Jonathon D. Friedmann
In today’s hard economic environment, it is often hard for borrowers to obtain conventional loans from a lender. As a result, it is often
In Germinara, the lender admitted that it had
violated the Anti-Usury Statute by charging an interest rate in excess of the
maximum rate permissible by law without having registered with the Attorney
General’s Office. A lender who registers with the AG’s Office may charge rates
in excess of the statutory maximum set by the Anti-Usury Statute. The Court
determined that the appropriate remedy in this instance was not voiding of the
loan but was instead reformation. The Court ordered the interest rate to be
reset at 18%. It should be noted that a violation of the Anti-Usury Statute
does not mandate a voiding of a loan. Rather, the statute gives a judge
discretion, based upon all the facts and circumstances surrounding the loan, to
void it, to rescind it, to refund, to credit any excessive interest paid, to
reform the contract, or to provide any other relief consistent with equitable
principle. The Court will look to the integrity of the loan to determine what
remedy is appropriate.
In the Germinara case, the lender previously
had been registered with the Attorney General’s Office so as to permit it to
make loans that would otherwise be usurious. Just prior to making the loan, the
attorney representing the lender died. Between the date of death of the
attorney and the date of death of the loan, the registration with the AG’s
Office, which is valid for two years, had expired without renewal. Accordingly,
at the time the loan was made, the registration had expired, and the loan was
therefore usurious. The Court ultimately found that the lender, when
negotiating and setting the terms of the loan, did not engage in misconduct.
The Court also found that the borrower was a sophisticated business person with
highly competent counsel and that the borrower understood and appreciated the
obligations he was undertaking when executing the loan documents.
The Court noted that the loan was a high-risk loan from a
lender’s perspective and the promissory note expressly provided for reformation
as the remedy if the interest rate was found to be usurious. Finally, the judge
observed that there were no recurring violations of the Anti-Usury Statute;
rather, that the violation resulted from a one-time, relatively small payment
of closing costs and points. What this tells us is that for sophisticated
business people borrowing money at high interest rates because conventional
lending is unavailable in today’s market, this is an avenue of obtaining loans
and the usurious loans may be enforced. So, should you need a usurious loan
utilizing non-traditional lenders as a mechanism for funding a business or
business ventures, it’s always risky due to the very nature of the loans.
However, these loans may be appropriate in unique circumstances. If you intend
to use this method to fund your business operation, it is suggested that you
proceed with caution and research the lender thoroughly to determine if the
lender is registered with the AG’s Office. In addition, find out from the AG’s
Office the lender’s history of compliance making usurious loans. Ultimately,
the decision to utilize a high-interest loan becomes business decision based
upon the necessity for money and the funding sources available. We always
recommend that a borrower, whether seeking a traditional loan or a
non-traditional loan, proceed with caution as these loan obligations are likely
to be found enforceable by the Courts.
A
founding partner of Rudolph Friedmann LLP and chairman of the firm’s litigation
practice, Jon litigates a great many matters in state and federal courts
throughout the United States. He was trial counsel for the prevailing party,
People’s Comprehensive Mortgage, and successfully defended the judgment in
favor of People’s Comprehensive Mortgage against Germinara on appeal. Jon’s
email address is jfriedmann@rflawyers.com.
