On June 3, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Sasidharan v. Piverger, 2014 NY Slip Op. 50890(U), refusing to enforce a personal guaranty because the loan it guaranteed was usurious.
In Sasidharan, the plaintiffs sued a guarantor for payment on a guaranty. The trial court granted the guarantor’s motion to dismiss, explaining:
Under New York law, usurious contracts are unenforceable. A usurious contract is void and relieves the obligor thereunder of the obligation to repay principal and interest thereon.
A transaction is usurious under civil law when it imposes an interest rate exceeding 16% per annum, and it is criminally usurious when it imposes an interest rate exceeding 25% per annum. While the defense of civil usury is unavailable to a corporation or an individual guarantor of a corporate obligation, a corporation or a guarantor of a corporation’s debt may assert a defense of criminal usury. Thus, Piverger, as a guarantor of ACI’s obligation, who was not involved in the drafting of the note, and did not obtain any direct benefit from the loan transaction, may raise the defense of criminal usury.
Here, since the note was extended to January 18, 2012, it was a one-year loan of $150,000 with interest of $32,000 (plus the $7,500 extension fee) resulting in interest of $39,500 for one year, which is in excess of 25% annual interest (which would be $37,500), rendering it criminally usurious. In addition, the sums retained by a lender are included as interest. Thus, since ACI never received the amount of $63,000 of the $150,000 loaned which was held in escrow and later released to plaintiffs, this effectively resulted in an annual interest of $39,500 on disbursed funds of $87,000, rendering it further in excess of the rate of 25% established for criminal usury.
(Internal quotations and citations omitted) (emphasis added).
This decision illustrates that in analyzing whether a loan is usurious–and thus unenforceable–courts look to the substance of the transaction, including all fees, and not simply whether a loan recites an interest rate above the legal maximum. It also shows the draconian penalty for making an usurious loan–not reformation to the maximum rate, but unenforceability. Given the stakes, counsel should take particular care not to cross the usury threshold.