Schneider v. Phelps, 41 N.Y.2d 233 (1977)

A loan made to an individual, even if intended for use in their corporation, remains an individual obligation allowing the individual to assert a usury defense, unless the corporation is also a primary obligor.

Summary

Schneider sued Phelps to recover on promissory notes. Phelps claimed the notes were usurious. Schneider argued the loans were for Phelps’ corporations, barring a usury defense. The Court of Appeals held that the loans were individual obligations, allowing Phelps to assert the usury defense. The court reasoned that Phelps signed the notes individually, making him the primary obligor. The mere intention to use the funds for corporate purposes does not transform an individual obligation into a corporate one. The court reversed the Appellate Division’s order and granted Phelps’ cross-motion for summary judgment.

Facts

Between February 1961 and February 1963, Schneider made various loans to Phelps. Phelps executed promissory notes in his individual name for these loans. The notes stipulated an interest rate of 15% per annum. Phelps made scheduled payments initially but later defaulted. Schneider sued Phelps to recover the outstanding amounts.

Procedural History

Schneider moved for summary judgment under CPLR 3213. Phelps opposed the motion and cross-moved for summary judgment, arguing the notes were void for usury. The lower court denied Phelps’ cross-motion. The Appellate Division affirmed, finding triable issues of fact regarding the identity of the borrower and whether Phelps was estopped from raising the usury defense due to alleged fraud. The Court of Appeals reversed the Appellate Division’s order.

Issue(s)

Whether an individual who signs promissory notes in their individual capacity can assert a usury defense when the borrowed funds are intended to be used for corporate purposes.

Holding

Yes, because the obligations represented by the promissory notes were those of the defendant individually, and the mere fact that the borrowed funds were expected to be or were intended to be used for corporate purposes cannot transform an individual obligation into a corporate obligation.

Court’s Reasoning

The court emphasized that Phelps signed the notes in his individual capacity, making him the primary obligor. The court stated, “it is clear that the obligations represented by the promissory notes sued upon were those of the defendant individually and there is no indication whatever of any corporate obligation.” The court distinguished this case from Hoffman v. Nashem Motors, where the corporate defendant executed the note. Here, Phelps’ unambiguous status as the maker of the notes entitled him to the usury defense, even if the funds were intended for corporate use. The court found that Schneider couldn’t argue the loans were made to the corporations to avoid the usury defense while simultaneously suing Phelps individually to recover on the notes. The court stated, “Manifestly, either the notes are corporate obligations…and are, therefore, not subject to the usury defense…or they are the personal obligations of the defendant and are subject to that defense.” The court cited Uniform Commercial Code §§ 3-401 and 3-413, and Matter of Waldman and Schwartz v. Fifty Greenwich St. Realty Corp. to support its holding that Phelps, as the maker of the notes, was entitled to assert the usury defense.