Estoppel Argument Successfully Counters Usury Defense

The plaintiff made a loan to the defendant, a family friend, using funds that were to pay her daughter’s college tuition. The plaintiff alleged the defendant was a real estate expert that needed the funds to develop an affordable housing project. The plaintiff claimed that the defendant had induced her to make the loan by promising her a portion of the profits on the project. He also offered to prepare the promissory note on her behalf. After the defendant defaulted, the plaintiff filed suit to collect on the note.

The defendant sought to dismiss the suit and argued that the note carried an interest rate of over 80% and was therefore void. The plaintiff countered that the defendant was barred from bringing a usury defense because he was the one that had induced the plaintiff to make the loan and he was the one who had prepared the note. The court agreed.

The court noted that while usurious loans are generally void, the doctrine of estoppel in pais will bar a defendant from asserting a usury defense in certain well-defined situations. Estoppel in pais is defined as:

An admission or statement by one individual intended to influence the conduct of another with whom he is dealing, and actually leading him into a line of conduct which must be prejudicial to his interests, unless the party making the admission or statement be cut off from the power of retraction. . . . In such a case it would be against good conscience, and a fraud to deny the truth of the admission or statement thus made and acted upon, and this is the point upon which the question of estoppel turns.

The court noted that New York appellate courts had recognized the validity of estoppel in the context of usury. Where a borrower induces reliance on the legality of the transaction through the use of a special relationship with the lender, the borrower may properly be estopped from interposing a usury defense. To permit otherwise, the court stated, would allow a borrower to achieve a total windfall, through subterfuge and deception, at the expense of the innocent lender.

The court explained that where a usury defense is alleged, estoppel may be applied when “1) the defendant took advantage of, or the plaintiff relied upon, an alleged fiduciary or confidential relationship between the plaintiff and defendant, or (2) the plaintiff was ‘unschooled in financial matters’ and relied to his or her detriment on the defendant’s superior experience and knowledge.” In the present case, the court held that the plaintiff had raised issues of fact as to whether she was financially unsophisticated and had relied on the defendant’s expertise to her detriment such that the doctrine of estoppel in pais would apply to the defendant’s usury defense. Therefore, the defendant’s motion to dismiss was denied.

Vitale v Flocco, 2015 N.Y. Misc. LEXIS 4500 (N.Y. Sup. Ct. Dec. 11, 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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