That Loan Was Made from the Proceeds of Illegal Gambling Does Not Make Loan Contract Unenforceable

On December 19, 2019, the Court of Appeals issued a decision in Centi v. McGillin, 2019 NY Slip Op. 09058, holding that a loan contract was enforceable even though the loan was made from the proceeds of illegal gambling, explaining:

Given our strong public policy favoring freedom of contract, agreements are generally enforceable by their terms. There is an affirmed finding, supported by the record, that the parties entered into a bona fide loan agreement and the facts do not support voiding the agreement on public policy grounds.

Neither the terms of the agreement nor plaintiff's performance — i.e., loaning money to a friend — was intrinsically corrupt or illegal. Although the loan was funded by the parties' illegal gambling operation (for which both were criminally prosecuted), the record does not support a characterization of their conduct as malum in se, or evil in itself and the source of funds used for a loan is not typically a factor in determining its validity. Defendant argues the agreement should be deemed unenforceable because the courts should not assist a party in profiting from ill-gotten gains. But, here, where both parties were involved in the underlying illegality, neither enforcement nor invalidation of the contract would avoid that result. Indeed, if the loan is not enforced, defendant receives a windfall despite his participation in the criminal acquisition of the funds. We have been reluctant to reward a defaulting party who seeks to raise illegality as a sword for personal gain rather than a shield for the public good. Although we do not condone plaintiff's illegal bookmaking business, for which he was prosecuted and fined, the circumstances presented here do not warrant a departure from this tenet.

(Internal quotations and citations omitted).

This does not come up often, but courts will not enforce an illegal contract. At the same time, as this decision shows, courts are reluctant to apply this rule in a way that gives a defendant "a windfall despite his participation in the" crime. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.