Commercial Division Blog

Posted: April 10, 2019 / Categories Commercial, Usury

Questions of Fact Preclude Dismissal of Criminal Usury Defense

On March 18, 2019, Justice Masley of the New York County Commercial Division issued a decision in Emigrant Bank Fine Art Fin., LLC v Kasmin Gallery Inc., 2019 NY Slip Op 30713(U), holding that questions of fact precluded dismissal of a defense of criminal usury, explaining:

Civil usury is not available to corporations and, in any event, may be asserted by individuals for only loans with principal values up to $250,000. The criminal usury defense may be interposed by an entity or its guarantor as an affirmative defense for loans bearing interest rates greater than 25% of the principal amount per annum, provided that the principal amount did not exceed $2.5 million. Corporations and their guarantors may invoke a criminal usury defense only to offset claims relating to nonpayment of a loan; it cannot be employed as a means to effect recovery by the corporate borrower.

Preliminarily, the criminal usury defense does not apply to claims relating to nonpayment of defendants' obligations under the $3 million 2014. Additionally, the criminal usury defense applies only to loans or forbearances that are absolutely repayable: the 2017 Restated Agreement is not a loan or forbearance and is not, therefore, susceptible to the defense.

Thus, the only criminal usury issues before the court' at this juncture concern whether the criminal usury defense can survive this motion to dismiss to the extent the defense is asserted as an offset to plaintiffs' nonpayment claims arising from the $2 million 2012 Loan, the only loan for which the statutory defense can be invoked.

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Usurious intent-that the lender had a general intent to take more than the lawful rate of interest, but not necessarily to violate Penal Law 190.40-is an essential element of a usury defense. Where loan documents reflect an unlawful rate of interest on their face, usurious intent is inferred. Usurious intent is an issue of fact where, as here, the loan documents have a stated interest rate below the lawful limit, but payment of other fees arising from or collateral to the loan, calculated together with the interest, may result in rates per annum exceeding the lawful limit. Here, the lawful limit is the statutory 25% rate per annum, annualized across the life of the transaction. The determination whether fees constitute.disguised interest must consider all of the circumstances surrounding the transaction.

The record on this CPLR 3211 motion is insufficient to eliminate those facts necessary to form the basis of defendants' criminal usury defense, as a matter of law, with respect to the 2012 Loan. Viewing the evidence in the light most favorable to defendants, the documents submitted by plaintiffs are not adequate to eliminate the usury defense with respect to the 2012 Loan and the fees/charges imposed throughout the course of that transaction. Plaintiffs argue that the documentary evidence establishes that all the fees paid for the 2012 Loan-even if the challenged success fees are included in the calculation of interest for usury purposes, did not exceed the maximum lawful interest rate per annum. The documents, however, do not sufficiently demonstrate what, if any, fees of any kind were incurred for the· 2012 Loan in the period from the maturity date, July 31, 2014, through March 2017. This gap in the record would require the court to impermissibly speculate, or assume, facts entirely absent from the documents submitted here.

Further, the documents do not identify facts surrounding the composition of the Payoff Agreement calculation, what costs, fees, interest, or remaining principal the calculation encompasses, and the precise amounts paid for those categories for the 2012 Loan; similarly, other sums in the Payoff Agreement, such as a catch-up success fee balance, are not identified as relating to any particular loan. In the absence of these and other facts regarding the 2012 Loan and the correlated February 2014 Letter imposing success fees for certain artworks, the court cannot find that all necessary facts forming the basis of defendants' criminal usury defense have been.eliminated by the documentary evidence or determine as a matter of law-that a lawful rate of interest per annum was taken for the 2012 Loan, with or without inclusion of success fees in the calculation.

While the court rejects defendants' arguments that the 2017 Restated Agreement is, itself, a criminally usurious transaction-since the 2017 Restated Agreement is not a loan to begin with-. plaintiffs have also failed to eliminate factual issues pertaining to the effect upon the 2012 Loan that was caused by execution of the 2017 Debt Agreements. For instance, the 2017 Debt Agreements alone do not adequately establish either that delivery of the Payoff Sum and execution of the 2017 Debt Agreements terminated the 2012 Loan and, instead, incorporated the February 2014 Letter for success fees into a new instrument simply consolidating/restructuring preexisting success fee obligations. Alternatively, plaintiffs' documents fail to establish that the 2012 Loan was not terminated upon payment of the Payoff Sum and execution of the 2017 Debt Agreements, which, instead, limited the parties' obligations and rights under the 2012 Loan to those concerning only future success fees under the February 2014 Letter.

In any event, the documents before the court on this CPLR 3211 motion do not eliminate, as a matter of law, all necessary factual issues upon which the criminal usury defense, with respect to only the 2012 Loan, is based. The usury counterclaim/affirmative defense is otherwise dismissed as to the remaining agreements at issue here; the 2014 Loan and 2017 Restated Agreement are not, as a matter of law, loans for which the statutory defense can be invoked.

(Internal quotations and citations omitted).

New York's usury laws can sometimes provide a defense to payment: the interest rate in an agreement can be so high that a court will not enforce it. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have a question regarding whether the interest rate in an agreement or note is legal.