Under CPLR 3213, a plaintiff can move for summary judgment in lieu of complaint which, under the right circumstances, serves as a useful tool to avoid extensive litigation and obtain speedy relief. Recently, in JADR Consulting Group Pty Ltd. v Ault Alliance, Inc., some loan sharks attempted to take advantage of the device’s efficiency. Manhattan Commercial Division Justice Margaret A. Chan heard the legendary jaws theme music but was not deterred, instead denying summary judgment and granting the defendant’s cross-motion to dismiss.
Background:
In JADR, the plaintiff and the defendant entered into a promissory note in which the defendant promised to repay a principal of $2,756,245.10. However, plaintiff conceded that the defendant only received $2,249,996. The interest rate on the note was set at 16% per annum, and the default rate was set at 24% per annum or the maximum permitted by law.
That note was amended twice. First, a new section was added to include that in the event of a default, the principal would increase by $1,000,000. Second, the maturity date of the note was extended and included that any default would, at the plaintiff’s discretion, extend the maturity date by 30 days, but also add $250,000 to the principal to be repaid. Further, both amendments increased the principal amount despite the fact that the defendant never received additional consideration.
The maturity date came and went without payment, but the plaintiff extended the maturity date six times, amounting to a total increase to the principal of $2,500,000 ($1,000,000 from the first amendment and $1,500,000 from the second amendment [$250,000 x 6 extensions]). The plaintiff then moved for summary judgment in lieu of complaint under CPLR 3213 to recover $4,545,086 from the defendant and the defendant’s guarantors.
In opposition, the defendant claimed that because the plaintiff only loaned $2,249,996–instead of the $2,756,245.10 provided in the note–the $506,259.10 difference should be classified as interest, which, when annualized and added to the 16% interest rate in the note, amounted to an actual interest rate of 126.26%, well in excess of the 25% criminal usury rate.
The Court first noted that summary judgment would be denied regardless of the usury analysis because “it is not clear from the face of the pleadings how much is outstanding.” While the plaintiff’s notice of motion requested $5,545,086, an affirmation submitted along with the motion asserted that the amount due is $4,545,086. Thus, the plaintiff’s own contradictions would have defeated its motion for summary judgment in lieu of complaint.
The Two-Step Usury Analysis:
The Court detailed its two-step analysis in determining whether a transaction is usurious. First, the Court looked to whether the note exceeded $2,500,000, because if the note exceeds $2,500,000, the usury laws are inapplicable. Second, the Court calculated the note’s actual interest rate.
Given the plaintiff’s admission that, in fact, only $2,249,996 was loaned to the defendant, the Court found that the loan fell short of the $2,500,000 maximum and thus the usury laws applied.
The Court then calculated the interest rate by calculating the total annual interest received and then dividing that sum by the amount that the debtor actually received. According to the Court’s calculation, the interest rate came out to 42.1%, clearly exceeding the criminal usury rate, albeit by a smaller margin than the defendant’s calculation. As a result, the Court deemed the note and its amendments void ab initio.
Takeaway:
In sum, the JADR decision serves as a cautionary tale for two reasons. First, when submitting a motion for summary judgment in lieu of complaint under CPLR 3213, plaintiffs should ensure that there are no issues of fact in their own pleadings. A voluntary contradiction proves detrimental to such a motion. Second, creditors should be aware of how a court calculates interest rates and the loan principal. The Court in JADR did not look only at the note’s terms but looked to the operative reality of the loan.