Choice of Law Provision Held Invalid Because Its Application Violates New York Public Policy

• Posted on: Sep 11 2023

By: Jeffrey M. Haber

It is well settled that parties to a contract are free to include choice-of-law provisions in their agreements. Such provisions are generally enforced by New York courts¹ and will be “interpreted so as to effectuate the parties’ intent.”² 

The freedom to contract, however, has limits. Courts will not, for example, enforce agreements that are illegal or where the chosen law violates “some fundamental principle of justice, some prevalent conception of good morals, some deep-rooted tradition of the common weal.”³ Indeed, New York appellate courts have repeatedly determined that a foreign jurisdiction’s laws should not be applied when they violate New York public policy.⁴

As shown in Samson Lending LLC v. Greenfield Mgt. LLC, 2023 N.Y. Slip Op. 23267 (Sup. Ct., Ontario County, Sept. 5, 2023) (here), the prohibition against usury is such a fundamental policy of New York, the courts will not hesitate to void a choice of law provision that conflicts with this state policy.  

A Primer on Usury

New York has a long history prohibiting usury. Since at least 1717, various New York legislatures have repeatedly passed legislation to address (and prohibit) usury. Over the intervening years, while other states repealed their usury laws, New York’s legislature refused to lessen the protections afforded by the usury statutes.⁵ 

[Eds. Note: In Adar Bays, LLC v. GeneSYS ID, Inc. (here), the New York Court of Appeals provided a lengthy and extensive discussion of the State’s history with enacting usury laws.]

Today, New York’s usury law can be found in General Obligations Law §§ 5-501, 5-511, 5-521; Banking Law § 14-a (1); and Penal Law § 190.40. Together, the statutes establish that loans of less than $250,000 to individuals cannot exceed a 16% annual rate, loans between $250,000 and $2.5 million cannot exceed 25% (the criminal usury rate) and loans of $2.5 million or more are not subject to the usury laws. More specifically, the General Obligations Law and Banking Law provide that the maximum rate of interest upon a “loan or forbearance of any money, goods, or things” is 16% per annum unless otherwise provided by law,⁶ and “[n]o person or corporation shall, directly or indirectly, charge, take or receive any money, goods or things in action as interest” at a rate exceeding 16%.⁷ In addition, a lender commits a class E felony when, without other legal authorization, the lender “knowingly charges, takes or receives any money or other property as interest on the loan or forbearance of any money or other property, at a rate exceeding [25%] per annum or the equivalent rate for a longer or shorter period.”⁸ Any loan that reserves or takes any greater interest “than is prescribed in section 5-501”— the civil usury prohibition (16%) —“shall be void”, unless the lender is a bank or loan association, which will be held to have forfeited all interest on the loan.⁹ Under General Obligations Law § 5-521 (1), the defense of usury is not available to corporations, but this bar does not preclude a corporate borrower from raising the defense of “criminal usury” (i.e., interest over 25%) in a civil action.¹⁰

Samson Lending LLC v. Greenfield Mgt. LLC

Samson Lending involved a loan agreement pursuant to which the corporate defendants agreed to pay plaintiff $1,742,000 over the course of 52 weeks in exchange for a loan of $1,300,000, a stated interest rate of 34%, with the terms of the corporate defendants’ compliance guaranteed by the individual defendant. 

The agreement contained a choice-of-law and a venue and jurisdiction provision that would require the court to apply Virginia law to the agreement.

Defendants moved to dismiss the complaint, arguing that the interest rate under the loan agreement (34%) violated New York’s public policy against criminal usury and that this vitiated the application of the agreement’s choice-of-law provision requiring application of New York law to the agreement. 

In opposition, Plaintiff argued that the choice-of-law provision must be honored, as Virginia law does account for usury, and alternatively argued that should New York law apply, the agreement should be modified according to its terms to allow the maximum interest rate allowable under New York law.

The motion court agreed with defendants, finding that “regardless of the agreement’s provision that Virginia substantive law would apply to the agreement’s terms, … the application of Virginia law (which would allow a 34% interest rate) would be so violative of New York’s public policy that the choice-of-law provision is invalid.”¹¹ Thus, concluded the motion court, “the choice-of-law provision is void, and New York law will apply to the agreement.”¹²

Having determined that New York law would apply to the dispute, the motion court next addressed whether defendants met their burden of showing that plaintiff acted with usurious intent. Under New York law, “where a loan agreement [is] usurious on its face, usurious intent will be implied, and usury will be found as a matter of law.”¹³

The motion court concluded that defendants met their burden.¹⁴ 

Here, the agreement had a stated interest rate of 34%, significantly higher than the maximum interest rate allowable in New York. Thus, as the agreement was for a loan less than $2.5 million, the agreement was usurious on its face. 

Finally, the motion court rejected plaintiff’s request to reform the contract in accordance with the “usury savings clause” in the agreement.¹⁵ The motion court explained that, under New York law, reformation is not available, either as a contractual or equitable remedy, when the lender has charged criminally usurious interest.¹⁶ 

Takeaway

Samson Lending is notable because of its conclusion that the bar against usurious loans is a fundamental precept of New York public policy. As such, the motion court could not apply the parties’ choice-of-law agreement. To do so would be, as the motion court held, offensive to the public policy of this State. 

Footnotes

1. inisters & Missionaries Ben. Bd. v. Snow, 26 N.Y.3d 466, 470 (2015).
2. Welsbach Elec. Corp. v. MasTec N. Am., Inc., 7 N.Y.3d 624, 629 (2006).
3. Cooney v. Osgood Mach., Inc., 81 N.Y.2d 66, 78 (1993) (quoting, Loucks v. Standard Oil Co. of N.Y., 224 N.Y. 99, 111 (1918)).
4. See, e.g., Brown & Brown, Inc. v. Johnson, 25 N.Y.3d 364, 370 (2015) (holding that application of Florida law “would be offensive to a fundamental public policy of this State.”) (internal quotation marks and citation omitted); Welsbach, 7 N.Y.3d at 632; Cooney, 81 N.Y.2d at 80.
5. Adar Bays, LLC v. GeneSYS ID, Inc., (37 N.Y.3d 320, 329 (2021).
6. GOL § 5-501 (1); Banking Law § 14-a (1).
7. GOL § 5-501 (2).
8. Penal Law § 190.40.
9. GOL § 5-511 (1).
10. GOL § 5-521 (3).
11. Slip Op. at *5.
12. Id. at *7.
13. See O’Donovan v. Galinski, 62 A.D.3d 769, 770 (2d Dept. 2009); Fareri v. Rain’s Intl., 187 A.D.2d 481, 482 (2d Dept. 1992); Roopchand v. Mohammed, 154 A.D.3d 986, 988-89 (2d Dept. 2017).
14. Id.
15. Slip Op. at *8.
16. Id. (citations omitted).

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.