Schneider v. Phelps, 41 N.Y.2d 238 (1977)
An individual guarantor of a corporate loan can assert a usury defense if the loan was, in fact, made to the individual to discharge personal obligations and not to further a corporate or personal enterprise, despite the general rule that corporations cannot claim usury.
Summary
This case addresses whether an individual guarantor of a corporate loan can assert a usury defense. The defendant, Phelps, guaranteed a loan to her corporation secured by a mortgage on her home. She claimed the loan was actually for her personal debts at a usurious rate. The court held that summary judgment was inappropriate. If the corporate form was used to conceal a usurious loan to an individual to discharge personal debts, the usury defense is available to the guarantor. The court emphasized the importance of determining the true purpose of the loan and the parties’ intent.
Facts
Phelps, a 75-year-old widow, sought a loan from Schneider. Schneider agreed, but only if a corporation was formed. Mrs. Bradley G. Phelps, Inc., was created. Admiral Development Corporation (in which Schneider was a principal) loaned the corporation money at 18% interest, guaranteed by Phelps with a mortgage on her home. Phelps claimed the loan proceeds were used for her personal debts, a fact known to Schneider. Later loans followed a similar pattern. Eventually, Phelps defaulted, and the plaintiffs ( Schneiders ) sought to foreclose.
Procedural History
The trial court granted summary judgment for the plaintiffs, appointing a referee to compute the amount due. Defendant sought leave to amend her answer to include a usury defense, which was denied. The Appellate Division affirmed the trial court’s judgment and the denial of the motion to vacate. The case was then appealed to the New York Court of Appeals.
Issue(s)
- Whether an individual guarantor can assert a usury defense when the loan is nominally made to a corporation?
Holding
- Yes, because if the corporate form was used to conceal a usurious loan made to an individual to discharge personal obligations and not to further a corporate enterprise, the defense of usury is available to the individual guarantor.
Court’s Reasoning
The court reasoned that the availability of the usury defense depends on whether the corporate form was used to conceal a usurious loan to an individual. The court emphasized that