Special Relationship May Defeat Usury Defense

November 8, 2012

Plaintiff sought to recover from a corporation and its shareholders a total of $106,000 based on a $15,000 loan. Defendants denied liability and raised usury as an additional defense. Both sides moved for summary judgment, the plaintiff on the note and the defendants on their defense of usury. In opposition to the usury defense, the plaintiff claimed that the amount in excess of $15,000 was not interest but a combination of smaller loans that were consolidated and included in the repayment for ease of reference and to be repaid all at one time.

In addressing the usury defense, Kings County Commercial Division Judge Carolyn E. Demarest, agreed that if the interest charged was usurious, the lender could not collect. However, in this case, it was the borrower-defendant that drafted the loan documents, proposed the interest rate and payment options, and assured the lender-plaintiff that it was all legal and enforceable. Additionally, the defendants were plaintiff's investment brokers and were hired to research and make investments for him. In that setting found the court, to avoid a situation where "'a borrower could void the transaction, keep the principal, and achieve a total windfall, at the expense of an innocent person, through his [or her] subterfuge and inequitable deception'" a usury defense could not stand.

The court found a related basis not to allow the defendant to hide behind the usury defense. Where the parties entered into the loan based on the relationship of trust between them, and the plaintiff's relied on that relationship, the borrower will not be rewarded for his scheming and misleading conduct. Thus, where a relationship "results in a borrower inducing the lender to make a loan at a usurious rate" the court may not void the loan because it is usurious. Instead, the court will enforce the loan at a legal rate of interest.