Promissory Note and Amendments Violated Criminal Usury Statute

On January 21, 2025, Justice Margaret A. Chan issued a Decision and Order in JADR Consulting Group Pty Ltd. v. Ault Alliance, Inc., Index No. 650537/2024, denying plaintiff’s motion for summary judgment in lieu of complaint based on a promissory note and various amendments and granting defendants’ cross-motion to dismiss. The Court explained:

Corporations may raise criminal usury as a defense to the enforcement of a loan (General Obligations Law § 5-521 [3] [prohibiting civil but not criminal usury]). "Criminal usury" is charging with knowledge "any money or other property as interest on the loan or forbearance of any money or other property, at a rate exceeding [25% per year] or the equivalent rate for a longer or shorter period" (Penal Law§ 190.40). However, usury laws do not apply if the loan is for $2,500,000 or more (General Obligations Law§ 5-501 [6] [b])."To successfully raise the defense of usury, a debtor must allege and prove by clear and convincing evidence that a loan or forbearance of money, requiring interest in violation of a usury statute, was charged by the holder or payee with the intent to take interest in excess of the legal rate" (Blue Wolf Capital Fund II, L.P v American Stevedoring, Inc., 105 AD3d 178, 183 [1st Dept 2013] [internal citation omitted]). "If usury can be gleaned from the face of an instrument, intent will be implied and usury will be found as a matter of law" (id.). "To determine whether a transaction is usurious, courts look not to its form but to its substance or real character" (id. [internal citation omitted]).

Based on the above principles, there is effectively a two-step analysis to determine whether a transaction is usurious. The first step is to determine whether the note is for $2,500,000 or more (see§ 5-501 [6] [b]). If it is, the usury laws do not apply. If it is not, the second step is to calculate the note's actual interest rate to determine whether that rate exceeds the 25% cap (see Penal Law§ 190.40).

The Initial Note on its face states that the principal is $2,756,245.10, but plaintiff admits defendants only received $2,249,996 in consideration. "It is settled law that the formula [for calculating interest rate] is based on the amount actually received," and the $2.5 million cap is inapplicable for the "same reason" (Concrete Capital, LLC v Olympic Prop. Partners, LLC, 2018 NY Slip Op 30804[U], 9 [Sup Ct, NY County 2018] [Crane, J.], citing Band Realty Co. v N. Brewster, Inc., 37 NY2d 460, 462 [1975], and Blue Wolf Capital, 105 AD3d at 183). Thus, because defendant actually received less than $2,500,000, the usury laws may apply…

Because the usury laws apply, the next step is to calculate the annual interest rate. Under the traditional method of calculating interest, courts first calculate the total annual interest received by adding together a year's worth of interest at the contract's rate and the amount of the principal retained by the lender as a discount, and then divide that sum by the amount the debtor actually received and express the final amount as a percent (see Band Realty Co. v N Brewster, Inc., 37 NY2d 460, 462 [1975]; Blue Wolf Capital, 105 AD3d at 183-184). Any money retained by the lender that is not for the purpose of reimbursing expenses related to the loan is properly considered a discount to be added to the annual interest in the first part of the formula (see Blue Wolf Capital, 105 AD3d at 183; Sandras Jewel Box v 401 Hotel, L.P, 273 AD2d 1, 3 [1st Dept 2000]). If the loan term is less than a year, the interest rate is annualized (Bakhash v Winston, 134 AD3d 468, 469 [1^st Dept 2015])….

Next to be calculated is the amount of annual interest payments that plaintiff would receive under the note. Here, that amount is the sum of the 16% annual interest rate on the $2,756,245.10 face principal, which comes to $440,999.22, plus the $506,249.10 discount retained by plaintiff, totaling $947,248.32. Dividing $947,248.32, the amount of annual interest, by $2,249,996, the net funds received, and multiplying by 100 to express the interest payments as a percentage of the net loan funds, the result is an interest rate of 42.1 %, almost double the criminal usury rate…

In short…the Initial Note is usurious on its face. The Initial Loan is therefore void ab initio (Adar Bays, LLC v GeneSYS ID, Inc., 37 NY3d 320, 333 [2021] ["(L)oans proven to violate the criminal usury statute are subject to the same consequence as any other usurious loans: complete invalidity of the loan instrument"]). By extension, both amendments are void, because a void agreement cannot be amended (see Goldberger v Magid, 213 AD3d 452, 452 [1st Dept 2023] ["the note was void ab initio and could not be reformed by reducing the interest rate from fifteen percent to nine percent"]).

The attorneys at Schlam Stone & Dolan frequently litigate promissory notes, usury issues, and actions seeking summary judgment in lieu of complaint. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning such issues.