So a plaintiff obtains a default judgment against a defendant on a promissory note case. Defendant fails to appear or defend. On a motion to enter the default pursuant to CPLR 3215, one would assume that without opposition, judgment would be entered for the amount of the loans. Interestingly, that’s not quite what happened in Power Up Lending Group, Ltd. v. Cardinal Resources, Inc., where a plaintiff lender sought entry of judgment on two loan agreements in the amount of $66,264.90. So what did happen?
Justice Stephen A. Bucaria, sua sponte, examined the plaintiff’s submission (which the court must), but then determined that certain provisions in the agreements were illegal as violating New York’s criminal usury laws. As a result, the Court calculated the amount due to the Plaintiff after severing the provisions deemed by the Court to be illegal, which was far less than that sought by plaintiff. Plaintiff appealed.
The Second Department in Power Up Lending Group, Ltd. v Cardinal Resources, Inc. disagreed with Justice Bucaria’s approach and reversed, concluding that the court erred when it, sua sponte, severed certain provisions of the loan agreements, which it found on its own to be “illegal pursuant to the criminal usury statute.” Since the defense of usury is an affirmative defense, it must be asserted by the Defendant affirmatively in its answer or as a ground to move to dismiss the complaint. Otherwise, the defense is waived. Here, because the Defendant failed to appear or answer or move, the defense was waived.
Two issues spring to mind. First, the affirmative defense of criminal usury is far different than most affirmative defenses, which do not involve violations of criminal law (e.g., statute of frauds, statute of limitations and the like). However, where an affirmative defense involves criminal activity, can a court as a matter of public policy have the power to raise the issue, sua sponte, even if it would otherwise be an affirmative defense?
Interestingly, in Youshah v. Staudinger, the defendant defaulted in an action brought by the plaintiff seeking to recover money owed to him by his former business partner for excluding him from an escort and dating service business, which fosters prostitution. The Court determined that although a party concedes liability by defaulting in an action, it would not, on public policy grounds, award judgment to the plaintiff as a result of an illegal enterprise. The Court held that it would not “enforce provisions of agreements which are patently illegal when public policy is at issue.”
Second, although the usury defense is waived if not raised, that very same defense could be advanced later by a defaulting defendant on a motion to vacate the default to establish a “meritorious defense.” See, e.g., Blue Wolf Capital Fund II LP v. American Stevedoring, Inc. (citing cases).
In sum, in order to obtain a default judgment against an defaulting defendant, the moving party must submit sufficient proof to establish a viable cause of action. Affirmative defenses, even if otherwise available to a defaulting defendant, should not stand in the way of entry of judgment. However, on a later motion to vacate, those affirmative defenses can be used to re-open the case, assuming that an excuse for the default has been established.