New York's Highest Court Rules Convertible Notes Subject To Criminal Usury Laws

• Published date: 03 October 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Criminal Law, Corporate and Company Law, Trials & Appeals & Compensation, Securities, Crime
• Law Firm: Basile Law Firm
• Author: Mr Mark R. Basile

The Basile Law Firm P.C. has been steadfast in representing our OTC Markets issuer clients in both federal and state courts around the country. To that end, we have been involved in dozens of federal court cases as toxic convertible notes lenders sued our client to try to enforce what are possible illegal contracts. The recent NY Court of Appeals decision, a decision that cannot be further appealed, reflects our long stated and correct legal position from the beginning that a convertible note is not only subject to New York's usury laws, but the conversion discount (when the debt is converted to stock based on a mathematical formula presenting a discount to the trading price of a public company's stock) must also be considered interest. The NY Court of Appeals also agreed with us and affirmed that a violation of New York's criminal usury statute (charging interest 25% or over - Penal Law '190.40) voids such loans; the lender loses both principal and interest, that the loans are void ab initio and must be cancelled by the courts. The Court also agreed with us and reached the conclusion that such a conversion feature does not transform a loan to an equity investment upon conversion for purposes of the application of New York's usury statute. The court further recognized there is no equitable remedy available to a usurer under NY law. Adar Bays, LLC v. GeneSYS ID, Inc., No. 51, 2021 BL 393765 (N.Y. Oct. 14, 2021).

Prior to the New York Court of Appeals decision, our firm had represented over a dozen OTC Market issuers against EMA Financial LLC, LG Capital Funding LLC, Adar Bays LLC, Blue Citi LLC, Coastal Investment Partners, L.P., Power Up Lending Group, Ltd. and Crown Bridge Partners, LLC, to name a few, raising the defense of violations of the criminal usury statute and we were constantly met with tremendous pushback from the federal courts, coming up with many 'reasons' why they shouldn't reach the conclusions that NY's highest court just reached and is now the law.

The federal courts, albeit consistent, refused to recognize the conversion discount feature as interest; have held that the loan mysteriously transformed into an equity investment once the loan is converted to stock taking it out of a usury analysis, and if that weren't the case, the criminal usury statute did not provide relief such as voiding the contract because New York's civil usury forfeiture statute did not apply. Some law firms and other toxic lenders even tried to use that track...