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Second Department Finds That Merchant Agreement Is A Criminally Usurious Loan

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  • Posted on: Nov 17 2023

By Jonathan H. Freiberger

Today’s Blog article is about usury, a topic that has previously been covered.  See, e.g., [here], [here], [here], [here].  Society’s disdain for usury was recently articulated by the Court of Appeals in Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320 (2021), where the Court stated:

Although the ancient laws relating to usury had religious and moral underpinnings, some of which may have carried into New York’s original usury law, the modern conception of our usury laws focuses on the protection of persons in weak bargaining positions from being taken advantage of by those in much stronger bargaining positions. Without doubt, New York’s voiding of usurious contracts can be harsh, perhaps especially in comparison to other states’ laws, but the penalty reflects the legislature’s consistent condemnation of the evils of usury. The forfeiture of interest and capital serves a strong deterrent effect—one the legislature has repeatedly affirmed.

Adar Bays, 37 N.Y.3d at 331 (citations and internal quotation marks omitted).  In describing the historical perspectives of New York’s usury laws, the Adar Bays Court, noting “the legislature’s intention to deter loan-sharking,” stated that “[o]rganized criminal groups built large and highly lucrative money lending businesses in which they charged unconscionable rates of interest such as 250% or even 2000% per year.  Adar Bays, 37 N.Y.3d at 330 and 333.

New York’s Penal Law § 190.40, which sets forth when lenders are guilty of criminal usury in the second degree, a class E felony, provides that:

A person is guilty of criminal usury in the second degree when, not being authorized or permitted by law to do so, he 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 twenty-five per centum per annum or the equivalent rate for a longer or shorter period.

See also Roopchand v. Mohammed, 154 A.D.3d 986, 988 (2nd Dep’t 2017).

Usurious loans, as a matter of law, are void.  New York’s General Obligations Law § 5-511; see also Bakhash v. Winston, 134 A.D.3d 468, 469 (1st Dep’t 2015) (“The subject note is usurious as a matter of law and, therefore is void.”); Roopchand, 154 A.D.3d at 588 (“A usurious contract is void and relieves the borrower of the obligation to repay principal and interest thereon”); Adar Bays, 37 N.Y.3d at 333 (“loans proven to violate the criminal usury statute are subject to the same consequence as any other usurious loans: complete invalidity of the loan instrument.”). 

Further, “where a loan agreement is usurious on its face, usurious intent will be implied and usury will be found as a matter of law.”  Roopchand, 154 A.D.3d at 989; see also Blue Wolf Capital Fund II, L.P. v. American Stevedoring Inc., 105 A.D.3d 178, 183 (1st Dep’t 2013) (“If usury can be gleaned from the face of an instrument, intent will be implied and usury will be found as a matter of law.”).  The New York Court of Appeals has explained:

Usurious intent, an essential element of usury, which is embodied in the statutory requirement that an unlawful rate of interest be knowingly taken is a question of fact.  It is the prevailing view that where usury does not appear on the face of the note, usury is a question of fact.  It has been properly observed: If the note or bond shows a rate of interest higher than the statutory lawful rate, it would be immaterial whether the lender actually intended to violate the law. His intent would be conclusively presumed.

Freitas v. Geddes Savings and Loan Ass’n., 63 N.Y.2d 254, 262 (1984) (citations, internal quotation marks and brackets omitted).

Where the term of a loan is for less than one year the interest rate is annualized with the stated interest rate being for the period of the loan.  Bakhash, 134 A.D.3d at 469.  In this regard, the Bakhash Court stated:

It is true that the stated rate on the four-month note is 12%. However, it does not say 12% per annum. Where, 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%.

Id., at 469 (citation omitted).

Frequently, courts must first determine whether a transaction is a loan before determining whether usury is applicable.  [Eds. Note: this Blog previously addressed this issue [here] and [here].]  Recently, the Appellate Division, Second Department, in Crystal Springs Capital, Inc. v. Big Thicket Coin, LLC, addressed this issue.  The parties in Crystal Springs “entered into a written merchant agreement pursuant to which the plaintiff agreed to purchase and the … defendants agreed to sell $140,000 of the … defendants’ future receipts for the price of $90,000.”  The defendants defaulted in appearing in an action commenced by the plaintiff for breach of the agreement.  After a default judgment was entered, the defendants moved, inter alia, to vacate the judgment and to dismiss the action based on criminal usury.  The defendants appealed the motion court’s denial of the motion.

On appeal, the Second Department reversed, finding that the motion court “should have granted that branch of the defendants’ motion which was to vacate the judgment in the interest of justice on the ground that the agreement constituted a criminally usurious loan.”  The Court noted that a party “is not necessarily required to establish a reasonable excuse in order to be entitled to vacatur in the interest of justice.”  (Citation and internal quotation marks omitted.)

In discussing the law on usury, the Court stated that:

The rudimentary element of usury is the existence of a loan or forbearance of money, and where there is no loan, there can be no usury, however unconscionable the contract may be. 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. Unless a principal sum advanced is repayable absolutely, the transaction is not a loan. Usually, courts weigh three factors when determining whether repayment is absolute or contingent: (1) whether there is a reconciliation provision in the agreement; (2) whether the agreement has a finite term; and (3) whether there is any recourse should the merchant declare bankruptcy. A loan that is criminally usurious is void.  [Citations, internal quotation marks and brackets omitted.]

In applying the law to the facts of the case, the Second Department found that the defendants established that the parties’ agreement was criminally usurious and stated:

The agreement and addendums thereto provided, among other things, that, in exchange for the purchase, the … defendants were obligated to authorize the plaintiff to automatically debit $4,000 from their bank account each business day, the plaintiff was “under no obligation” to reconcile the payments to a percentage amount of the … defendants’ sales rather than the fixed daily amount, and the plaintiff was entitled to collect the full uncollected purchase amount plus all fees due under the agreement in the event of the … defendants’ default by changing their payment processing arrangements or declaring bankruptcy. Together, these terms established that the agreement was a loan, pursuant to which repayment was absolute, rather than a purchase of future receipts under which repayment was contingent upon the … defendants’ actual sales. The plaintiff does not dispute that the agreement effected an annual interest rate exceeding the criminally usurious threshold of 25% (see Penal Law § 190.40). Accordingly, the Supreme Court should have granted that branch of the defendants’ motion which was to vacate the judgment in the interest of justice on the ground that the agreement constituted a criminally usurious loan.  [Citations omitted.]

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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