Despite Criminal Usury Claim, Court Compels Arbitration

A New York resident sued an alternative small business lender for, among other counts, criminal usury related to small business financing that the resident’s business had received and that the resident had agreed to guarantee. The agreement included a provision that required that “all claims brought by the signing principal, as well as the business itself” be resolved by arbitration. In response to the complaint, the lender filed a motion to compel arbitration as provided by the agreement.

In its decision, the court explained that “[u]nder the FAA [Federal Arbitration Act], a court must compel arbitration if it finds that: (1) a valid arbitration agreement exists between the parties; and (2) the dispute before it falls within the scope of the agreement.” After reviewing the facts of the present case, the court found that “here, [the resident], as owner of [the business] and as personal guarantor, signed the Agreement, manifesting his intent to be bound by the Agreement’s terms and its arbitration provision.” Additionally, the court held that the resident’s personal guaranty of the financing was subject to the arbitration provision.

Therefore, the court granted the lender’s motion and stayed the case pending the completion of the arbitration.

Caudill v Can Capital, Inc., 2017 N.Y. Misc. LEXIS 9, 2017 NY Slip Op 30008(U) (N.Y. Sup. Ct. Jan. 3, 2017)

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Another New York Court Upholds Bar on Corporate Usury Defense

A welding company sold a portion of its future business receivables to an MCA provider for a lump sum purchase price. When the welding company failed to remit the purchased sale proceeds as required by the parties’ agreement, the MCA provider filed suit against the company and its owner that had signed as a personal guarantor.

As a defense, the defendants argued that the transaction was not a true purchase and sale of future receivables but rather a disguised loan with a usurious interest rate. In response, the MCA provider filed a motion to dismiss the defendants’ usury defense and argued that because the transaction was not a loan or forbearance the defense was meritless. In opposition to the motion to dismiss, the welding company urged that the motion was premature as discovery had not yet been completed and that an affirmative usury defense could not be dismissed until discovery is completed. The court disagreed.

In its order dismissing the defendant’s usury defense, the court held that a plaintiff may move at any time to dismiss an affirmative defense if the defense is without merit. Reviewing the facts before it, the court held that the company, as a corporation, could not interpose the defense because under New York law corporations are barred from asserting the defense of civil usury. Further, the court found that an individual guarantor is also precluded from raising the defense. As such, the court held that the defendants’ argument that the agreement was usurious was meritless and dismissed their defense.

Merchant Cash and Capital, LLC, Plaintiff, v. Hobby Horse Welding, Inc., and Robbie Jo Carpenter, Defendants., 2016 N.Y. Misc. LEXIS 4894 (N.Y. Sup. Ct. Dec. 21, 2016).

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New York Court Enforces Choice of Law Provision Despite State Usury Law

An alternative small business lender provided a loan to a business. The business later filed suit against the lender in an attempt to void the loan agreement. The business alleged that the agreement violated New York’s criminal usury statute.  The agreement contained a choice of law provision which provided that the transaction would be interpreted and governed by Utah state law.

The lender filed a motion to dismiss the complaint arguing in part that the agreement’s choice of law provision was enforceable and that under Utah state law the loan was not usurious. The court agreed, stating,

Hornbook law holds that Courts must enforce choice-of-law provisions, at least if there is a reasonable connection between the law chosen and one of the parties. Here, defendants, one of which is located in Utah, and the transaction, which defendants claim, without contradiction, was “made” in Utah, obviously have a strong connection to Utah. Thus, the choice-of-law provision is enforceable, and the agreement is not void based on New York’s usury law.

As a result, the court granted the lender’s motion and dismissed the case.

Parry v Retail Capital LLC, 2017 N.Y. Misc. LEXIS 154, 2017 NY Slip Op 30082(U)

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New York Court Upholds Bar on Use of Usury Defense by Corporate Entity

A computer consultant asked a client for a loan. The client obliged but required a confession of judgment be included in the loan contract along with an increased interest rate in the event of default. The consultant agreed. The loan, which was made jointly to the consultant and his corporation, carried a 9% interest rate that would increase to 16% if the loan became overdue.

When the consultant failed to repay, the client initiated suit in New York state court to recover. As a defense, the consultant argued that the loan was unconscionable and civilly usurious because the interest rate increased from 9% to 16% upon default.

Upon review, the court rejected the consultant’s argument. It found that the defense of usury was unavailable as to the corporation. Further, the court held that the mere fact that the loan required a higher rate of interest after the original maturity date did not render it usurious. It also noted that a 16% interest rate in New York would not be usurious.

Therefore, the court granted the client’s motion for summary judgment.

Sternlicht v JMJ Films, Inc., 2016 N.Y. Misc. LEXIS 1052

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New York Court Finds Sale of Future Receivables is Not Subject to Usury Laws

A small business funder entered into an agreement with a business to purchase a portion of the business’ future receivables for an upfront lump sum. In exchange for the lump sum payment, the funder was to receive 9% of the business’ daily proceeds until the funder received the total amount of purchased receivables.

Within ten days of receiving the purchase price, the business refused to allow any of its receivable proceeds to be forwarded to the funder. As a result, the funder filed a complaint against the business and obtained a default judgment. The business later filed a motion to vacate the judgment. The business argued that the transaction was not a true purchase and sale but rather a usurious loan.

After reviewing the business’ arguments the trial court denied the motion. First, the court held that the business, which was a corporation, was barred from asserting civil usury because that defense is unavailable to corporate entities in New York. Second, the court found that business’ had failed to sufficiently allege a criminal usury defense because it failed to allege that the funder had knowingly charged, took or received annual interest in excess of 25% on a loan or forbearance.

The court explained that usury laws are only applicable to loans and forbearances and that where a financial arrangement is a purchase and sale there can be no usury. The court specifically found that the agreement between the parties was a purchase of future receivables for an upfront payment and highlighted aspects of the transaction that it found conclusively proved that there was no loan:

The repayment was based upon a percentage of daily receipts, and the period over which such payment would take place was indeterminate. Plaintiff took the risk that there could be no daily receipts, and defendants took the risk that, if receipts were substantially greater than anticipated, repayment of the obligation could occur over an abbreviated period, with the sum over and above the amount advanced being more than 25%. The request for the Court to convert the Agreement  to a loan, with interest in excess of 25%, would require unwarranted speculation, and would contradict the explicit terms of the sale of future receivables in accordance with the Merchant Agreement.

As a result, the court found that the business’ defense of usury was entirely without merit and denied the motion to vacate.

Merchant Cash & Capital, LLC v G&E Asian Am. Enter., Inc., 2016 N.Y. Misc. LEXIS 3067, 2016 NY Slip Op 31592(U)

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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)

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Bankruptcy Trustee Seeks to Recharacterize Litigation Financing Contract as Loan, Survives Motion to Dismiss

A litigation finance firm advanced funds to an attorney working a personal injury case on contingency. The attorney ultimately settled the case and was awarded a portion of the settlement as his fee. Following the settlement award, the attorney’s creditors, including the litigation finance firm, filed a petition to place the attorney in an involuntary bankruptcy to recover amounts due.

Rather than distributing funds to the finance firm, however, the bankruptcy trustee commenced an adversarial proceeding against the firm to recover any settlement funds that the firm had received or sought to recover from the attorney. The trustee argued that even though the transaction was couched as a purchase and sale of future income, it was in fact a loan that carried a usurious interest rate.

The trustee focused on portions of the agreement that it claimed exposed the transaction as a loan rather than a purchase and sale. Specifically, the trustee highlighted the agreement’s disclosure tables that referred to certain monetary transfers as “Amount of [finance firm]’s Interest/Amount Due to [finance firm].” The trustee claimed that the use of the term “interest” indicated that transaction was in fact a loan.

The finance firm filed a motion to dismiss the trustee’s claims arguing that the clear and unambiguous terms of the agreement controlled  and that the transaction was a true sale. The firm challenged the trustee’s interpretation and argued that the term “interest” was being taken out of context as it actually referred to the firm’s right to a portion of any future contingency fees the attorney ultimately received.

After reviewing the trustee’s allegations and the language of the agreement, the bankruptcy court denied the firm’s motion. The court stated that the use of the term “interest” was enough to introduce sufficient ambiguity into the agreement so that parol evidence could be considered to interpret the nature of the transaction.

Standish v. P. Rodney Jackson & LAC, LLC (In re Albertson), 548 B.R. 715, 2016 Bankr. LEXIS 1060 (Bankr. S.D. W. Va. 2016)

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Appellate Court Permits Use of Parol Evidence to Support Usury Defense

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)


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Supreme Court Denies Madden v. Midland Funding Cert. Petition

The Supreme Court has denied Midland Funding’s petition for certiorari. As a result, the 2nd Circuit’s holding that nonbank assignees are not entitled to NBA preemption if they are not acting on behalf of a national bank will remain binding law on the three states that make up the 2nd Circuit. The case, however, is still on ongoing. It will now remanded to the district court to decide whether or not to enforce the parties’ Delaware choice of law provision. If the provision is enforced, Midland should be successful in arguing that the interest rate it charged was not usurious. In its brief, the Solicitor General argued that there’s a good possibility that the district court will decide that issue in Midland’s favor which would result in the case being dismissed.

However, even if the case were dismissed, the 2nd Circuit’s holding on NBA preemption will still be binding. Assignees of national banks litigating in the circuit must now convince lower courts to disregard the 2nd Circuit’s decision or sufficiently distinguish the facts of their own cases such that district court judges feel comfortable not following Madden’s holding.

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Plaintiff Awarded Treble Damages for Usurious Interest Charges

A mother pawned some jewelry and coins in exchange for a loan which carried an interest rate of twenty percent per month. After the mother died, her son attempted to regain possession of the pawned items. The pawnbroker refused to return the items until the full balance due on the loan was repaid. Because the son believed the loan transaction to be usurious, he refused to pay the outstanding balance. The pawnbroker later sold a portion of the items. The son, as executor of his mother’s estate, then filed suit against the pawnbroker and alleged claims of state law conversion and federal RICO violations, among other actions.

The son moved for summary judgment against the pawnbroker and the US District Court judge granted the motion as to the conversion and RICO claims. In his motion, the son had also requested treble damages. After reviewing the case, the judge granted his request for treble damages as to the RICO claim but denied it for the conversion claim.

The Court explained that the federal RICO statute provides that any person injured as a result of a RICO violation is entitled to treble damages. To recover treble damages, a plaintiff must show that the defendant’s RICO violation actually caused the plaintiff’s injury. The Court held that the usurious interest rate (which constituted the collection of an unlawful debt and therefore meet the definition of a RICO violation) had directly resulted in the mother paying more interest than legally authorized. As a result, the Court granted the son’s request for treble damages.

The Court, however, denied the son’s request as to the conversion claim. The Court found that because the son had not offered evidence that the usurious interest rate had prevented the recovery of his mother’s property, he had failed to prove that the pawnbroker’s RICO violation had caused the damages related to the conversion claim. Therefore, the son’s request for trebling of the conversion damages was denied.

Gilmore v. Pawn King, Inc., 2016 U.S. Dist. LEXIS 39089 (D. Conn. Mar. 25, 2016)

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