How New York Usury Law Tripped Up An Over-Smart Lender

Certain loans in New York are deemed usurious and invalidates them. The usury law in New York has so many exceptions and exclusions that it rarely applies to loans. Sometimes it will rear its ugly head with casual or noninstitutional transactions, or with a lender asking for too much.

In a recent New York Court of Appeals case, that happened. An odd occurrence for a public company is when a corporation borrows money. The loan document had an 8% interest rate. The lender was given an option to convert the loan into corporate stock. The loan had lender-friendly terms that made the discussion color.

New York usury law states that a corporation can't claim usury as a defense. The rule against having a corporation assert usury might be overcome if the total interest rate surpasses 25%.

The lender was able to convert its right. The borrower said that the arrangement violated New York's usury laws because the effective interest rate was too high. The lender would be able to keep their money if the entire loan was declared void.

The second circuit court of appeals is where the borrower appealed. The New York Court of Appeals was asked to advise on the matter.

According to the New York court, New York has always taken usury law very seriously and tried to protect borrowers from excessive lending.

The favorable conversion right was found to be an additional compensation under New York usury law. The court said that courts can value the conversion right even if it is hard to do.

If further proceedings include an actual valuation of the favorable conversion right, the borrower could keep the lender's money.

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The initial decision in favor of the lender was correct according to a Dissenting New York Judge. The judge noted that New York has always been a good place to do business. The state of New York could lose its pre-eminent role as America's capital of capital if it drives this type of structure out of the state.

There is a case in New York. There is an opiate. There is a new date for October 14, 2021.