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  • Posted on: Mar 8 2024

By Jonathan H. Freiberger

Folks have general notions about usury.  However, there are many nuances to the application of the usury laws in New York.  This BLOG has previously written about usury.  See [[here], [here], [here], [here], [here].]  As noted in our prior BLOG articles, usury statutes were developed centuries ago to “protect desperately poor people from the consequences of their own desperation.”  Seidel v. 18East 17th Street Owners, Inc., 79 N.Y.2d 735, 740 (1992) (citations and internal quotation marks omitted).

“To successfully raise the defense of usury, a debtor must allege and prove by clear and convincing evidence that a loan or forbearance of money, requiring interest in violation of a usury statute, was charged by the holder or payee with the intent to take interest in excess of the legal rate.”  Blue Wolf Capital Fund II, L.P. v. American Stevedoring Inc., 105 A.D.3d 178, 183 (1st Dep’t 2013).

Pursuant to General Obligations Law §5-501(1), interest on a loan or forbearance “shall be six per centum per annum unless a different rate is prescribed in section fourteen-a of the banking law.”  GOL §5-501(2) prevents individuals or entities from charging interest rates exceeding those permitted pursuant to GOL §5-501(1).  Banking Law §14-a(1) provides that the “maximum rate of interest provided for in section 5-501 of the general obligations law shall be sixteen per centum per annum.”  Because Corporations are “generally the antithesis of … desperately poor people”, they are “ordinarily barred from asserting a usury defense.”  Seidel, 79 N.Y.2d at 740 (citations, footnote and internal quotation marks omitted).  See also GOL  § 5-521(1).  However, a corporation can assert usury as a defense to the extent that the usury is criminal under Section 190.40 of New York’s Penal law, which makes interest on a loan or forbearance that exceeds twenty-five per cent per annum a felony.  GOL § 5-521(3)See also Roopchand v. Mahammed, 154 A.D.3d 986, 988 (2nd Dep’t 2017) (citation omitted).  Further, the criminal usury laws do not apply to loans in the amount of $2,500,000.00 or more.  GOL § 5-501(6)(b).

When calculating interest rates on loans for less than one year, the interest will be annualized if not so stated in the note.  Thus, in Bakhash v. Winston, 134 A.D.3d 468 (1st Dep’t 2015), the Court found a loan criminally usurious where a four-month note provided for 12% interest without indicating that such rate reflected the annual rate of interest.  The Bakhash Court noted that “[w]here, as here, the loan is for less than a year, the interest rate is annualized, and thus, the annual rate on the note is 36%, well above the criminal usury rate of 25%.”  Bakhash, 134 A.D.3d at 469 (citation omitted).

Further, in addition to the stated interest rate on the note, other factors are used in determining the actual interest rate for usury purposes.  For example, in American E Group LLC v. Livewire Ergogenics Inc., 2022 WL 2236947 (2nd Cir. 2022) (applying New York law), the Court affirmed the District Court’s refusal to enforce a promissory note and the dismissal of the lender’s action to enforce the note in light of the borrower’s criminal usury defense.  While the stated interest rate on the $30,000 note was 20%, the borrower was also obligated to give the lender $50,000 in its restricted shares as “additional consideration”, which, the Court agreed, “also count[ed] as interest.”  Thus, the Court concluded, the interest rate on the $30,000 loan “far exceed[ed] the 25% threshold for criminal usury.”  See also Frost v. Collateral Partners, LLC, 219 A.D.3d 587, 588 (2nd Dep’t 2023) (finding that since borrower was charged an insurance fee for declined insurance coverage, there was a question of fact as to whether “the purported insurance fee was, in actuality, additional interest on the loan,” precluding summary judgment.); Blue Wolf, 105 A.D.3d at 183 (“If an instrument provides that the creditor will receive additional payment in the event of a contingency beyond the borrower’s control, the contingent payment constitutes interest within the meaning of the usury statutes.”)

Finally, a usury defense is inapplicable “where the terms of the note impose a rate of interest in excess of the statutory maximum only after default or maturity.”  Torto Note Member, LLC v. Babad, 192 A.D.3d 843, 845 (2nd Dep’t 2021) (citations, internal quotation marks and ellipses omitted).  See also Kraus v. Mendelsohn, 97 A.D.3d 641 (2nd Dep’t 2012); 1077 Madison Street, LLC v. Daniels, 954 F.3d 460, 465 (2nd Cir. 2020) (applying New York law).

On March 6, 2024, the Appellate Division, Second Department, addressed some of these issues in Alleon Capital Partners, LLC v. Choudhry.  The lender in Alleon loaned in excess of $2.78 million to defendant medical practices.  The loan was secured by medical receivables.  Considering fees and escrowed funds, only $2.36 million was received by the borrowers.  The borrowers defaulted on their repayment obligations under the note and the lender commenced action.  The borrowers’ motion to dismiss the complaint on the grounds of usury was denied, as was their subsequent motion for renewal and reargument. 

On appeal, the Court affirmed, holding that because of the size of the loan, the usury defense was inapplicable.  Thus, the Court stated:

General Obligations Law § 5-501(2) provides that “[n]o person or corporation shall, directly or indirectly, charge, take or receive any money, goods or things in action as interest on the loan or forbearance of any money, goods or things in action at a rate exceeding the [maximum permissible interest] rate” (Zanfini v Chandler, 197 AD3d 594, 595 [internal quotation marks omitted]). “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” (Adar Bays, LLC v GeneSYS ID, Inc., 37 NY3d 320, 326). However, civil and criminal usury laws do not “apply to any loan or forbearance in the amount of [$2,500,000] or more” (General Obligations Law § 5-501[6][b]).

Here, the Supreme Court properly determined that usury laws do not apply to the subject loan since the parties agreed to a principal loan of more than $2,500,000 (see Specfin Mgt. LLC v Elhadidy, 201 AD3d 31, 42; Shasho v Pruco Life Ins. Co. of N.J., 67 AD3d 663, 665). Contrary to the appellants’ contention, the portion of the loan that was used to cover closing fees, attorney fees, and taxes did not lower the agreed-upon amount of the loan below the $2,500,000 threshold in this instance (see Tides Edge Corp. v Central Fed. Sav., 151 AD2d 741, 742).

Jonathan H. Freiberger 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.

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