Boswick v. Bronte

  Upon the reading and filing of the following papers in this matter: (1) Notice of Motion by defendant, filed June 5, 2018, and supporting papers; (2) Affirmation in Opposition by plaintiff, filed July 30, 2018; (3) Replying Papers, filed August 20, 2018; it is ORDERED that defendant’s motion to dismiss plaintiff’s complaint pursuant to CPLR’ 3211(a)(1) and CPLR’ 3211(a)(7) is denied.This is an action in which plaintiff seeks an order vacating the Judgment dated August 7, 2017 and amended by order dated October 3, 2017¹, in the amount of $451,860.19, entered against her by the defendant, a litigation funding company, pursuant to an affidavit for judgment by confession; a judgment declaring that the credit agreement, dated June 14, 2012, that she entered into with the defendant Bronte SPV LLC’s predecessor-in-interest² (the “credit agreement”) is void as a matter of law for violating the civil and criminal usury statutes; a judgment declaring that the forbearance agreement entered into by the parties, dated July 5, 2017, is void as a matter of law; and an award of damages to plaintiff for what she alleges were the usurious and unlawful loans that the defendant and its predecessor in interest extended to her to pay legal fees, forensic accounting costs and living expenses during divorce proceedings with her then husband.Background.On June 14, 2012, plaintiff entered into a credit agreement with the defendant’s predecessor-in-interest in which the latter agreed to loan plaintiff up to a total of $250,000 to finance her legal fees and forensic accounting costs (up to $200,000), and to pay her living expenses (up to $50,000), arising during the pendency of her divorce proceedings with her then husband. The loan was to be repaid in full no later than the earlier of fourteen days after her or her attorney’s receipt of “all or part of any settlement proceeds or other proceeds with respect to” her divorce proceeding or within seven days after the lender made a demand for repayment. Plaintiff ultimately borrowed a total of $245,516.60 in seven installments between June 2012 and May 2013. The credit agreement provided for an annual interest rate of 17.95 percent, quarterly management fees of 0.8 percent and one-time underwriting fees of 3.92 percent for each ten-thousand dollar or larger disbursement she received. On December 12, 2013, plaintiff made a single “repayment” of $50,000, which the defendant seems at first to have applied to reduce the principal balance but later used instead to reduce the loan’s overall outstanding balance. On October 4, 2016, judgment was entered in the plaintiff’s divorce proceeding. Plaintiff did not repay the loan at that time, however. Instead, she and Bronte eventually agreed to defer repayment until plaintiff ‘s former martial residence could be sold and, subsequently, entered into a written forbearance and limited release agreement (the “forbearance agreement”), executed by plaintiff on July 5, 2017, according to the terms of which Bronte agreed to forbear, pending the sale of the martial home, in taking action with respect to plaintiff’s failure to repay the loan on time and plaintiff agreed that her proceeds from the sale of the home would be used to repay the loan. Under the forbearance agreement, interest and management fees were to continue to accrue on the loan at the same nominal rates-17.95 percent and 3.2 percent, respectively — stated in the credit agreement, although whether these were to be based solely upon the stated principal amount outstanding — $245,516.60 — or upon the total outstanding “Indebtedness” — $428,431.45 — was not specified. In conjunction with her execution of the forbearance agreement, plaintiff also executed an affidavit for judgment by confession for the amounts then outstanding and due under the credit agreement, totaling $428,431.45, with pre-judgment interest accruing from May 16, 2017 through the date of entry of judgment at the annual rate of 24.95 percent, as a form of security to guarantee payment of her outstanding obligation to Bronte. A judgment assertedly based upon plaintiff’s confession of judgment affidavit was filed with the Suffolk County Clerk a month later, on August 7, 2017, with an additional $23,428.74 in pre-judgment interest included, for a total of $451,850.19, together with post-judgment interest also at the rate of 24.95 percent per annum; subsequently, the judgment was amended to include plaintiff’s previous legal name. Defendant then placed a lien on plaintiff’s marital home in an amount totaling $451,860.19. Prior to the sale of the marital home, plaintiff apparently paid the entire outstanding amount to the defendant, satisfying the lien so that the closing on the sale of the home would not be impeded.³Defendant now moves for an order dismissing the complaint on the ground that the documentary record demonstrates that the loan it extended to plaintiff was lawful. Specifically, the defendant contends that the maximum permissible interest rate, pursuant to General Obligations Law’ 5-501(6)(a), is 25 percent, that plaintiff waived her right to assert civil usury when she executed the forbearance agreement and that documentary evidence conclusively establishes that the judgment does not enforce a usurious debt. In support of its motion, defendant submits copies of, among other things, the signed credit agreement, the forbearance agreement, the amended affidavit for judgment by confession, the judgment filed with the Suffolk County Clerk, select loan statements from April 15, 2014 to April 2, 2018 and a spreadsheet showing the maximum permissible loan balance (“usury threshold”) during the term of the loan, calculated by adding interest at the annual rate of 25 percent, computed daily, to outstanding principal. The spreadsheet compares the usury threshold, again, based upon a 25 percent interest rate, with the plaintiff’s actual loan balances according to statements on plaintiff’s account in the period from April 15, 2014 through May 23, 2018, in order to demonstrate that the actual balances did not, at least as reflected by those statements, exceed the usury threshold. Significantly, the spreadsheet does not reveal, and defendant has not provided any evidence showing, the actual outstanding loan balances on plaintiff’s account at any time prior to April 15, 2014, even though there was substantial account activity prior to that date — plaintiff drew on the loan in seven installments between June 19, 2012 and May 20, 2013 and made a substantial repayment on December 12, 2013 — and the credit agreement by its terms called for plaintiff to be provided with monthly statements.Plaintiff opposes defendant’s motion, contending that the agreement should be interpreted as having allowed the defendant to charge her usurious interest at rates ranging from 45.3 percent to 57.75 percent. Her calculations stem from a reading of the credit agreement’s “Calculation of Daily Interest and Balance Subject to Interest” provision, which called for interest to be computed daily, at a rate corresponding to an annual interest rate of 18.95 percent, to the entire “daily balance of [plaintiff's] Account” — “including unpaid interest, fees and charges” — and its “Assessment Fee” provision, which, by its terms, provided for a charge of 3.92 percent to be assessed on the “total outstanding amount of credit extended to” plaintiff each time she received a disbursement. Plaintiff further contends that the repayment date as defined in the agreement permitted the defendant to demand repayment at any time upon seven days notice which, had it done so within the first year, would have resulted in the accrued interest and charges exceeding the usury threshold.Discussion.As the Court of Appeals has repeatedly emphasized, on a pre-answer…motion to dismiss pursuant to CPLR 3211, the pleading is to be afforded a liberal construction (see, CPLR 3026). We accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory (Morone v. Morone, 50 N.Y.2d 481, 484, 429 N.Y.S.2d 592, 413 N.E.2d 1154; Rovello v. Orofino Realty Co., 40 N.Y.2d 633, 634, 389 N.Y.S.2d 314, 357 N.E.2d 970). [Thus, u]nder CPLR 3211(a)(1), a dismissal is warranted only if the documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law (see, e.g., Heaney v. Purdy, 29 N.Y.2d 157, 324 N.Y.S.2d 47, 272 N.E.2d 550).Leon v. Martinez, 84 NY2d 83, 87-88 [1994]. See YDRA, LLC v. Mitchell, 123 A.D.3d 1113, 1113 [2d Dept 2014], quoting Goshen v. Mutual Life Ins. Co. of N.Y., 98 N.Y.2d 314, 326 [2002]; Whitebox Concentrated Convertible Arbitrage Partners, L.P. v. Superior Well Servs., Inc., 20 N.Y.3d 59, 63 [2012]; Tooma v. Grossbarth, 121 A.D.3d 1093, 1094-1095 [2d Dept 2014]; Biro v. Roth, 121 A.D.3d 733, 734 [2d Dept 2014]; Hamilton Capital VII, LLC, I v. Khorrami, LLP, 48 Misc 3d 1223(A) [Sup Ct 2015], quoting Goshen v. Mutual Life Ins. Co. of NY, 98 N.Y.2d at 326 ( “the motion will succeed only if ‘the documentary evidence utterly refutes plaintiff’s factual allegations, conclusively establishing a defense as a matter of law.”"). Further, “[i]n order for evidence submitted under a CPLR 3211(a)(1) motion to qualify as ‘documentary evidence,’ it must be ‘unambiguous, authentic, and undeniable’” (Cives Corp. v. George A. Fuller Co., Inc., 97 A.D.3d 713, 714 [2d Dept 2012], 948 N.Y.S.2d 658, quoting Granada Condominium III Assn. v. Palomino, 78 A.D.3d 996, 996-997 [2d Dept 2010]; see Treeline 1 OCR, LLC v. Nassau County Indus. Dev. Agency, 82 A.D.3d 748, 752[2d Dept 2011]).Measured against the standard articulated by the Court of Appeals in Leon v. Martinez, YDRA, LLC v. Mitchell, Goshen v. Mutual Life Ins. Co. of N.Y. and Whitebox Concentrated Convertible Arbitrage Partners, L.P. v. Superior Well Servs., Inc., supra, and by the Appellate Division in Tooma v. Grossbarth, and Biro v. Roth, supra, and for the reasons that follow, defendant’s motion must be denied.Plaintiff’s central allegation, upon which all of her claims for relief turn, is that the combination of interest, underwriting fees and management charges provided for in the credit agreement rendered the agreement usurious. It is well settled that “[i]n determining whether a transaction is usurious, the law looks not to its form, but its substance, or real character” (O’Donovan v. Galinski, 62 AD3d 769 [2d Dept 2009] [internal citations omitted]). “To determine whether the interest rate charged exceeded the usury limit, [the court] must apply the traditional method for calculating the effective interest rate” (Oliveto Holdings, Inc. v. Rattenni, 110 AD3d 969, 972 [2d Dept 2013], but see 3 NYCRR’ 4.4⁴) and compare that interest rate to the interest rate that could have been lawfully earned to the loan’s maturity date (see Band Realty Co. v. N. Brewster, Inc., 37 NY2d 460, 464 [1975]; Oliveto Holdings, Inc. v. Rattenni, 110 AD3d 969, 972 [2d Dept 2013]; see also Feldman v. Kings Highway Sav. Bank, 278 AD 589, 590 [2d Dept 1951], affd, 303 NY 675 [1951]). Fees, including loan origination fees, which are deemed interest for the purposes of determining whether an interest rate charged exceeds the usury limit, are annualized when calculating the effective annual interest rate (see, e.g., Lugli v. Johnston, 78 AD3d 1133, 1135 [2d Dept 2010]; see also 3 NYCRR’ 4.2). Although a borrower who challenges a loan as usurious bears the burden of proving each element of usury — including⁵ the payee’s “intent to take interest in excess of the legal rate” (Blue Wolf Capital Fund II, L.P. v. Am. Stevedoring Inc., 105 AD3d 178, 183 [1st Dept 2013], citing Giventer v. Arnow, 37 NY2d 305, 309 [1975]) — by clear and convincing evidence (Oliverto Holdings, Inc. v. Rattenni, 110 AD3d 969 [2d Dept 2013]; Hochman v. LaRea, 14 AD3d 653 [2d Dept 2005]), “[i]f usury can be gleaned from the face of an instrument, intent will be implied and usury will be found as a matter of law”( Blue Wolf Capital Fund II, L.P. v. Am. Stevedoring Inc., supra, 105 AD3d at 183, citing Fareri v. Rain’s Intl., 187 AD2d 481, 482 [2d Dept 1992]).Moreover, the intent that must be proved is general intent with respect to the overall amount of interest and interest-deemed fees and other assessments charged to the payee and not the specific intent to violate the usury laws:…The intent which enters into and is essential to constitute usury is simply the intent to take or reserve more than the maximum legal rate of interest for the loan or forbearance of money (Fiedler v. Darrin, 50 N.Y. 437; National Equipment Rental, Limited v. Stanley, D.C.N.Y., 177 F.Supp. 583, affd. 2 Cir., 283 F.2d 600). If the parties intended that which results in usury, then, in legal effect, they intended usury (Vee Bee Service Co. v. Household Finance Corp., Sup., 51 N.Y.S.2d 590, affd. 269 App.Div. 772, 55 N.Y.S.2d 570).Clearly, the intent which will violate the statute is a general and not a specific intent (32 N.Y.Jur., Interest and Usury, s 72), and, in the case at bar, the usurious intent of plaintiffs is plain upon the face of the agreement. Nor is proof of subjective intent necessary merely because the agreement was couched in terms of a sale and repurchase. A transaction must be considered in its totality and judged by its real character, rather than by the name, color, or form which the parties have seen fit to give it (Quackenbos v. Sayer, 62 N.Y. 344).(Lester v. Levick, 50 AD2d 860, 862-63 [2d Dept 1975] [Christ, J., dissenting], revd on dissenting op. 41 NY2d 940 [1977]. See Abir v. Malky, Inc., 59 AD3d 646, 649 [2d Dept 2009]). Thus, usury avoidance language in the loan or forbearance instrument “purporting to reduce the interest rate to the legal rate in the event of a finding of usury, do not make the subject agreements nonusurious” (Roswell Capital Partners LLC v. Alternative Const. Tech., 08 CIV 10647(DLC), 2009 WL 222348, at *15 [SDNY Jan. 30, 2009], quoting Simsbury Fund, Inc. v. New St. Louis Associates, 204 A.D.2d 182 [1st Dep't 1994]).Here, the nominal rate of interest recited in the section of the credit agreement entitled “Account-Opening Disclosures” is 17.95 percent⁶ annually, the “Calculation of Daily Interest and Balance Subject to Interest” section of the agreement cites an interest rate of 18.95 percent and a corresponding daily rate of interest of 0.0519 percent. Although “[t]he maximum rate of interest provided for in section 5-501 of the general obligations law” — the civil usury statute — “shall be sixteen per centum per annum” (Banking Law’ 14-a), pursuant to General Obligations Law §5-501, “[n]o law regulating the maximum rate of interest which may be charged…except section 190.40 and section 190.42 of the penal law, shall apply to any loan or forbearance in the amount of two hundred fifty thousand dollars or more…” Notwithstanding plaintiff’s argument that each of the seven distributions she received under the credit agreement, the largest of which was $42,594.68, should be treated as a separate loan, pursuant to General Obligations Law’ 5-501(6)(a), “[a] loan of two hundred fifty thousand dollars or more which is to be advanced in installments pursuant to a written agreement by a lender shall be deemed to be a single loan for the total amount which the lender has agreed to advance pursuant to such agreement on the terms and conditions provided therein.” (Cf. Roswell Capital Partners LLC v. Alternative Const. Tech., 08 CIV 10647(DLC), 2009 WL 222348, at *16 [SDNY Jan. 30, 2009]; Am. Equities Group, Inc. v. Ahava Dairy Products Corp., 01 CIV.5207(RWS), 2004 WL 870260, at *16 [SDNY Apr. 23, 2004]. Compare In re Rosner, 48 BR 538, 561 [Bankr EDNY 1985](rejecting lender’s contention that advances only, but not repayments, should be aggregated under revolving credit arrangement to determine if $2.5 million usury ceiling of GOL 5-501(6)(b) was exceeded). Thus, the credit agreement is governed by Penal Law’ 190.40, which provides that “[a] person is guilty of criminal usury…when, not being authorized or permitted by law to do so, he knowingly charges…as interest on the loan or forbearance of any money…at a rate exceeding twenty-five per centum per annum.” (See also Penal Law’ 190.42).Here, the documentary evidence submitted by the defendant falls short of satisfying its burden under CPLR §3211(a)(1) to establish conclusively that the plaintiff has no viable cause of action against it. On the contrary, that documentation quite plainly does not eliminate the question of whether the transaction was predictably usurious from its inception. (Cf. In re Carla Leather, Inc., 44 B.R. 457, 469 [Bankr.S.D.N.Y.1984], affirmed 50 B.R. 764 [D.C.S.D.N.Y.1985] (impact of variable interest rate). Thus, while defendant argues that the “actual effective interest rate” — that is, the combination of interest, underwriting fees and management charges — “hovered around 21 percent” and declined as time passed (defendant’s Affirmation in Support of Motion to Dismiss,6), the chart it supplies to support that assertion (id.) recites an actual effective interest rate of 23.84 percent as late as the April 15, 2014 loan statement and relatively simple calculations show that earlier in the life of the loan, the effective interest rate would have exceeded the criminal usury interest threshold of 25 percent set forth in Penal Law’ 190.40.As noted above, the credit agreement contained no fixed maturity date. Rather, it provided that all advanced amounts and accrued interest, fees and charges were to be repaid, in full, no later than the earlier of 14 days after settlement or other proceeds from plaintiff’s divorce proceeding were received by her or her attorney or within seven days after defendant, or its predecessor in interest, made a demand for repayment. So far as the defendant’s moving papers disclose, at the time the credit agreement was made, the actual duration of the loan, whether because of it reaching its defined maturity or of defendant’s earlier demand for repayment, was not known. The credit agreement was created on June 12, 2012, and a series of seven advances, for costs related to the divorce proceeding and for plaintiff’s living expenses, were made — on June 19, August 15, September 6 and November 14, 2012 and January 7, February 17 and May 20, 2013 — in all totaling $245,516.60. Applying the combination of stated interest — 17.95 percent APR, underwriting fees — 3.92 percent on each advance, and management charges — 0.8 percent quarterly (or 3.2 percent annually), had the defendant demanded payment on June 19, 2013, one year after the first advance was made, the credit agreement’s combination of interest, fees and charges would have permitted effective interest totaling at least $41,899.96 to be charged. The 25 percent usury threshold prescribed by CPL’ 190.42, however, would have capped permissible interest at a figure nearly $5,000 less, $36,916.86. Although the defendant asserts that its “loan processing agent…employed an overly-conservative internal mechanism designed to back out fees if they at all risked resulting in the possible appearance of a usurious amount being charged” (defendant’s Affirmation in Support of Motion to Dismiss,7, fn. 2 (emphasis supplied)⁷), nowhere in the credit agreement or associated loan documentation is such an “internal mechanism” described⁸, and, notwithstanding the requirement that the borrower be provided with monthly account statements, none has been furnished by defendant in support of its motion for any period ending prior to mid-April 2014. Thus, the court has not been provided by defendant with any documentary evidence purporting to show that the effective interest rate that actually was charged to plaintiff’s account at potential maturity dates prior to April 15, 2014 — or, for that matter, on the date settlement or other proceeds from the plaintiff’s divorce proceeding were received⁹ — were below the usury threshold under Penal Law’ 190.40 (see Band Realty Co. v. N. Brewster, Inc., supra; Oliveto Holdings, Inc. v. Rattenni, supra). In short, the defendant has failed to sustain its burden of establishing conclusively, through documentary evidence “that utterly refutes plaintiff’s factual allegations” (Goshen v. Mutual Life Ins. Co. of N.Y., supra, 98 N.Y.2d at 326), a defense to the claims asserted against it as a matter of law and that the plaintiff has no viable cause of action, nor has it shown that the allegations of the complaint do not “fit within any cognizable legal theory” (McFadden v. Amodio, 149 AD3d 1282, 1283, 52 NYS3d 538 [3d Dept 2017]).The court has considered the remaining contentions of the parties and finds that they do not alter the foregoing determination.¹⁰ Accordingly, and for all of the reason stated above, defendant’s motion is denied.This constitutes the decision and order of the court.Dated:Riverhead, New York__FINAL DISPOSITION     XX NON-FINAL DISPOSITION