67 N.Y.2d 42 (1986)

Under New York law, a loan agreement deemed usurious is void, and a lender’s subsequent offer to return the excess interest charged does not revive the agreement or entitle the lender to recover the principal and lawful interest.

Summary

Szerdahelyi sought a declaration that a loan from Harris was usurious, rendering the note and stock power void. Harris tendered a check for the excess interest. The New York Court of Appeals held that the usurious loan was void, and Harris’s tender of excess interest did not revive the contract. The court reasoned that usury statutes render usurious contracts void and that the tender provision addresses penalties, not the underlying invalidity of the agreement. The court emphasized the legislative intent to combat criminal loan-sharking without altering existing usury laws.

Facts

Szerdahelyi obtained a $25,000 loan from Harris at 21% interest to purchase a cooperative apartment. The legal maximum interest rate was 16%. Szerdahelyi executed a note for $25,000 at 21% interest, secured by her stock certificate and an irrevocable stock power. After paying interest for 11 months, Szerdahelyi claimed the loan was usurious.

Procedural History

Szerdahelyi sued for a declaration that the loan was usurious and void. The Special Term granted her summary judgment. The Appellate Division reversed, holding that Harris’s tender of the excess interest entitled him to recover the principal and legal interest. The Court of Appeals reversed the Appellate Division, granting partial summary judgment to Szerdahelyi.

Issue(s)

Whether a lender, by tendering a return of excess interest paid on a usurious loan, may establish a right to recover the loan principal plus legal interest.

Holding

No, because General Obligations Law § 5-519 does not allow the revival of a void usurious contract through the tender of excess interest.

Court’s Reasoning

The court reasoned that General Obligations Law § 5-519, which addresses the consequences of tendering back excess interest, does not negate the fact that a usurious instrument is void. The court clarified that a determination that a usurious instrument is void is not a penalty or forfeiture under the statute; rather, it’s the implementation of the principle that illegal contracts are unenforceable. The court cited Curtiss v. Teller, 157 App. Div. 804 (1913), which held that the tender-back provisions would not save the lender the money advanced on the usurious loan. The court noted the 1965 amendment to § 5-519 was intended to address criminal loan-sharking and clarify the original purpose of the statute without modifying existing laws limiting lawful interest rates. The legislative history indicated an intent to codify the existing judicial interpretation, not to overturn decisions holding that a tender back of excess interest does not entitle the lender to recover the underlying debt and unpaid lawful interest. The court emphasized, “The amendment will merely codify the present judicial interpretation of the section making it very clear that the penalties which are relieved by a re-payment under this section are those imposed by the preceding sections of Article 5“. The court concluded that although the lender need not return the lawful interest already paid, they cannot recover either the money loaned or the interest remaining due, because the transaction was void ab initio.