Barone v. Frie, 29 N.Y.2d 184 (1971)
A purchase-money mortgage is not considered a loan subject to usury laws, allowing sellers to charge interest rates exceeding the statutory maximum.
Summary
Plaintiff sought to invalidate a purchase-money mortgage, arguing it was usurious because it charged 7% interest, exceeding the legal rate of 6% at the time. The defendant seller argued that purchase-money mortgages are exempt from usury laws. The trial court dismissed the complaint, but the Appellate Division reversed. The New York Court of Appeals reversed the Appellate Division, holding that a purchase-money mortgage is not a loan within the meaning of the usury statute and therefore not subject to the statutory interest rate limitations. The court reaffirmed the long-standing exception to usury laws for purchase-money mortgages, emphasizing the freedom of contract between buyer and seller in setting the price of property.
Facts
Plaintiff, a real estate broker, bought property from the defendants for $15,500, paying $1,000 in cash and executing a purchase-money mortgage for $14,500. The mortgage stipulated a 7% interest rate. At the time, New York’s usury statute limited interest rates to 6%. Plaintiff then sued to declare the mortgage usurious and void.
Procedural History
The Special Term (trial court) dismissed the complaint, finding the purchase-money mortgage was not a loan subject to usury laws. The Appellate Division reversed, holding that while sellers could increase the mortgage obligation, they could not charge interest exceeding the statutory rate. The New York Court of Appeals granted leave to appeal.
Issue(s)
Whether a purchase-money mortgage, explicitly stating an interest rate exceeding the statutory maximum, constitutes a “loan” subject to the state’s usury laws.
Holding
No, because a purchase-money mortgage represents the terms of a sale, not a loan or forbearance of money. Therefore, the usury statute does not apply.
Court’s Reasoning
The Court of Appeals relied on a long line of New York cases establishing an exception to usury laws for purchase-money mortgages. The court reasoned that the interest rate in a purchase-money mortgage is part of the agreed-upon price of the property. Citing Weaver Hardware Co. v. Solomovitz, 235 N.Y. 321, the court stated that “the laws against usury pertain to the loan and forbearance of money and not to the purchase price of building materials.” The court also noted Williston’s view that parties may agree to a higher price if paid later, even if stated as interest exceeding the legal rate. The court emphasized the principle of stare decisis and the need for stability in commercial transactions. It acknowledged that while a purchase-money mortgage could be a disguised loan, there was no evidence of subterfuge in this case. The court directly quoted McAnsh v. Blauner, 222 App. Div. 381, 382, affd. 248 N. Y. 537: “A contract which provides for a rate of interest greater than the legal rate upon a deferred payment, which constitutes the consideration for a sale, is not usurious.” The Court concluded that, based on settled authority, the purchase-money mortgage was not void for usury.