Opinion
9171/2009.
Decided April 1, 2010.
Ricki H. Berger, P.C., Attorneys for Plaintiffs, New City, New York.
Joseph J. Haspel PLLC, Attorneys for Defendants, Goshen, New York.
Plaintiffs bring this motion for summary judgment in lieu of complaint pursuant to CPLR § 3213 based on two promissory notes and defendants' default in payment. Defendants (who did not cross-move) seek the dismissal of the case.
FACTS
The parties entered into three loan agreements. Plaintiffs contend that defendants sought "short term financing pending the closing of title on the residential units" contained in a luxury high rise condominium building in Manhattan that defendants were building. The first "short term" loan occurred in June 2008 in the amount of $250,000. The loan included an "origination fee" of an unspecified amount, and a $1,000 per day penalty fee if the loan were not paid on time. It is undisputed that defendants repaid the loan — albeit two months after the due date.
In October 2008, defendant Ira Shapiro asked plaintiffs for a loan in the amount of $500,000 (the "second loan"). Notwithstanding defendants' late payment on the first loan, plaintiffs agreed to the second loan. The promissory note for the second loan provides that defendants shall repay the debt of $500,000, along with an "origination fee" of $130,000, with $50,000 of the origination fee to be paid upon execution of the note, and the remaining $80,000 to be paid with the principal debt. The note for the second loan further provides that if defendants were to default, plaintiffs would be entitled to receive a penalty of $2,000 per day. Mr. Koenig's affidavit states that the terms and conditions of the second loan were similar to the first loan, and "all such terms were proposed to me by Mr. Shapiro." The loan was due and payable on or before December 24, 2008.
Several weeks later, in November 2008, Mr. Shapiro again approached Mr. Koenig and requested an additional loan of $250,000 (the "third loan"). The terms and conditions for the third loan were the same as for the second loan, with one exception: the penalty was $1,000 per day, not $2,000. The third loan was also due and payable on or before December 24, 2008. The promissory notes for the second and third loans were secured by a Guaranty of Payment signed by the individually named defendants. Each Guaranty provided for the timely payment of the notes, and reimbursement to plaintiffs for all of the costs and reasonable attorneys' fees they may incur in collecting on the debt. In addition to the guaranties, in November 2008, the corporate defendant ISMJ Corporate Office, LLC, executed a Collateral Assignment Agreement with plaintiffs. This Collateral Agreement purports to assign to plaintiffs defendants' interest as purchaser for unit 7B in their building at 23 East 22 Street, New York, New York (known as One Madison Park).
Plaintiffs claim that defendants have failed to pay the second and third loans by the due date and are thus in default. However, the parties agree that defendants have paid $350,000 to plaintiffs. Plaintiffs now seek payment in the amount of $698,000 on the second loan, and $494,000 on the third loan, for a total of $1,192,000. They also seek a minimum of $7,500 in attorneys' fees and $3,000 per day in daily penalties for every day that the default continues. As further relief, plaintiffs request enforcement of the Collateral Assignment Agreement.
Neither party has submitted any information to the Court as to when this payment was made. Plaintiffs contend the payment was the penalty sum, while defendants do not characterize the payment, arguing only that "we did pay back $350,000."
On the second loan, in addition to the principal sum of $500,000, plaintiffs seek $80,000 as the balance of the origination fee and $468,000 as late penalties, less the $350,000 payment received from defendants. On the third loan, plaintiffs seek $10,000 in origination fees and $234,000 in late penalties, in addition to the $250,000 principal sum.
THE LEGAL STANDARD FOR SUMMARY JUDGMENT
Plaintiffs' motion for summary judgment pursuant to CPLR § 3213 is based upon the unconditional Promissory Notes and the Guaranties and Collateral Assignment Agreement securing them. Defendants oppose the motion by contending that the second and third loans are usurious. They state that as such, the loans violate the New York Penal Law and are therefore void as a matter of law and public policy.
Summary judgment is a drastic remedy which the Court should grant only where there is no genuine issue of material fact to be presented at trial. See Andre v. Pomeroy, 35 NY2d 361, 362 NYS2d 131 (1974). The burden on a motion for summary judgment rests with the moving party to come forward with sufficient proof to enable the Court to conclude that it is entitled to judgment as a matter of law. Funding Group, Inc., v. Water Chef, Inc. , 19 Misc 3d 483 , 852 NYS2d 736 (Sup. Ct. NY Co. 2008). Once the moving party has made a prima facie showing of its entitlement to summary judgment, "the burden shifts to the opposing party to produce evidentiary proof . . . to establish the existence of material issues of fact which require a trial of the action." Id. at486, citing Garnham Han Real Estate Brokers v. Oppenheimer, 148 AD2d 493, 538 NYS2d 837 (2d Dept. 1989).
Plaintiffs have met their initial burden by submitting proof of the existence of the promissory notes and defendants' default in payment. These documents are clearly instruments for the payment of money only. See, e.g., Beube v. English, 206 AD2d 339, 614 NYS2d 44 (2d Dept. 1994); Machidera Inc. v. Toms, 258 AD2d 418, 685 NYS2d 719 (1st Dept 1999). The burden then shifts to defendants to prove that the lender knowingly charged an illegal rate of interest. If defendants were to meet their burden, plaintiffs then would be required to produce evidence negating the usury defense. Funding Group, supra at 488, 852 NYS2d at 741.
DISCUSSION
Defendants argue that the interest on the loans exceeds what is legally permissible, and so are criminally usurious and therefore void under New York law. They state that the payments required under the second and third loans are in excess of 100% per annum, which rises "to the level of shocking."
It is clear that when taken together, the origination fees and penalties on each loan amount to an annualized interest payment of nearly 156% per annum.
New York law recognizes two levels of usury. Under General Obligation Law ("GOL") § 5-501, the maximum annual interest rate that may be charged is 16% (this is called "civil usury"). Interest rates in excess of 25% violate Penal Law § 190.40 (this is called "criminal usury"). At the outset, it should be noted that there is a strong presumption against the finding of either civil or criminal usury. Cusick v. Isfhin, 70 Misc 2d 564, 334 NYS2d 106 (NY City Civ.Ct.), aff'd 73 Misc 2d 127, 341 NYS2d 280 (1972). As counsel for defendants point out, GOL § 5-521(1) provides that corporations are generally barred from asserting a usury defense. However, GOL
§ 5-521(3) states that this prohibition does not apply to an action, such as this, where the corporation raises a defense of criminal usury under the Penal law. See Transmedia Restaurant Co., Inc. v. 33 E. 61st Street Restaurant Corp., 184 Misc 2d 706, 710 NYS2d 756 (Sup. Ct. NY Co. 2000).
Defendants suggest that the "conglomeration of interest and fees" in the second and third loans are "designed to provide a usurious rate of return to Plaintiffs." Defendants refer to Funding Group, 19 Misc 3d 83, 852 NYS2d 736 in support of their position that the loans should be voided and the case dismissed. While defendants are correct in citing Funding Group as on point in this case, they fail to comprehend fully the holding of that case and the precedents cited in the opinion. Defendants' opposition states that in "order to appreciate the current status of the usury statutes, a little history is needed." While this is no doubt true, defendants failed to address all the pertinent statutes at issue in this matter. "The court finds it necessary to remind . . . counsel that attorneys are always under an ethical obligation to cite applicable law to the court (Code of Professional Responsibility EC 7-23). An attorney's failure to cite such authority is an abdication of responsibility, undermining the adversarial process and burdening the court unnecessarily." Shammah v. Shammah , 22 Misc 3d 822 (Sup. Ct. NY Co. 2008).
In Funding Group, the defendant had negotiated with the plaintiffs a $25,000 loan with interest amounting to 120% per year, plus penalties for late payment. In that case, the defendant paid back the principal, interest and penalties over the course of several months past the due date. The plaintiffs sued to enforce a provision of the loan which provided for the transfer of stock to plaintiffs if the loan was not paid on time. The defendant sought to dismiss the motion on the ground that the loan was usurious, and counter-claimed for summary judgment seeking to recover the illegal interest and penalties it had paid on the loan. The Funding Group Court conducted a two-step analysis of the situation. First, it looked at the loan and found that the defendant had proved that the loan was usurious. Plaintiffs then attempted to negate the usury finding by alleging that the parties shared a special relationship which would establish an exception to the usury defense. However, the Funding Group Court found that no special relationship existed, because the plaintiffs did not establish that the defendant induced him to rely on the legality of the transaction, or make representations intended to influence him to his detriment. Id. at 489. Since there was neither a special relationship, nor was the transaction a joint venture, the Court granted that part of defendant's motion seeking the dismissal of plaintiffs' complaint. As for defendant's counterclaim seeking repayment of the illegal fees and penalties it had paid, the Court stated: "Defendant's contention that this court must declare the loan void as a matter of law is without merit." Id. at 491. The Court stated that while GOL § 5-511 voids a loan that violates the civil usury statute, it found that there is no specific statutory authority for voiding a loan that violates the criminal usury statute. Id. The Court denied defendant's request to recover the payments it made over the legal limit, and refused to grant attorneys' fees as well.
The Funding Group Court found In re Venture Mortgage, L.P., 282 F.3d 185 (2d Cir. 2002) to be instructional. In that case, the Second Circuit analyzed New York's usury laws in great depth. The Court stated that:It appears from a close reading of the complex and cross-referencing statutes that compose New York's usury law that the voiding provision only operates to void loans that violate the civil usury statute — a statute that by its terms applies only to loans of less than $250,000 (with interest in excess of 16%) — and might not operate to void a loan of $250,000 or greater even if such loan's annual interest rate exceeds 25% and is therefore criminally usurious. See NY Gen. Oblig. Law §§ 5-501, 5-511 (McKinney 2001); NY Banking Law § 14-a (McKinney 2001).
Nothing we see in the criminal usury statute, NY Penal Law § 190.40 (McKinney 2001), provides for voiding, and it is unclear whether the Legislature intended that criminally usurious loans of $250,000 or greater be voided. On the one hand, it may be expected (as the parties to this appeal evidently assume) that one who commits criminal usury should not be preferred (and be able to collect) over the usurer who charges a rate of interest that is not criminal. On the other hand, the larger the loan transaction, the less likely it is that the borrower needs or deserves financial protection; moreover, the greater the amount of forfeiture, the more unsettling it becomes to financial arrangements. As the New York courts have recognized, the consequences to a lender of voiding a usurious loan transaction are harsh: "the borrower is relieved of all further payment-not only interest but also outstanding principal, and any mortgages securing payment are cancelled. In effect, the borrower can simply keep the borrowed funds and walk away from the agreement." Seidel, 79 NY2d 735; accord Rossi v. Hood ( ex rel. Estate of Dane), 55 AD2d 224, 390 NYS2d 249, 250 (App. Div. Third Dep't 1976) ("New York's usury laws are harsh, and courts have been reluctant to extend them beyond cases that fall squarely under the statutes.").
In two recent cases, New York Supreme Courts have followed the analysis set forth in In re Venture Mortgage Fund. See Selcuk v. Yuran, WL 1905165 (Sup.Ct. NY Co. June 18, 2009), (loan over $250,000 with interest amounting to 57% per year found to be not void); Bakis v. Levitin, 3 Misc 3d 1110(A), 787 NYS2d 676 (Table) (Sup.Ct. N.Y.Co. 2004) ($300,000 loan for 60 days at 120% interest not void because criminally usurious). See also Machidera Inc. v. Toms, 258 AD2d 418, 685 NYS2d 719 (1st Dept 1999) (restrictions on usurious loans not applicable to loans over $250,000).
CONCLUSION
Applying the relevant law to the facts in this case, the Court determines that the second and third loans are not void under New York law. While defendants have met their burden of showing that the interest rates on the two loans are in excess of 25% and thus come within the definition of criminal usury, there is nothing in the General Obligations Law or Penal Law that requires that the Court deem these transactions void. Defendants here are not — and cannot even claim to be — in the same situation as the defendant was in the Funding Group case: at least in that case, the defendant made the argument that he had followed his basic obligations, and had repaid in full the loan and the interest. In that case, the defendant just wanted to get a return of the amount paid over the legal limit. In this case, in contrast, defendants have been defiant, refusing to even pay back the principal amounts they borrowed.
Both plaintiffs and defendant Ira Shapiro are sophisticated and knowledgeable businessmen. While they did not have a special relationship under the General Obligations Law, they had a social relationship, with many of their common friends being aware of Ira Shapiro's development project, One Madison Park. Defendants entered into three separate loan transactions with plaintiffs. Each time, defendants were the ones who drafted the contracts and suggested the specific terms, with promises to pay extraordinary amounts of interest and penalties in order to obtain short term financing for their project. There is no doubt that defendants fully understood the consequences if they were to default on any or all of the loans. Moreover, defendants repaid the first loan and penalties and did not raise the usury issue at that time. Rather, they immediately went back to plaintiffs and sought additional "short term" funding as it suited their needs.
The Court is troubled by the allegations raised by both parties concerning the drafting of the contracts. In an attempt to persuade this Court that he was the victim of a usurious transaction, Mr. Shapiro's sworn Affidavit states that Mr. Koenig's counsel prepared the contracts. Yet both the reply Affirmation of plaintiffs' counsel and Mr. Koenig's reply Affidavit attest that the various loan documents were in fact prepared by two separate law firms representing the defendants. Both Mr. Koenig and his lawyer further contend, with some credibility, that Mr. Shapiro insisted that his lawyer prepare the documents since he was also preparing similar documents for loans with other parties on similar terms.
Plaintiffs have submitted copies of news articles, emails and other material which tends to demonstrate that defendants were in dire need of financing. Mr. Koenig's Affidavit also states that he has first-hand information that defendants have entered into other loans with other parties under similar terms to those at issue here. Plaintiffs also allege that the unit in One Madison Park which was pledged as collateral concurrent with the third loan, and which secures the total indebtedness of $750,000, has also been pledged in at least one other third-party transaction. Although the Court makes no determination as to the merits of the allegations contained in these materials, it does find that it is, at a minimum, disingenuous for defendants to say that they are the "victims" of criminally usurious and "shocking" terms.
These savvy investors are presumed to understand the potential risks and benefits associated with these kind of transactions, and the Legislature did not intend to grant them the protection of law if the results are not as they intended.
Accordingly, it is hereby
ORDERED that plaintiffs' motion for summary judgment is granted. Counsel for plaintiffs is directed to submit a proposed order and judgment, on notice of settlement to defendants, in the amount of the principal of the two loans, less the $350,000, plus interest at the statutory rate from December 25, 2008, the date of default, to the present. Any calculations shall be set forth specifically.
The proposed order shall further include a provision for the granting of attorneys' fees. Plaintiffs shall submit proof of their attorneys' fees and an affidavit detailing the services provided along with the proposed order and judgment, so that the Court may fill in the appropriate amount.
The foregoing constitutes the decision and order of the Court.