New York Law Review

Tag: dummy corporation

  • Hoffman v. Nashem Motors, Inc., 22 N.Y.2d 513 (1968): Corporate Exception to Usury Laws

    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.

  • Leader v. Durst, 24 N.Y.2d 391 (1969): Corporate Loans and Usury Defense

    Leader v. Durst, 24 N.Y.2d 391 (1969)

    A loan to a corporation is not usurious simply because the corporation was formed to avoid usury laws, even if the individual shareholders guarantee the loan.

    Summary

    Leader and Durst, controlling stockholders of Leader-Durst Corporation, formed Leatex Investing Corporation to borrow $400,000 from Dinkier Management Corporation. Dinkier agreed to the loan only if made to a corporation. Leatex borrowed the money at a high interest rate, and Leader and Durst guaranteed the loan. After repayment, Dinkier sought to exercise an option to purchase Leader-Durst stock. Leader sued, claiming the loan was usurious and the release of claims was under economic duress. The Court of Appeals affirmed the Appellate Division’s grant of summary judgment to Dinkier, holding that the loan was a corporate obligation and not subject to usury laws, and that the release was enforceable.

    Facts

    Leader and Durst, promoters of Leader-Durst Corporation, needed to acquire 80,000 shares of their company’s stock. Lacking funds, they formed Leatex to borrow $400,000 from Dinkier. Dinkier insisted the loan be made to a corporation. Leatex was created with Leader and Durst as shareholders. The loan was secured by Leader-Durst stock and personally guaranteed by Leader and Durst. The loan agreement included an option for Dinkier to purchase Leader-Durst voting stock. After the loan was repaid, Leader, fearing a shift in corporate control, negotiated a release with Dinkier, giving up Class A stock in exchange for Dinkier relinquishing its option. Leader subsequently sued, alleging usury and economic duress.

    Procedural History

    Leader sued Durst and Dinkier seeking a return of interest paid in excess of 6% and the return of stock. Special Term denied Dinkier’s motion for summary judgment, deeming it untimely. The Appellate Division reversed, granting summary judgment to Dinkier. The Court of Appeals affirmed the Appellate Division’s decision.

    Issue(s)

    1. Whether a loan made to a corporation, formed to circumvent usury laws, but guaranteed by individual shareholders, is considered a usurious loan to the individual shareholders.

    2. Whether a release entered into six months after alleged economic duress is enforceable.

    Holding

    1. No, because the loan was made to the corporation, and the corporation is a separate legal entity, even if created for the purpose of avoiding usury laws.

    2. Yes, because the six-month delay in challenging the release waived any claim of economic duress.

    Court’s Reasoning

    The court relied on precedent, particularly Jenkins v. Moyse, stating, “The test of whether this loan is usurious is whether it was in fact made to the plaintiff.” The court emphasized that the loan was made to Leatex, a separate legal entity, not to Leader and Durst individually, even though they guaranteed it and Leatex was formed to avoid usury laws. The court further reasoned that sustaining such loan agreements aligns with legislative policy, noting that corporations are generally not permitted to avoid obligations, even if they are closely held. The court distinguished 418 Trading Corp. v. Oconefsky, where the loan was used to finance a personal residence, an area of specific legislative concern. In this case, the funds were deposited into the corporate account, the corporation purchased the stock, and the stock was pledged as security. The court found no merit in Leader’s claim of economic duress, stating that the delay in challenging the release waived any such claim. The court stated that “almost all of the cases in which we have sustained these loan agreements against charges of usury are cases in which the loans, though made to ‘dummy’ corporations, were being used to further business ventures of the individuals who ultimately benefited from the transactions.”