The question in this case is whether the state’s usury laws apply to a provision of a loan making the loan balance convertible to stock at the lender’s option.
This case involves New York’s civil and criminal usury statutes. The civil statute provides that any loan charging an interest rate above 16 percent “shall be void.” A separate provision, however, states that a corporation cannot invoke the civil usury statute as a defense in any action. The criminal statute makes a person guilty of a class E felony if he “knowingly charges” a loan with an interest rate exceeding 25 percent. A corporation can invoke the criminal usury statute, but there is no express statutory provision stating that a loan itself, rather than the offending contractual provision, is void if criminally usurious.
GeneSYS, a publicly-traded company, borrowed $35,000 from Adar Bays at an annual interest rate of 8 percent with prepayment penalties. The parties’ loan agreement permitted Adar Bays, after a certain point, to convert the outstanding balance into GeneSYS shares at a favorable conversion price. After the loan was fully funded, Adar Bays sought to convert $5000 of the balance to GeneSYS shares. When the request was not honored, Adar Bays sued in federal court for breach of contract.
In the district court, GeneSYS argued that the conversion provision rendered the loan both civilly and criminally usurious. The district court rejected these arguments, finding that GeneSYS could not invoke the civil usury statute and that the criminal usury law did not apply to the stock conversion provision. On appeal, the Second Circuit found ambiguity in New York law as to whether the state’s usury laws apply to such a conversion provision and certified it for resolution by the Court of Appeals. The court also certified a question about remedies: if the loan is found to be criminally usurious, is it void altogether?
The Court of Appeals accepted the certified questions.