Usury – New York Appellate Digest

Contract Law, Debtor-Creditor, Securities, Usury

A LOAN AGREEMENT WHICH ALLOWS THE LENDER TO CONVERT THE BALANCE TO SHARES OF STOCK AT A FIXED DISCOUNT CAN VIOLATE THE USURY STATUTE, WHICH WOULD THEREBY RENDER THE AGREEMENT VOID AB INITIO (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge Wilson, over a partial dissent. answered two questions posed by the Second Circuit in the affirmative. “1. Whether a stock conversion option that permits a lender, in its sole discretion, to convert any outstanding balance to shares of stock at a fixed discount should be treated as interest for the purpose of determining whether the transaction violates N.Y. Penal Law § 190.40, the criminal usury law. 2. If the interest charged on a loan is determined to be criminally usurious under N.Y. Penal Law § 190.40, whether the contract is void ab initio pursuant to N.Y. Gen. Oblig. Law § 5-511:”

GeneSYS ID, Inc. (“GeneSYS”) is a publicly held corporation that produces various types of medical supplies. Adar Bays, LLC is a limited liability company based in Florida. On May 24, 2016, Adar Bays loaned GeneSYS $35,000. In exchange, GeneSYS gave Adar Bays a note with eight percent interest that would mature in one year. The note included an option for Adar Bays to convert some or all of the debt into shares of GeneSYS stock at a discount of 35% from the lowest trading price for GeneSYS stock over the 20 days prior to the date on which Adar Bays requested a conversion. Adar Bays could exercise its option starting 180 days after the note was issued and could do so all at once or in separate partial conversions. …

Six months and four days after the note was issued … Adar Bays requested conversion of $5,000 of debt into 439,560 shares of stock. GeneSYS refused … seeking to renegotiate the loan. … GeneSYS was trading for $0.024 per share, the conversion price was $0.011. Adar Bays … sued GeneSYS in the … Southern District of New York for breach of contract. GeneSYS filed a motion to dismiss arguing the contract was void because the loan’s rate of interest, including both the stated interest and conversion option, exceeded the criminal usury rate of 25%. Adar Bays, LLC v GeneSYS ID, Inc., 2021 NY Slip Op 05616 CtApp 10-14-21

October 14, 2021/by Bruce Freeman

Foreclosure, Usury

DEFENDANT IN THIS FORECLOSURE ACTION UNSUCCESSFULLY RAISED USURY AS AN AFFIRMATIVE DEFENSE; DEFENDANT ARGUED THE BROKER’S COMMISSION, TITLE INSURANCE COST AND ATTORNEY’S FEE CONSTITUTED A COVER FOR USURY (SECOND DEPT).

The Second Department determined the broker’s commission, title insurance and attorney’s in connection with defendant’s (Chandler’s) mortgage were not a cover for usury. Chandler had raised usury as an affirmative defense to foreclosure:

General Obligations Law § 5-501(2) provides that “[n]o person or corporation shall, directly or indirectly, charge, take or receive any money, goods or things in action as interest on the loan or forbearance of any money, goods or things in action at a rate exceeding the [maximum permissible interest rate].” In New York, the civil usury statute provides that “[t]he maximum interest rate permissible on a loan is 16% per annum, and any interest rate in excess of that amount is usurious” … . “A usurious contract is void and relieves the borrower of the obligation to repay principal and interest thereon” … . There is a strong presumption against a finding of usury, which must be established by clear and convincing evidence … . …

Chandler claimed that three charges, a $14,000 mortgage broker’s commission, a title insurance charge of $7,212.50, and a $1,000 fee paid to her attorney at the closing, were a cover for usury. “[W]hether a commission is a cover for usury is a factual issue which must be demonstrated by clear and convincing evidence” … . If itemized in writing to the borrower, reasonable fees, charges and costs for, among other things, title insurance and legal services are not considered interest on a loan secured by a one- or two-family owner-occupied residence Notably, “[a]n imprecise … . disclosure . . . constitutes a bona fide error of fact which is insufficient to establish the requisite usurious intent” … . Zanfini v Chandler, 2021 NY Slip Op 04681, Second Dept 8-11-21

August 11, 2021/by Bruce Freeman

Consumer Law, Debtor-Creditor, Fraud, Usury

THE DEFENDANTS IN THIS USURY, FRAUD AND DECEPTIVE BUSINESS PRACTICES ACTION FINANCED THE SALE OF JEWELRY OVER MANY MONTHS, MARKETING THE SALES AS A WAY FOR CONSUMERS TO IMPROVE THEIR CREDIT; THE MAJORITY HELD THE BUSINESS MET THE DEFINITION OF A “CREDIT SERVICES BUSINESS” WITHIN THE MEANING OF GENERAL BUSINESS LAW 458-H (FOURTH DEPT).

The Fourth Department, over a dissent, determined the cause of action which alleged defendants operated a “credit services business” within the meaning of General Business Law 458-h. The defendants financed the purchase of jewelry, claiming that such financing was a means of improving consumers’ credit record:

Plaintiff commenced this action alleging various claims for usury, common-law and statutory fraud, and deceptive business practices. …

A “credit services business” is defined as “any person who sells, provides, or performs, or represents that he can or will sell, provide or perform, a service for the express or implied purpose of improving a consumer’s credit record, history, or rating or providing advice or assistance to a consumer with regard to the consumer’s credit record history or rating in return for the payment of a fee” (§ 458-b [1]). According to the complaint, defendants “represent[]” that they “provide” a “service” to consumers—specifically, financing the purchase of jewelry—and defendants market such financing as a means “of improving [the] consumer’s credit record.” Put simply, defendants allegedly offer consumers the option of paying for jewelry over many months, and defendants allegedly advertise that financing option as a mechanism to improve the consumer’s credit. In exchange for that financing—i.e., the “service” contemplated by section 458-b (1)—defendants allegedly charge interest. Such interest, we conclude, constitutes a “fee” within the meaning of section 458-b (1). Thus, contrary to the court’s determination and the view of our dissenting colleague, the complaint sufficiently alleges that defendants’ business satisfies the statutory definition of a “credit services business” … . People v Harris Originals of Ny, Inc., 2020 NY Slip Op 06883, Fourth Dept 11-20-20

November 20, 2020/by Bruce Freeman

A LOAN AGREEMENT WHICH ALLOWS THE LENDER TO CONVERT THE BALANCE TO SHARES OF STOCK AT A FIXED DISCOUNT CAN VIOLATE THE USURY STATUTE, WHICH WOULD THEREBY RENDER THE AGREEMENT VOID AB INITIO (CT APP).

DEFENDANT IN THIS FORECLOSURE ACTION UNSUCCESSFULLY RAISED USURY AS AN AFFIRMATIVE DEFENSE; DEFENDANT ARGUED THE BROKER’S COMMISSION, TITLE INSURANCE COST AND ATTORNEY’S FEE CONSTITUTED A COVER FOR USURY (SECOND DEPT).

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