A lender provided a $600,000 loan to a borrower on the condition that the proceeds be used to purchase shares of a publicly traded company. The note provided for an interest rate of 10% and granted the lender warrants to purchase the shares at a fixed price. Upon the maturity of the note, the borrower had the option of repaying the principal plus interest or delivering the shares to the lender plus a cash payment of interest.
When the note came due, the borrower elected to deliver the shares to the lender. At the time the lender took ownership of the shares, their value had increased to more than $2 million. The borrower later filed a breach of contract action against the lender arguing that the value of the stock received by the lender in excess of the principal plus New York’s criminal usury rate of 25% should have been refunded to the borrower. The US District Court dismissed the borrower’s claim as barred by the one-year statute of limitation period on claims of overcharged interest. The borrower appealed to the Second Circuit.
Reviewing the District Court’s decision de novo, the Court of Appeals affirmed the District Court’s decision, though not on the same grounds (in a footnote, the Court appeared to reject the conclusion that the borrower’s claims was barred by the statute of limitations). Rather, the Court of Appeals found that the language of the note clearly removed the possibility that the transfer of the shares constituted a payment of interest.
“The contract provides that [the borrower] could elect to deliver the preferred shares to [the lender] to ‘repay the principal’ of the loan instead of paying back the $600,000 principal in cash. The contract specifically requires, however, that if [the borrower] chooses this alternative principal payment, she must make an additional “cash payment equal to the interest accrued . . . through the date of such delivery” at the regular, 10% per annum interest rate. There is no hint anywhere in the contract that to the extent the value of the preferred shares exceeded $600,000, that value would constitute payment of interest—in fact, the contract specifically contemplates that any interest must be paid in cash.”
Given the unambiguous language of the contract, the Court of Appeals rejected the borrower’s attempt to re-characterize the increase in the value of the shares as interest. As such, the court affirmed the District’s judgment.
Chassman v. Shipley, 2017 U.S. App. LEXIS 11252 (2d Cir. N.Y. June 21, 2017)