Despite Violation of Usury Statute, Lender Still Entitled to Full Contractual Interest Rate

A recent federal appellate decision highlights the discretion often afforded judges when deciding usury cases. The case involved a Massachusetts state court judgment that a lender had obtained against the guarantor of multiple business loans. When the guarantor failed to satisfy the judgment, the lender instituted an involuntary bankruptcy action against him.

The guarantor objected to the bankruptcy action and argued that the amount due to the lender was in dispute and therefore could not serve as the basis of an involuntary action. The bankruptcy court rejected the borrower’s argument and authorized the commencement of the involuntary proceedings.

The borrower appealed to the First Circuit. In his appeal, the borrower argued that the lender was not entitled to the loans’ full default interest rate of 35% because the lender had failed to timely submit a required “usury notification form” to the state attorney general before levying interest rates in excess of 20%, as required by Massachusetts’ usury statute. As a result, the guarantor argued, the debt was in dispute and therefore was insufficient grounds upon which an involuntary action could be commenced. The First Circuit rejected the borrower’s argument and affirmed the bankruptcy’s court decision.

The Circuit Court explained that under Massachusetts law, trial courts are afforded discretion when deciding a remedy to a violation of the usury statute. The Court cited a Massachusetts Supreme Court case which held that an appropriate remedy

is arrived at by balancing a number of
factors including the importance of the
public policy against usury, whether a
refusal to enforce the [usurious] term will
further that policy, the gravity of the
misconduct involved, the materiality of
the provision to the rest of the contract,
and the impact of the remedy on the
parties’ rights and duties.


Given the discretion afforded state judges when deciding the appropriate relief, if any, for a violation of the Massachusetts usury statute, the Circuit Court refused to disturb the trial court’s findings despite the lender’s technical violation. The Court held that the outstanding balances of the loans could serve as a basis for the involuntary bankruptcy proceeding.

Fustolo v. 50 Thomas Patton Drive, LLC, 2016 U.S. App. LEXIS 3229 (1st Cir. Mass. Feb. 24, 2016)

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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