is repayable absolutely, the transaction is not a loan.”8 

When considering whether repayment is absolute or contingent, courts typically weigh three factors:9 

(1) Whether there is a reconciliation provision in the agreement. The reconciliation provisions of a contract allow the merchant to seek an adjustment of the amounts being taken out of its account based on its cash flow (or lack thereof). If a merchant is doing poorly, the merchant will pay less, and will receive a refund of anything taken by the company exceeding the specified percentage (which often can also be adjusted downward). If the merchant is doing well, it will pay more than the daily amount to reach the specified percentage. If there is no reconciliation provision, the agreement may be considered a loan.10

(2) Whether the agreement has a finite term. If the term of the agreement is indefinite, then it is consistent with the contingent nature of each and every collection of future sales proceeds under the contract. This is because the defendant’s collection of sales proceeds is contingent upon the plaintiff actually generating sales and those sales resulting in the collection of revenue.11

(3) Whether there is any recourse should the merchant declare bankruptcy

In 110% Effort, 1000% of the Time LLC v. High Roller Rentals LLC, 2021 N.Y. Slip Op. 32678(U) (Sup. Ct., Kings County Dec. 13, 2021) (here), the Court examined the foregoing principles in denying a motion to dismiss, finding that the agreement between the parties was was not a loan and therefore did not require the payment of criminally usurious interest.

On January 30, 2020, the parties entered into a contract whereby defendant, High Roller Rentals LLC, sold $129,000.00 worth of High Roller’s future receivables to plaintiff for $100,000.00 (the “Purchase Agreement”). Defendant William Casey Penn personally guaranteed High Roller’s obligations under the Purchase Agreement.

The Purchase Agreement obligated High Roller to deposit all of its receipts into a designated bank account and authorized plaintiff permission to debit and retain 12% of all future receipts until the sum of $129,000.00 was paid back to plaintiff.

Plaintiff alleged that High Roller breached the Purchase Agreement by changing the designated bank account without its authorization. Defendant moved to dismiss the complaint claiming that the Purchase Agreement was in actuality a criminally usurious loan and was, therefore, unenforceable under General Obligations Law § 5-521.

Applying the three factors discussed above, the Court concluded that the Purchase Agreement was not a loan. 

With respect to the first factor (i.e., whether there is a reconciliation provision in the agreement), the Court held that the “fact that High Roller ha[d] no right of adjustment/reconciliation … under the Purchase Agreement militate[d] in favor of deeming the transaction a loan.” “However,” said the Court, “this is just one of the three factors that must be weighed in determining the true nature of the transaction at issue.”

With respect to the second factor (i.e., whether the agreement has a finite term), the Court held that plaintiff’s entitlement to repayment was not absolute and was contingent upon several factors, such as the cessation of defendant’s business due to “adverse business conditions” beyond defendant’s control, the loss of the premises where defendant operated its business, defendant’s bankruptcy, and/or natural disasters or similar occurrences beyond defendant’s control.

With respect to the third factor (i.e., whether there is any recourse should the merchant declare bankruptcy), the Court held that High Roller’s obligations under the Purchase Agreement terminated if High Roller was declared bankrupt. In other words, said the Court, “bankruptcy [was] not a default under the Purchase Agreement, entitling plaintiff to an immediate judgment against High Roller.

Based upon the foregoing three-factor analysis, and a review of the Purchase Agreement, the Court concluded that the agreement between the parties was not a loan. As such, the Purchase Agreement was “not subject … to New York’s usury statutes.”


In New York, there is a presumption that a transaction is not usurious. As a result, claims of usury must be proved by clear and convincing evidence.12 

In determining whether a transaction is a loan or not, the court must examine whether the defendant is absolutely entitled to repayment under all circumstances. Weighing the factors discussed above, the Court in 110% Effort concluded that defendants were not absolutely entitled to repayment under all circumstances. As such, the Purchase Agreement was not a loan.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.


  1. Abir v. Malky, Inc., 59 A.D.3d 646, 649 (2d Dept. 2009); see also Penal Law § 190.40.
  2. Paycation Travel, Inc. v. Glob. Merch. Cash, Inc., 192 A.D.3d 1040, 141 (2d Dept. 2021); LG Funding, LLC v. United Senior Props. of Olathe, LLC, 181 A.D.3d 664, 666 (2d Dept. 2020). 
  3. Intima-Eighteen, Inc. v. Schreiber Co., 172 A.D.2d 456, 457-458 (1st Dept. 1991) (internal quotation marks and citations omitted).
  4. LG Funding, 181 A.D.3d at 665.
  5. Id. (citations omitted).
  6. Abir, 59 A.D.3d at 649 (quoting Ujueta v. Euro–Quest Corp., 29 A.D.3d 895, 895 (2d Dept. 2006) (internal quotation marks omitted).
  7. K9 Bytes, Inc. v. Arch Capital Funding, LLC, 56 Misc. 3d 807, 816 (Sup. Ct. Westchester County 2017).
  8. LG Funding, 181 A.D.3d at 666.
  9. K9 Bytes, 56 Misc. 3d at 816–819.
  10. Id.
  11. Id.
  12. Giventer v. Arnow, 37 N.Y.2d 305, 309 (1975).
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