Alternative Small Business Lender Successfully Defends Against Usury Claim

A recent decision out of Westchester County, New York provides support for the enforceability of choice-of-law clauses in New York state where claims of usury are involved. The decision is especially noteworthy following the 2nd Circuit’s ruling in Madden v. Midland Funding, LLC, which cast doubt on the ability of non-bank assignees to benefit from the preemption of statue usury laws provided by the National Bank Act. In light of the Madden decision, choice-of-law clauses have become critically important to lenders that make loans in multiple jurisdictions.

In Klein v. On Deck Capital, Inc., the owner of a professional medical corporation sued an alternative small business lender alleging that the loan he had received from the lender was usurious under New York law. The owner sought to recover $37,000.00 that had been paid in interest on the loan. While both parties agreed that the 37% interest rate charged on the loan exceeded the criminal usury rate in New York, the lender argued that Virginia, rather than New York law applied.

Reviewing the loan document, the trial court found that the choice-of-law provision clearly provided that Virginia law should govern the loan transaction. The court noted that choice-of-law clauses are generally enforceable in New York so long as the chosen law bears a reasonable relationship to the parties or transaction and that the enforcement of the foreign law would not violate a fundamental principle of justice of the state.

Based on the facts of the case before it, the trial court found the choice-of-law clause enforceable. “Pursuant to their agreement the parties intended Virginia law to apply. Moreover, Virginia law bears a reasonable relationship to the loan and the application of Virginia law is not offensive to New York public policy. Virginia law bears a reasonable relationship to the loan since defendant is headquartered in Virginia and the agreement provides that all payments are not considered made until received in Virginia…In addition, plaintiff failed to meet its ‘heavy burden of proving that application of [Virginia] law would be offensive to a public policy of the State’…”

As Virginia law prohibits corporations from suing for usury, the New York court dismissed the owner’s complaint.

Klein v On Deck Capital, Inc., 2015 N.Y. Misc. LEXIS 2231 (N.Y. Sup. Ct. June 24, 2015)

About Patrick Siegfried

Patrick Siegfried is the author of the Usury Law Blog. Patrick is a practicing attorney in Bethesda, Maryland. Patrick’s work focuses on issues regarding alternative small business financing. He can be reached at
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