Lender Fees At Risk?

A New York state court has voided a $1.3 million loan agreement to a corporate borrower because the loan agreement’s stated interest rate of 34% violated New York’s criminal usury law statute.

The loan agreement was governed by Virginia law, which doesn’t allow corporate borrowers to plead a usury defense. However, because this borrower was based and licensed in New York, the court found a sufficient nexus to New York to allow the state’s public interest against usurious contracts to void the agreement’s choice of law provision and enforce New York’s criminal usury law.

Specifically, the New York statute prohibits interest rates over 25% on loans between $250,000 and $2.5 million and permits voiding of such contracts. The court noted that under New York law, all consideration paid for a loan (including fees) count toward the 25% usury threshold.

This decision is relevant for smaller DIP loans governed by New York law or loans made to borrowers that have a connection to New York. If the interest and fees exceed this threshold, the contract would be void (i.e. if the money was already lent, the lenders would not their money back or the interest and fees).