Usury
Print Article- Posted on: Dec 27 2021
By Jonathan H. Freiberger
Generally speaking, usury statutes prevent excessive interest from being charged on a loan. The New York Court of Appeals has noted that “[s]tatutes prohibiting usurious loans were enacted in the 15th century England, became part of New York’s colonial history, and have remained since” and that “[t]heir purpose is 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).
As noted in this Blog’s December 22, 2021, article entitled: “Agreements That Are Not Loans Are Not Subject to New York’s Usury Statutes,” “the rudimentary element of usury is the existence of a loan or forbearance of money” and, accordingly, “where there is no loan, there can be no usury….” (Citations, footnotes and internal quotation marks omitted.) That article also discussed when a transaction is considered a loan for the purpose of applying New York’s usury statutes.
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.” GOL §5-511 provides that usurious contracts are void. 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 was annual. The Bakhash Court said 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).
Failure to abide by usury laws could have significant repercussions. “The consequences to the lender of a usurious transaction can be harsh: the borrower is relieved of all further payment—not only interest but also outstanding principal, and any mortgages securing payment are cancelled. In effect, the borrower can simply keep the borrowed funds and walk away from the agreement.” Seidel, 79 N.Y.2d at 740. Further, GOL § 5-513 permits the borrower to “recover any interest paid above the amounts permitted by law. Because the penalties are harsh, usury must be proven by “clear and convincing evidence.” Roopchard, 154 A.D.3d at 988 (citation omitted).
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).
Some of the preceding principles were applied by the Second Department in Adler v. Marzario, a case decided on December 15, 2021. The defendants in Adler, delivered to plaintiff a note evidencing a promise to repay $75,000 with interest at the rate of 20% per annum. The note was secured by a mortgage on real property owned by one of the defendants. Upon defendants’ default, plaintiff commenced a mortgage foreclosure action, which was defended on the ground of usury. Plaintiff moved for summary judgment and defendants cross-moved for summary judgment dismissing the complaint “as asserted against them and deeming the mortgage void on the ground that the loan was usurious.” Supreme court granted the cross-motion and plaintiff appealed.
The Second Department found the loan usurious on its face and, therefore, “void … as a matter of law.” Accordingly, the borrowers were relieved “of the obligation to repay principal and interest thereon.” The Court also rejected plaintiff’s efforts to avoid the usury laws by attempting to characterize the underlying transaction as a “business or investment loan.” The Court also stated that “contrary to the plaintiff’s further contention, a clause in the subject promissory note purporting to reduce the rate of interest to a non-usurious rate if the rate originally imposed was found to be usurious could not save the note from being usurious (Fred Schutzman Co. v Park Slope Advanced Med., PLLC, 128 AD3d 1007, 1008; see also Bakhash v Winston, 134 AD3d 468, 469; Simsbury Fund v New St. Louis Assoc., 204 AD2d 182).”
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.
