Should Default Interest Be Included In A New York Criminal Usury Analysis

• Jurisdiction: United States,Federal,New York
• Law Firm: The Basile Law Firm P.C.
• Subject Matter: Litigation, Mediation & Arbitration, Criminal Law, Trials & Appeals & Compensation, White Collar Crime, Anti-Corruption & Fraud
• Author: Mr Mark R. Basile and Agapija Cruz, Esq.
• Published date: 02 February 2023

The New York Court of Appeals has been busy redressing lower state and federal courts' interpretations of its usury laws for the past two years. Two Circuit Courts of Appeals'the 9th Circuit and the 2nd Circuit'have certified questions to New York's highest court on certain unsettled usury issues. See Adar Bays, LLC v. GeneSYS ID, Inc., 962 F.3d 86 (2d Cir. 2020); Fast Trak Inv. Co., LLC v. Sax, 962 F.3d 455 (9th Cir. 2020). The latter case was dismissed upon settlement of those issues. Our Adar Bays case resulted in a convincing win on other usury issues.

Another unsettled issue of law that may make its way to the New York Court of Appeals is contractual default interest and default charges built into financial transactions, and whether default rates and charges should apply to interest subject to New York's criminal usury analysis. There is a split of authority stretching over both federal and state courts on this issue that has not been addressed, nor resolved by New York's highest court. If the New York Court of Appeals takes an appeal on this issue, I believe they will find default interest rates charged in excess of 25% will violate New York's criminal usury statute and will void those transactions as well.

A default charge'frequently included in financial transactions'is a specified percentage of interest or other form of compensation meant to compensate the lender in the event of a default. When default compensation provision is included in the agreement, it is sometimes interpreted as a form of a penalty. Several courts have held these types of penalties to be unenforceable. See Wells Fargo Northwest Bank, N.A. v. Varig-S.A., 2003 U.S. Dist LEXIS 10812, at 15 (S.D.N.Y. Jun. 20, 2003)( stating that a default provision in a contract to secure performance is an unenforceable penalty); Rattigan v. Commodore Int'l Ltd., 739 F. Supp. 167, 169 (S.D.N.Y. 1990)( stating that if a default provision 'is intended by the parties to operate in lieu of performance, it will be deemed a liquidated damages clause and may be enforced by the courts . . . . If such a clause is intended to operate as a means to compel performance, it will be deemed a penalty and will not be enforced.') citing Brecher v. Laikin, 430 F. Supp. 103, 106 (S.D.N.Y. 1977). See also PDV Sweeny, Inc. v. ConocoPhillips Co., 2015 U.S. Dist. LEXIS 116175, at *29 ('[T]he Court again acknowledges that the prohibition on penalty clauses in contracts is well-established public policy in New York.')...