The usury defense: when the loan suing you was never enforceable at all.

New York caps interest at 16 percent under civil usury law and 25 percent under criminal usury law. A loan crossing the criminal line is void, not repriced. Corporations and LLCs cannot plead civil usury, subject to a narrow dwelling exception, but can plead criminal usury. A genuine purchase of future receivables is not a loan.

What is the usury defense, and when does it make the loan unenforceable?

The usury defense asserts that the lender charged more for the money than New York law permits, so the instrument sued on is void rather than simply overpriced. General Obligations Law 5-511 declares usurious contracts void, subject to a narrow forfeiture-of-interest rule for savings banks and savings and loan associations. Usury reaches only a loan or a forbearance.

So the defense runs in three steps. Is the transaction a loan or forbearance. What was the true annualized cost of the money. Which cap applies to this borrower and this amount. Prove a criminally usurious rate and the note is not reduced. It is void.

Law: N.Y. Gen. Oblig. Law 5-501; N.Y. Gen. Oblig. Law 5-511.

What is the difference between civil usury at 16 percent and criminal usury at 25 percent?

Civil usury is the 16 percent annual ceiling drawn from General Obligations Law 5-501 read with Banking Law 14-a, which sets the maximum rate. Criminal usury is the separate 25 percent ceiling in Penal Law 190.40, which makes knowingly charging interest above that rate a class E felony unless the rate is authorized or permitted by law.

The charge must be knowing, so the defense is not pure arithmetic, and rates authorized by other law sit outside the cap. That puts many regulated and federally chartered lenders outside the argument.

Two statutory lines matter as much as the rates. General Obligations Law 5-501(6)(a) removes the civil usury defense from loans and forbearances of 250,000 dollars or more, with a carve-out for loans secured primarily by an interest in real property improved by a one or two family residence, and 5-501(6)(b) removes every rate limit, including the criminal usury cap, at 2,500,000 dollars or more.

Read that table against your own paper first. A defense that dies on the amount of the advance dies early.

Law: N.Y. Gen. Oblig. Law 5-501; N.Y. Banking Law 14-a; N.Y. Penal Law 190.40; N.Y. Penal Law 190.42.

My company signed the note, not me. Can a corporation raise usury at all?

General Obligations Law 5-521(1) bars a corporation from interposing the defense of usury in any action, and Limited Liability Company Law 1104(a) does the same to domestic and foreign LLCs. Subdivision 3 of each statute is the shield that survives: the bar does not apply where the entity interposes a defense of criminal usury as described in Penal Law 190.40.

The corporate form surrendered the 16 percent line, not the 25 percent line. A note at 19 percent to your operating company is not attackable as civil usury. A note whose true annualized cost is 40 percent is attackable as criminal usury.

Subdivision 2 of 5-521 is narrower than it is usually described. It restores the usury defense to a corporation whose principal asset is a one or two family dwelling, where the corporation was organized, or the controlling interest acquired, within six months before it executed the note and a mortgage on that dwelling. Only for that indebtedness does the statute void, as contrary to public policy, a waiver or estoppel signed before, simultaneously with, or within sixty days after the money is delivered. Limited Liability Company Law 1104(b) is the LLC parallel.

So do not treat the waiver paragraph in an ordinary commercial note as dead on arrival. Civil usury is a waivable defense in New York, and the Court of Appeals has held that an estoppel certificate may waive criminal as well as civil usury, subject to duress, other invalidating circumstances, or the holder’s knowledge of the usury. Attack the waiver on those grounds. Do not assume it away.

The corporate bar is not a wall. It is a filter. It strains out the 16 percent argument and lets the 25 percent argument through untouched.

Law: N.Y. Gen. Oblig. Law 5-521; N.Y. Limited Liability Company Law 1104.

Case: Hammelburger v Foursome Inn Corp., 54 NY2d 580 (1981).

What does Adar Bays v GeneSYS actually hold about voiding a criminally usurious loan?

Adar Bays, LLC v GeneSYS ID, Inc. holds that a loan proven to violate the criminal usury statute suffers complete invalidity of the loan instrument. The Court of Appeals also held that the value of a stock conversion option may be counted as interest, and it refused to reform a criminally usurious note to a lawful rate.

The transaction was small and the lesson is not. A 35,000 dollar convertible note carried 8 percent stated interest for one year, plus an option to convert debt into stock at a discount to market. The borrower argued the discounted conversion right was disguised interest pushing the rate past 25 percent.

Two limits travel with that holding. The value of a floating-price conversion option is a question of fact, which is why the Second Circuit vacated summary judgment and remanded rather than voiding the note itself. And the borrower carries the defense by clear and convincing evidence, so the arithmetic must be documented. The lender that crosses the line then collects nothing under the instrument, principal included.

Case: Adar Bays, LLC v GeneSYS ID, Inc., 37 NY3d 320 (2021) (certified questions answered).

Case: Adar Bays, LLC v GeneSYS ID, Inc., 28 F4th 379 (2d Cir 2022) (on remand).

How is the interest rate calculated when the lender charged points, fees, and equity?

General Obligations Law 5-501(2) counts as interest any and all amounts paid or payable, directly or indirectly, by any person, to or for the account of the lender in consideration for making the loan or forbearance. The number printed next to the word “interest” is a starting point. Relabeled fees are still interest.

That language is the engine of most winnable usury defenses. Work the closing documents and add back everything the lender received for making the loan:

• An origination or commitment fee withheld from the wire, so you never received the stated principal.
• Charges paid at closing to the lender or for the lender’s account under some other label.
• Consideration in equity or a conversion right, which Adar Bays confirms can be part of the rate, valued as a question of fact.
• A short term. Fifteen percent of the advance taken back over ninety days is not 15 percent per year.

Then compute the annualized rate on money actually received, over the actual term. A note reading 22 percent on its face can annualize far above 25 percent once a withheld fee shrinks the principal and a ninety-day term shortens the clock. Put that calculation in an affidavit with the bank record attached.

Law: N.Y. Gen. Oblig. Law 5-501(2).

Why do true sales of future receivables sit outside usury entirely?

A purchase of future receivables is not a loan, and usury law reaches only loans and forbearances. Where the funder is not absolutely entitled to repayment under all circumstances, and instead bears the risk that the revenue never arrives, the transaction is a sale. The Appellate Division has held that where there is no loan, there can be no usury.

Courts do not accept the label on the document. The transaction is judged in its totality by its real character rather than by the name, color, or form the parties gave it. The Second Department usually weighs three factors, none dispositive alone, in deciding whether repayment is absolute or contingent:

• Whether the agreement contains a reconciliation provision that adjusts the remittance to actual receipts.
• Whether the agreement has a finite term.
• Whether the funder has recourse if the merchant declares bankruptcy.

Application is where these cases turn. A provision obligating the funder to adjust the remittance on the merchant’s request, supported by revenue proof, points toward a purchase. A provision letting the funder adjust the payment only in its sole discretion, as it deems appropriate, has been held to raise a question whether the transaction was a loan.

The weighing is not mechanical. Real reconciliation, no finite term, and no recourse in bankruptcy point to a sale, and usury is then irrelevant no matter how brutal the pricing. Discretionary reconciliation, a fixed term, and acceleration of the whole uncollected balance whatever the revenue point to a loan.

Contingency is the whole question. If the funder gets paid in full whether or not your revenue ever arrives, the funder made a loan and called it a purchase.

Case: LG Funding, LLC v United Senior Props. of Olathe, LLC, 181 AD3d 664 (2d Dept 2020).

Case: Principis Capital, LLC v I Do, Inc., 201 AD3d 752 (2d Dept 2022).

Can you sue the lender for criminal usury, or only defend with it?

Criminal usury is a shield and not a sword for a business borrower. The Second Department has held that a defendant may assert criminal usury as an affirmative defense under General Obligations Law 5-521(3), Limited Liability Company Law 1104(c), and Penal Law 190.40, but may not assert criminal usury as the basis for a counterclaim.

Plan the pleading accordingly. The usury point goes into the answer as an affirmative defense, and into a dispositive motion where the documents alone establish the rate. Money you want back travels under a different theory with its own elements.

Nothing in that limitation weakens the defense itself. A void instrument supports no judgment. But the defense is proved, not announced: on a motion to dismiss the documents have to carry it, and the standard is clear and convincing evidence, so a fact dispute over rate or contingency sends the case to discovery rather than an early exit.

Case: LG Funding, LLC v United Senior Props. of Olathe, LLC, 181 AD3d 664 (2d Dept 2020), citing Intima-Eighteen, Inc. v Schreiber Co., 172 AD2d 456 (1st Dept 1991); see also Blue Wolf Capital Fund II, L.P. v American Stevedoring, Inc., 105 AD3d 178 (1st Dept 2013).

What should you do first if you have been sued on a loan that looks usurious?

The first task is arithmetic, not argument: fix the exact amount that reached the account, the exact total the lender demands back, and the exact number of days between them. Every element of a New York usury defense depends on those three numbers, and the clock on your answer starts when service is complete.

I read the note, the fee schedule, and the funding wire before I read the complaint. I ask what actually landed in the operating account before I accept the principal figure anyone has written down.

That deadline has a trigger, not a date. Under CPLR 320, an appearance and answer are generally due within 20 days after personal delivery of the summons within the state, and within 30 days after service is complete when service is made any other way. Confirm the method of service before you count.

A defense-ready file for a usury analysis contains the following:

• The note, purchase agreement, or financing agreement, with every rider, addendum, and amendment.
• The guaranty, signed and dated, in the form you actually executed.
• The bank statement page showing the deposit, so the net funded amount is documented, not described.
• The full payment history, including every debit taken by ACH.
• The borrower’s entity type on the signing date, because a corporation, an LLC, and an individual do not stand in the same place under 5-521, 1104, and 5-501(6).
• Any reconciliation request you made, and whatever the funder did or did not do about it.

Then run the checks in order. Loan or purchase. Annualized cost of money actually received. Which cap applies given the borrower and the amount. Whether the lender knowingly charged that rate and whether any other law authorizes it. Whether the paper contains a waiver or estoppel certificate, and on what ground it is attacked.

If the true rate crosses 25 percent on a sub-2,500,000 dollar advance to your company, and you can prove it by clear and convincing evidence, you are not negotiating a discount. You are litigating a void instrument.

Law: N.Y. Gen. Oblig. Law 5-501, 5-511, 5-521; N.Y. Limited Liability Company Law 1104; N.Y. Penal Law 190.40; N.Y. CPLR 320.