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Posted: June 7, 2015

Usurious Interest Rate Makes Promissory Note Unenforceable

On May 27, 2015, the Second Department issued a decision in Fred Schutzman Co. v. Park Slope Advanced Med., PLLC, 2015 NY Slip Op. 04447, holding that a promissory note was unenforceable because the interest rate was criminally usurious.

In Fred Schutzman Co., the plaintiff brought an action to recover on a promissory note. The Second Department affirmed the decision of the trial court granting summary judgment dismissing the claims, explaining:

Although a corporation or professional limited liability company (hereinafter PLLC), or an individual guarantor of such an entity’s debt, may not assert the defense of civil usury, a corporation or PLLC, or a guarantor of such an entity’s debt, may assert the defense of criminal usury. Contrary to the plaintiff’s contention, even though the defendants in this case would have been precluded from interposing the defense of usury if the note had not been criminally usurious, the note imposed an annual interest rate in excess of 16%, and since that rate was more than the rate prescribed in General Obligations Law § 5-501, the note was void, pursuant to General Obligations Law § 5-511. Contrary to the plaintiff’s further contention, a clause in the subject promissory note purporting to reduce the rate of interest to a non-usurious rate if the rate originally imposed was found to be usurious could not save the note from being usurious.

(Internal quotations and citations omitted) (emphasis added). This decision highlights the catastrophic effect of demanding in a note an interest rate that violates the usury (particularly the criminal usury) laws. Anyone drafting a note should always keep this in mind.

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