Our parents taught us that playing with fire is dangerous. Throughout my career I have emphasized to my clients that playing with usury is dangerous. A recent New York case (Pearl Capital Rivis Ventures, LLC v. RDN Construction, Inc. and Robbie Neely, ____N.Y.S.3d ___, 2016 WL 6245103, 2016 N.Y. Slip Op. 26344) highlights the risk and should serve as a lesson.
Increased regulation in the banking industry has created opportunities for non-bank lenders, some of whom have succeeded in obtaining very high returns – often at usurious rates. At times these high rates are obtained through loans that are exempt from usury laws. In other instances the loan, together with its usurious interest, is repaid without incident. The recent New York case demonstrates the risk.
Pearl Capital Rivis Ventures, LLC made a $9,000 loan to RDN Construction, Inc., which loan was guaranteed by Robbie Neely. The loan was to be repaid by installment “payments of $198 …made every weekday, excluding legal holidays, until there was a total payback of $13,050.00, i.e., a period of approximately 13 weeks. Pearl had access to debit electronically the aforesaid payments from RDN’s bank account, into which RDN was supposed to deposit its receivables.” In addition, Pearl charged a $2,500 default fee and $665 in bounced debit fees.
When Pearl brought its action, RDN and its guarantor defaulted and a default was taken. However, in the context of an inquest to set the amount of the judgment, the judge, sua sponte [on his own in lawyer talk] drilled in to determine whether the loan was usurious and determined that the interest rate was 180% per annum.
Pearl argued that they had actually purchased receivables and that the transaction was not a loan. However, when pressed by the Court Pearl could not cite any “non-recourse” provision in its agreement. Despite Pearl’s claim to the contrary, the Court concluded the transaction to be a usurious loan.
In New York (as well as in many other jurisdictions) the penalty for criminal usury is not only a loss of interest but also a loss of principal and costs. The Court concluded:
For the reasons set forth above, it is the Court’s decision and order that plaintiff is not entitled to recover principal or interest, nor is it entitled to recover any of the other fees or costs requested, or arising out of, this matter.
The amount at issue here was not large. Thus, the experience may be well worth the lesson learned.
Watch for more from us on usury.