Lender May Charge Reasonable Expenses Attendant to Loan Without Making Loan Usurious

On May 2, 2016, Justice Emerson of the Suffolk County Commercial Division issued a decision in Aquila v. Rubio, 2016 NY Slip Op. 50682(U), holding that a lender may charge for its reasonable expenses attendant to making a loan without making the loan usurious.

In Aquila, the plaintiff loaned the defendant's decedent $900,000 "for a term of 30 days at 8% interest per annum. A $20,000 placement fee was due for the plaintiff's services in connection with the funding of the loan 10 days after the loan was made." The loan was not repaid and the plaintiff sued. The court rejected the defendant's argument that the promissory note was unenforceable because the terms were usurious.

First, the court found that the defendant had waived its claim for civil usury, but not criminal usury:

A transaction is usurious under civil law when it bears an annual interest rate exceeding 16% and under criminal law when it bears an annual interest rate exceeding 25%. . . . .

The long-standing rule in New York is that civil usury is a waivable defense. It is purely a matter of private right and does not involve any considerations of public policy. However, when a right has been created for the betterment or protection of society as a whole, an individual is incapable of waiving that right. Criminal statutes, in general, and criminal usury statutes, in particular, fall within the class of rules created for the protection of society as a whole. Criminal usury statutes were enacted in an effort to protect the public from loansharking, one of the most heinous, virtually bloodsucking criminal activities of all times. It follows, then, that a party cannot waive his right to be protected from criminally usurious loans. The right is not personal to the borrower, so as to be waivable by him. The right exists for the benefit of everyone.

In an affidavit executed contemporaneously with the settlement agreement, [the defendant's decedent] withdrew all of the defenses and counterclaims that he had previously raised in this action, including, but not limited to, the defense that any of the loans made by the plaintiff were usurious. This constitutes a waiver of the defense of civil usury only, since the defense of criminal usury cannot be waived.

Next, the court concluded that the $20,000 placement fee did not make the loan usurious:

A lender may charge reasonable expenses attendant on a loan without rendering the loan usurious provided that the expenses charged are not a pretext for higher interest. However, when fee payments do not actually reimburse a lender for expenses associated with the loan, and instead are a disguised loan payment, the fees are appropriately considered when determining the interest rate. . . . The record reflects that the placement fee was intended to cover the expenses that the plaintiff would incur, as well as his services, in connection with the funding of the loan. For example, the plaintiff anticipated that he would incur due diligence expenses such as accounting and legal fees, title searches on the collateral properties, inspection of the dealership's books and records, UCC searches, and appraisal of the dealership property, among other things. Moreover, since the loan was being made on a emergency basis for only 30 days, the placement fee was also intended to compensate the plaintiff for the services that he was to provide to find permanent financing for the Rubios, per their request. . . . .

In any event, even if the placement fee is considered to be interest, the total interest payment is still under the 25% needed for criminal usury. The cross-moving defendants contend that the placement fee was due "upon maturity" of the loan. Since the loan matured in 30 days, they add the placement fee to the interest payment due each month to arrive at a total interest rate of 36% per annum. However, the promissory note explicitly provides that the placement fee "is to be made within ten (10) days from the date hereof."

. . . . The parties did not intend for the placement fee to be a recurring fee payable every 30 days after the note became due, but a one-time fee payable 10 days after the promissory note was executed. Since the promissory note was executed on July 6, 2012, the $20,000 placement fee was due on July 16, 2012. Adding $20,000 to the $73,200 annual interest due on the first loan results in an interest rate of 10% per annum. . . . Ten per cent is well below the 25% per annum needed for criminal usury.

Finally, the court rejected the argument "that the plaintiff's employment agreement was a sham and that the $5,500-a-week salary was disguised interest, raising the interest rate on the loans above 25% per annum," explaining:

One well-recognized way of concealing a usurious transaction is an ostensibly unrelated contract providing for payment by the borrower for the lender's services, which are of little value or which are not, in fact, rendered. Factors to consider in determining whether an employment contract is merely a device or subterfuge to conceal usury are whether entry into the employment contract was an explicit condition to receipt of the loan; whether the fee paid was directly related to the size of the loan and rose and fell with the amount of the loan; whether a default in the payment for services under the contract was a default under the loan agreement; whether the borrower could elect to accept, reject, or terminate the employment agreement; and whether the lender was under an obligation to furnish any services.

Relying on the terms of the employment agreement alone, the cross-moving defendants contend that, since the agreement did not set forth the services that the plaintiff was expected to perform for Smithtown Nissan, his entire salary should be considered additional interest on the loan.

The court evaluated the evidence, including the plaintiff's performance of his duties until his employment was terminated, and concluded that the defendants had "failed to establish usury by clear and convincing evidence."