Excessive Interest Caused By Contingency Under Debtor’s Control Not Usurious

A horse owner provided a loan to a horse trainer. The promissory note required simple interest payments of 4% per annum. The trainer had the option of providing free training for two of the owner’s horses in lieu of paying interest. When the note came due 10 years later, the trainer failed to repay the principal. The owner then filed suit for breach of contract and moved for summary judgment.

The trainer offered two defenses. First, it argued that the value of the free training services provided to the owner should be deducted from the amount due on the note. The court, however, rejected this argument. The court held that nothing in the note stated that the value of the training provided would be used to reduce the principal amount due. The court cited language from the note that stated that “in lieu of simple interest payment”
the trainer has the “option to waive the monthly training fees for two (2) of [owner’s] horses.” The court stated that a reasonable interpretation of the language did not support the meaning advanced by the trainer.

Second, the trainer argued that the because the retail value of training provided far exceeded the 4% simple interest rate, the note was unlawful because the trainer was paying an effective interest rate of 18% and that such a rate was usurious. The court again rejected the trainer’s position. The court held that “[w]here the excessive interest is caused by a contingency under the debtor’s control, the transaction will not be deemed usurious.” Therefore, because the trainer elected to provide free training rather than pay the non-usurious rate of 4%, the note was lawful.

Nelson v. McFall, 2016 U.S. Dist. LEXIS 96895 (E.D. Cal. July 22, 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 psiegfried@usurylawblog.com
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