Two New York debtors entered into a promissory note with a lender in which the lender agreed to lend $35,000 to the debtors and the debtors promised to repay the lender $35,000 plus 15% interest. When the debtors failed to make the required payments, the lender filed suit for breach of contract.
In response, the debtors argued that the note was illegal because it charged an interest rate that exceeded the 16% maximum rate permitted by New York law. In support of their argument, the debtors provided a copy of a check payable from the lender to the debtors in the amount of $30,000. The debtors explained that the other $5,000 had been withheld as a “loan fee.” Given that the 15% rate was charged on $35,000 instead of the $30,000 the debtors alleged they had received, the debtors claimed that the actual rate charged was 17.5%. The lender did not dispute the debtors claims but argued that the allegations should be excluded as parol evidence because the promissory note was complete on its face. The trial court agreed with the lender and granted it summary judgment. The debtors appealed.
The appellate court explained that while parol evidence is generally inadmissible to vary the terms of a promissory note that is otherwise clear on its face, it is admissible to show that a contract is illegal. In the present case, the debtors had alleged the affirmative defense of usury and therefore carried the burden of proving the existence of a usurious rate. The appellate court held that the debtors were entitled to submit the parol evidence to meet their burden of proof. Otherwise, the court reasoned, usury laws could be easily avoided through the use of fully integrated contracts.
The appellate court, therefore, denied the lender’s motion for summary judgment.
Stransky v DiPalma, 137 A.D.3d 1734, 28 N.Y.S.3d 548, 2016 N.Y. App. Div. LEXIS 2231, 2016 NY Slip Op 02254 (N.Y. App. Div. 4th Dep’t 2016)