Hoffman v. Nashem Motors, Inc., 22 N.Y.2d 513 (1968)
A loan to a corporation, even if the corporation is a shell created to avoid usury laws, is valid, but a loan made directly to an individual, even if intended for a corporation, is subject to usury laws.
Summary
Hoffman sued Nashem Motors, Inc., and Leland Nashem to recover money owed on three promissory notes. The court addressed whether summary judgment was proper regarding usury claims. The court held that the first note, made to the corporation, was valid even if the loan’s purpose was to circumvent usury laws, aligning with the corporate exception. However, the other two notes raised a triable issue because the loan was made directly to Nashem individually and never reached the corporation. The court reversed the grant of summary judgment on those notes, allowing Hoffman to prove the loans were not usurious or were, in fact, corporate loans.
Facts
George Hoffman and Margaretha Wilkens sought to recover funds from Lee Nashem Motors, Inc., (the corporate defendant) and Leland Nashem (the individual defendant) based on three promissory notes. The first note was for $18,250 payable to Hoffman. The second was for $16,000, also payable to Hoffman. The third was for $1,000, payable to Wilkens, Hoffman’s secretary. Nashem claimed the first note was a usurious loan disguised as a corporate loan. He claimed the other two notes were for a separate loan with a usurious interest rate and were made to him as an individual, with the funds not entering the corporate account.
Procedural History
The Special Term granted summary judgment to Hoffman. The Appellate Division affirmed this decision. The dissenting Justice at the Appellate Division level prompted an appeal to the New York Court of Appeals.
Issue(s)
1. Whether a loan, nominally to a corporation but allegedly intended to circumvent usury laws, is valid under New York law?
2. Whether a loan made directly to an individual, but allegedly intended for a corporation, is subject to usury laws?
Holding
1. Yes, because New York law permits loans to corporations even if the purpose is to avoid usury laws, as established in Leader v. Dinkler Mgt. Corp.
2. Yes, because the corporate exception to usury laws only applies when the loan is, in form, made to the corporation.
Court’s Reasoning
The court relied on Leader v. Dinkler Mgt. Corp., which held that loans to corporations are valid, even if the corporation is a “dummy” created to accept a usurious loan. The court stated, “[A] loan to a corporation, even a ‘dummy’ corporation formed to avoid the usury laws and to accept the usurious loan, is valid.” Thus, the first note was valid regardless of the alleged usurious intent. However, regarding the second and third notes, the court found that the loan was made directly to Leland Nashem as an individual, and the funds did not reach the corporate account. Therefore, the corporate exception did not apply. The court reasoned that, “To come within the purview of the rule set down in Leader v. Dinkler Mgt. Co.…the loan must be made in form, at least, to the corporation.” Because of this factual distinction, the court held that a trial was necessary to determine whether the loan was usurious or if it could be proven that the loan was, in fact, made to the corporation. The court rejected the argument that the two loans were one transaction, finding no factual support for this claim in the affidavits. The court noted that the loans were made on different dates to different borrowers, and the defendant did not assert this claim in the original filings. Therefore, this claim was without merit.