Fee Charged to Forebear From Suing on Note Interest for Purposes of Usury Law

On July 13, 2020, Justice Sherwood of the New York County Commercial Division issued a decision in Salamone v. EIP Global Fund LLC, 2020 NY Slip Op. 32295(U), holding that a fee charged in connection with an agreement to forebear from suing to collect on a note was interest for the purposes of New York's usury laws, explaining:

Defendants argue the breach of contract claims (four and five) against EIP and Sridhar should be dismissed because the interest rate charged is usurious, making the agreement void. Plaintiff claims it loaned $2 million on October 11, 2019 and defendants owed plaintiff $2,369,918.50 on November 2, 2019, constituting 143.6% interest per annum. Interest is deemed criminal usury when it exceeds 25%. Defendants also argue the Demand Note is superseded by the subsequent agreements, so a breach of the Demand Note is no longer actionable.

Plaintiff opposes the motion to dismiss and asks this portion of the motion be converted to a motion for summary judgment pursuant to CPLR 3211(c). Plaintiff argues neither EIP nor Sridhar may assert a civil usury defense because of the value of the loan. Further, no corporation shall hereafter interpose the defense of usury in any action. The term corporation, as used in this section, shall be construed to include all associations, and joint-stock companies sharing any of the powers and privileges of corporations not possessed by individuals or partnerships. Plaintiff also argues the criminal usury law does not apply because the Demand Note and the Forbearance Agreement do not charge a criminally usurious rate of interest. The interest charged on the face of the Demand Note is merely 10%. The Forbearance Agreement charges 20% interest. The Forbearance Fee is additional principal in the Forbearance Agreement, not interest. Defendants bear the burden of establishing any additional fees, such as the Forbearance Fee, should be considered a ruse to collect additional interest in excess of thAt allowed by law.

According to the plaintiff, even if the Forbearance Agreement were void as usurious, the Demand Note would still stand and should be enforced. The Demand Note is not superseded by the Forbearance Agreement and the subsequent agreement does not extinguish the underlying obligation.

As the amount of the loan is too large to permit a civil usury defense, the court must consider whether the Forbearance Fee should be considered interest for the purpose of determining the rate of interest charged on the loan. Plaintiff takes the position that the Forbearance Fee is proper consideration for its forbearing to seek payment of the original Demand Note, and relies on Halliwell v Gordon for the premise that forbearance to do an act that a person has a legal right to do constitutes consideration. However, it is longstanding law that where money is owing upon a contract for the repayment of a loan, and forbearance is given for such debt upon the condition of receiving more than the legal rate of interest, such forbearance is as much usury as if the sum of money had bee absolutely loaned upon a contract to pay more than legal interest, has been established so long as to render further discussion wholly unnecessary. The amount charged, taken or received as interest includes any and all amounts paid or payable, directly or indirectly, by any person to or for the account of the lender in consideration for asking the loan or forbearance, excepting certain costs and fees.

Accordingly, the Forbearance Fee constitutes interest for the purpose of usury law, and the Forbearance Agreement is void as usurious. Therefore, claim five, for attorneys' fees pursuant to that agreement, fails. Nonetheless, plaintiff's fourth cause of action, for breach of both the Forbearance Agreement and the underlying Demand Note, survives as far as it relates to the Demand Note because the validity of an indebtedness, originally valid, is not affected by the fact that it forms a part of the consideration for a subsequent usurious security which was substituted therefor, or by the fact that the subsequent transaction is a mere cover for a usurious contract of forbearance.

(Internal quotations and citations omitted).

New York's usury laws can sometimes provide a defense to payment: the interest rate in an agreement can be so high that a court will not enforce it. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding whether the interest rate in an agreement or note is legal.