New York Law Review

Tag: Usury

  • Freitas v. Geddes Sav. & Loan Ass’n, 63 N.Y.2d 254 (1984): The Usury Defense and Its Limitations

    Freitas v. Geddes Sav. & Loan Ass’n, 63 N.Y.2d 254 (1984)

    A borrower may be estopped from asserting a usury defense if they induced the lender’s reliance on the transaction’s legality due to a special relationship, but only if the lender suffered a cognizable injury as a result of that reliance.

    Summary

    This case concerns a mortgage foreclosure action where lenders sought to preclude a usury defense. Southside Development Co. obtained a loan with a usurious interest rate. The New York Court of Appeals held that the cooperative, Owners, could assert a usury defense despite being a subsequent owner of the property, because the conveyance was part of the original loan agreement. While a borrower may be estopped from claiming usury if they induced the lender’s reliance on the loan’s legality, that borrower must have caused injury to the lender to invoke estoppel.

    Facts

    Southside Development Co. borrowed $150,000 from Eta Herbst at a usurious interest rate of 28.6%. The loan was secured by a second mortgage on a building Southside intended to convert into a cooperative. The agreement included an option for Herbst to exchange a portion of the debt for shares in the cooperative. Southside conveyed the building to the cooperative corporation, 18 East 17th Street Owners, Inc. After Herbst’s death, her executors initiated foreclosure proceedings when Owners failed to pay the remaining debt. Owners then asserted a usury defense.

    Procedural History

    The Supreme Court found triable issues regarding whether Owners could assert the usury defense. The Appellate Division affirmed, identifying additional issues for trial, including whether the transaction could be viewed as a joint venture and whether the defendants acted in good faith. The Appellate Division certified the question of the correctness of their order to the Court of Appeals.

    Issue(s)

    1. Whether Owners, as a grantee of the property, is precluded from asserting a usury defense.
    2. Whether Southside waived the usury defense by conveying the property subject to the mortgage.
    3. Whether the doctrine of estoppel in pais applies, preventing Owners from asserting the usury defense.
    4. Whether the transaction should be construed as a joint venture, exempting it from usury laws.

    Holding

    1. No, because Owners was not a stranger to the transaction but was an integral part of the original loan agreement.
    2. No, because Southside’s conveyance to Owners does not infer a waiver in this case where the cooperative conversion was contemplated by all parties in the original loan agreement.
    3. No, because while a borrower can be estopped from raising a usury defense if they induced the lender’s reliance on the loan’s legality, the lender must have suffered injury due to the reliance. Herbst did not suffer any injury.
    4. No, because despite the presence of a unilateral option, the agreement was in form and substance a loan and not a joint venture.

    Court’s Reasoning

    The Court of Appeals emphasized the purpose of usury laws: “to protect desperately poor people from the consequences of their own desperation.” While exceptions exist, such as barring corporations from asserting the defense, those exceptions did not apply here. The court found that Owners was essentially the borrower, given the circumstances of the cooperative conversion. The court distinguished this case from situations where an independent third party obtains property subject to a mortgage in an arm’s-length transaction.

    Regarding estoppel, the court recognized that a borrower can be estopped when, through a special relationship, they induce reliance on the legality of the transaction. However, the court emphasized that “an indispensable requisite of an estoppel in pais, is that the conduct or representation was intended to, and did, in fact, influence the other party to [her] injury.” Since Herbst realized a significant profit on the loan, she suffered no cognizable injury.

    Finally, the Court rejected the argument that the transaction was a joint venture, stating that “[i]f the court can see that the real transaction was the loan or forbearance of money at usurious interest, its plain and imperative duty is to so declare, and to hold the security void.” The Court also dismissed the argument that implied covenants of good faith and fair dealing should force compliance with a usurious agreement, stating that usury laws take precedence. The Court ultimately held that the lender had earned a profit from the loan and could not claim injury for the purposes of seeking the aid of equity.

  • Szerdahelyi v. Harris, 67 N.Y.2d 42 (1986): Tender of Excess Interest Does Not Revive a Usurious Loan

    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.

  • Freitas v. Geddes Savings & Loan Assn., 63 N.Y.2d 254 (1984): Usurious Intent and Bank Fees

    63 N.Y.2d 254 (1984)

    A bank lender is not civilly liable for usury, absent usurious intent, solely for failing to properly itemize an otherwise authorized bank charge.

    Summary

    The Freitas case addresses whether a bank is liable for usury simply because it failed to properly itemize a bank charge, even if the charge itself was authorized and there was no intent to charge a usurious interest rate. The plaintiffs claimed the bank charged an unauthorized fee rendering the loan usurious. The Court of Appeals held that absent usurious intent, a mere failure to properly itemize a permissible fee does not constitute usury. The court emphasized that usury requires a knowing intent to charge an unlawful rate, and the burden of proving this intent lies with the borrower. The case highlights the importance of establishing usurious intent in usury claims and protects lenders from strict liability for minor technical errors.

    Facts

    Daniel and Beverly Freitas applied for a mortgage from Geddes Savings and Loan to finance the purchase of a modular home. The bank approved a $29,000 loan at 8.5% interest, the maximum legal rate at the time. Along with the commitment letter, the bank requested a “one percent Commitment Fee of two hundred ninety dollars.” The Freitas paid the fee and closed the loan. Subsequently, they claimed the unitemized $290 fee rendered the loan usurious, seeking cancellation of interest and recovery of twice the interest paid.

    Procedural History

    The trial court denied summary judgment, finding a factual issue regarding the fee’s purpose. After a non-jury trial, the court found no usurious intent but ruled the bank could not collect the fee due to improper itemization, awarding the plaintiffs $290. The Appellate Division affirmed. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether a bank lender is civilly liable for usury, absent usurious intent, solely because of a failure to properly itemize an otherwise authorized bank charge.

    Holding

    No, because usury requires a knowing intent to charge an unlawful rate of interest; a mere failure to properly itemize a permissible fee, without usurious intent, does not constitute usury.

    Court’s Reasoning

    The Court of Appeals emphasized that usury statutes are strictly construed, and the borrower bears a substantial burden to prove all elements of usury, including usurious intent, with clear and convincing evidence. The court stated that penalties for usury should not apply to violations not clearly within the statute’s intent. The court referenced Di Nome v Personal Fin. Co., stating that technical violations of disclosure requirements, absent usurious intent, do not warrant the harsh penalty of forfeiture. Usurious intent is a question of fact. Citing Hammelburger v Foursome Inn Corp., the court held that where usury isn’t apparent on the note’s face, it’s a factual question whether the charge was a ruse to collect excess interest. A bona fide mistake of fact vitiates usurious intent. The court found that because the trial court determined the fee was for an authorized item and not a subterfuge, and the Appellate Division affirmed, there was an affirmed finding that the bank lacked the intent to charge interest above the legal rate. The court stated, “To accept this interpretation of the bank regulations and the statute would impose a strict liability upon the bank, a much more stringent test for usury than would be authorized by the statute under which the regulations were promulgated.” The court also noted that “Section 380-e of the Banking Law prohibits the knowingly taking of interest in excess of that allowed by law.”

  • Fareri v. Ventresca, 49 N.Y.2d 464 (1980): Traditional vs. Present Value Method in Usury Calculations

    Fareri v. Ventresca, 49 N.Y.2d 464 (1980)

    In determining whether a loan is usurious, courts should apply the traditional method of calculating interest rather than the present value method, even if the latter is arithmetically more precise.

    Summary

    Fareri v. Ventresca addresses the method of calculating interest to determine usury. The lender used the traditional method, while the borrower argued for the “present value” method, which accounts for the time value of money. The New York Court of Appeals held that the traditional method should be used, emphasizing that the legislature set the usury rate with the understanding that the traditional method would be employed. Changing the calculation method would effectively alter the usury rate, a task best left to the legislature.

    Facts

    A corporation (Ventresca) borrowed $300,000 from another corporation (Fareri). The loan agreement stipulated a 13% discount ($39,000) retained by the lender and an 8% annual interest rate on the face amount of the mortgage. The borrower was to make twelve monthly installments of $2,000 each, with the principal due at the end of one year. The borrower failed to make the principal payment, and the lender initiated foreclosure proceedings. The borrower defended against the foreclosure by alleging usury, arguing that the effective interest rate exceeded the 25% statutory limit for corporate borrowers.

    Procedural History

    The trial court (Special Term) granted summary judgment in favor of the lender (Fareri). The Appellate Division affirmed the trial court’s decision, upholding the determination that the loan was not usurious. The borrower (Ventresca) appealed to the New York Court of Appeals.

    Issue(s)

    Whether, in determining if a loan is usurious, courts should use the traditional method of calculating interest or the more arithmetically precise “present value” method.

    Holding

    No, because the legislature set the usury rate of 25% with the understanding that the traditional method of interest calculation would be used. Adopting a new method of calculation would effectively change the usury rate, which is a legislative function.

    Court’s Reasoning

    The court acknowledged that the “present value” method is arithmetically sound and more accurately reflects the realized return for the lender. However, the court emphasized that the issue is not about determining the most precise rate of return but whether the lender received a return proscribed as usurious by the legislature. The court stated: “Modification of either would produce a different point of proscription. In our opinion, the Legislature must be deemed to have set the figure of 25% with full awareness of the traditional method of computing interest and in an expectation that it would continue to be used.” The court cited precedent, including Marvine v. Hymers and International Bank v. Bradley, supporting the traditional method. The court also quoted Feldman v. Kings Highway Sav. Bank, stating, “[S]o long as all payments on account of interest did not aggregate a sum greater than the aggregate of interest that could lawfully have been earned had the debt continued to the earliest maturity date, there would be no usury.” The court concluded that changing the computational method would effectively set a new usury level, a function belonging to the legislature.

  • Barone v. Frie, 29 N.Y.2d 184 (1971): Purchase Money Mortgage Exception to Usury Laws

    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.

  • 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.”

  • Republic National Bank of New York v. Richter, 16 N.Y.2d 163 (1965): Parol Evidence Rule and Usury Defense

    Republic National Bank of New York v. Richter, 16 N.Y.2d 163 (1965)

    The parol evidence rule bars the admission of oral evidence to contradict the clear terms of a written agreement, even when a party claims the written terms were a mere formality to circumvent usury laws.

    Summary

    Republic National Bank loaned Richter $150,000 at 10% interest, secured by stock and personal guarantees, with the note stating it was payable “On Demand.” When the bank sued for repayment, Richter claimed the loan was actually for one year and the “On Demand” clause was a sham to avoid usury laws. The Court of Appeals held that the parol evidence rule prevented Richter from introducing oral evidence to contradict the written terms of the note. The court also clarified the requirements for collateral under the relevant statute, finding that collateral need not equal the full loan amount to be considered valid security.

    Facts

    Richter borrowed $150,000 from Republic National Bank, evidenced by a promissory note with 10% interest, payable “On Demand.” The loan was secured by corporate stock valued at approximately 40% of the loan amount and personal guarantees from Wolf, Spilky, and Eckhaus. Richter claimed he applied for a one-year loan through Spinrad, an officer at an affiliated bank, who allegedly assured him the “On Demand” clause was a mere formality. The bank’s records indicated initial discussion of a one-year loan, but the final approved loan was documented as payable on demand.

    Procedural History

    The bank sued for summary judgment based on the note. The defendants argued usury. Special Term granted partial summary judgment to the bank. The Appellate Division modified the interest rate post-default but otherwise affirmed the judgment for the bank. The defendants appealed to the Court of Appeals.

    Issue(s)

    1. Whether the parol evidence rule bars the admission of oral evidence to contradict the “On Demand” term in a promissory note, where the borrower claims the true agreement was for a one-year loan.

    2. Whether collateral pledged as security for a loan must equal or exceed the loan amount to satisfy the requirements of Section 379 of the General Business Law (now General Obligations Law, § 5-523).

    Holding

    1. Yes, because the parol evidence rule prevents the introduction of oral evidence that contradicts the clear terms of a written agreement, even if the borrower claims the written terms were intended to circumvent usury laws.

    2. No, because Section 379 requires only that the lender accept property of substantial value as security; it does not mandate that the collateral’s value equal or exceed the loan amount.

    Court’s Reasoning

    The Court of Appeals emphasized the importance of the parol evidence rule: “The rule of law which defeats defendants and makes this summary judgment valid is that which makes parol evidence inadmissible to vary the terms of a written instrument.” The court distinguished this case from fraud in the inducement, where oral evidence may be admitted to show that the written agreement was procured by fraud. Here, the defendants received the loan they sought but were attempting to avoid repayment based on an alleged oral agreement contradicting the written terms. The court cited Thomas v. Scutt, 127 N.Y. 133, 138 as direct authority. As to the collateral issue, the court noted that the statute requires only that the lender accepts “collateral security.” While declining to speculate on a situation involving only nominal collateral, the court held that collateral of “substantial value” satisfies the statute’s requirements. The court stated, “If the lender accepts as security property of a substantial value and of the kind required by the statute, that should satisfy its requirements.” The court also noted, “It is of course no defense here that plaintiff made the note payable on demand to avoid usury and to take advantage of the exempting statute (Dunham v. Cudlipp, 94 N. Y. 129; Jenkins v. Moyse, 254 N. Y. 319).”

  • Seiter v. Geiszler, 70 N.Y. 294 (1877): Usury Requires Intent by Borrower to Pay and Lender to Receive Illegal Interest

    Seiter v. Geiszler, 70 N.Y. 294 (1877)

    Usury requires a corrupt agreement where the borrower intends to pay, and the lender intends to receive, interest exceeding the legal rate; the mere fact that a lender extracts an unlawful premium without the borrower’s knowledge or consent does not establish usury.

    Summary

    This case addresses the essential elements of usury. Seiter loaned Geiszler money, ostensibly at a legal interest rate. However, Seiter charged Geiszler an additional “commission” through the attorney facilitating the loan, which Geiszler disputed. The court held that usury was not established because Geiszler did not intend to pay usurious interest, and Seiter’s extraction of the commission was without Geiszler’s agreement or knowledge. The critical element of a mutual agreement to violate the usury laws was absent, making the loan valid.

    Facts

    Geiszler owed Seiter $172.45 on two past-due notes. Seiter agreed to loan Geiszler $1,500, with the existing debt to be paid from the loan proceeds. At the loan closing, Geiszler received a statement showing the $172.45 debt, an attorney’s bill for $230.45 (including a $150 “commission for obtaining loan”), and a check for $1,097.10. Geiszler questioned the $150 commission, stating he did not expect to pay it. Seiter responded that it was “cheap enough.” The $150 was, in fact, retained by Seiter, not paid to the attorney.

    Procedural History

    The mortgagee, Seiter, brought the action against the mortgagor, Geiszler, to foreclose on the mortgage. The lower court likely found in favor of the mortgagee. Geiszler appealed the decision, arguing the mortgage was usurious. The New York Court of Appeals reviewed the case.

    Issue(s)

    Whether the loan was usurious when the lender charged and retained a “commission” that, if considered interest, would exceed the legal rate, but the borrower did not agree to pay it and protested the charge.

    Holding

    No, because there was no intent on the part of the borrower to pay usury, nor any expectation that the lender should receive usury. The essential element of a corrupt agreement to violate usury laws was missing.

    Court’s Reasoning

    The court emphasized that usury requires a specific intent and agreement by both parties: the borrower must intend to pay, and the lender must intend to receive, interest exceeding the legal rate. The court stated, “There was no intent on the part of Geiszler to pay usury; no expectation on his part that Seiter should have usury. And I am not able to perceive how, in the absence of such intent, there could have been an agreement or contract for it.” Because Geiszler protested the $150 commission and never agreed to it, Seiter’s actions were viewed as a potential fraud or unauthorized extraction of funds, but not usury. The court reasoned that “either the attorney, without right, or Seiter, by false pretense, has deprived the defendant Geiszler of the money due to him, but it was by virtue of no agreement, and so there can be no usury.” The court distinguished between waiving a tort and implying an agreement, stating that “from a fraud you cannot imply or import a term into a valid agreement, for the purpose of rendering that agreement void.” The remedy, if any, would be a claim by Geiszler for the unauthorized deduction, not a finding of usury invalidating the entire loan.