The opinion of the court was delivered by: Mcmahon, District Judge.
On November 3, 2000, this Court entered an order granting summary
judgment to plaintiff, directing that defendant repay plaintiff the sum
of $250,000 that he had borrowed from plaintiff, together with interest
at the rate stipulated in the agreement between the parties — which
rate the Court found to be 480%, given the amount of interest stipulated
in that Agreement ($100,000) and the duration of the loan (30 days). The
Court reached this uncomfortable result after concluding that Sec.
5501(6)(a) of New York's General Obligations Law exempted loans (other
than mortgages) from the sweep of the civil usury statute, with its
interest ceiling of 16%. The Court ordered enforcement of the Agreement's
provision for attorney's fees to the prevailing party and submitted the
matter to The Hon. George A. Yanthis, U.S.M.J., for inquest. No final
judgment was entered.
On December 20, 2000, after the letter requesting additional briefing
went out, I received a Notice of Appeal from my November 3, 1999 Decision
and Order, which Defendants filed with the Pro Se Office on or about
December 1, 2000. The Second Circuit subsequently has granted Hufnagel's
motion to dismiss his appeal without prejudice. Hufnagel v. George,
00-9582 (2d Cir. Jan. 31, 2001).
Having reviewed both parties' responses to my December 14 request, and
some additional cases, I conclude that the November 3, 2000 decision was
in error, and that significant portions thereof must be vacated, the loan
from Hufnagel to George declared void, and the complaint dismissed.
General Obligations Law Sec. 5-511 provides that all usurious contracts
"shall be void," and directs (with exceptions having only to do with
savings banks, which are not here relevant) that "the court shall declare
the same to be void, and enjoin any prosecution thereon, and order the
same to be surrendered and cancelled." The New York Court of Appeals has
confirmed that the transaction must be deemed void if it is deemed
usurious. Szerdahelyi v. Harris, 67 N.Y.2d 42, 48, 499 N.Y.S.2d 650,
490 N.E.2d 517 (1986). It has been held that loans between $250,000 and
$2.5 million that bear interest of more than 25% are against public
policy and thus void ab initio. Fareri v. Rain's Interns., Ltd.,
187 A.D.2d 481, 589 N.Y.S.2d 579 (2d Dep't. 1992). This is true whether
or not the lender knew that the rate of interest he was charging violated
the Penal Law. As Chief Judge Bernstein held in Venture Mortgage Fund:
Venture Mortgage Fund, 245 B.R. at 473-74 (emphasis added). Here the
Court has already found, based on the undisputed facts, that a promissory
note, specifically denominated as such, was executed by the
parties, and that it charged a rate of interest that substantially
exceeded 25% per annum. Because equities play no role in a court's
determination of whether to apply G.O.L. § 5-551, see id. (citing
Estate of Dane v. Hood, 55 A.D.2d 224, 226, 390 N.Y.S.2d 249, 250 (3d
Dep't. 1976)), these findings appear to end the inquiry — even
though defendant George admitted the debt in the papers he submitted to
the Court in opposition to Hufnagel's motion for summary judgment and
indicated his willingness to repay Hufnagel $350,000 (but no more).
Hufnagel asserts that he could not be found guilty of criminal usury,
because he did not realize that he was making a loan and charging
interest — rather, he thought he was participating in a joint
venture. See Plaintiff's Letter Brief, December 22, 2000, at 1. However,
the Court has thoroughly analyzed the documentary evidence in this case
and has already found, as a matter of law, that the transaction in
question was a loan, not a joint venture. I decline to revisit this
determination. Nor is there any basis in this record for concluding that
Hufnagel did not know that he was making a loan, given the issuance of a
promissory note and the provision of the Agreement that permitted
Hufnagel, at his option, to convert the advance into a real joint venture
participation by foregoing repayment. See Hufnagel v. George, No.
00-CIV-331 (S.D.N.Y. filed Nov. 3, 2000).
Hufnagel also argues that he and George stood in some sort of "special
relationship" to each other. He relies on both Venture Mortgage Fund, 245
B.R. at 460, and Seidel v. 18 East 17th Street Owners, Inc., 79 N.Y.2d 735,
586 N.Y.S.2d 240, 244, 598 N.E.2d 7 (1992), for the proposition that a
borrower is estopped from interposing a usury defense when he had induced
a lender's reliance on the legality of the transaction.
New York courts consistently have endorsed the rule that a borrower may
be estopped from interposing a usury defense when, through a special
relationship with the lender, the borrower induces reliance on the
legality of the transaction. Seidel, 79 N.Y.2d at 741, 586 N.Y.S.2d 240,
598 N.E.2d 7. "Otherwise, a borrower could void the transaction, keep the
principal, and `achieve a total windfall, at the expense of an innocent
person, through his own subterfuge and inequitable deception.'" Id. at
743, 586 N.Y.S.2d 240, 598 N.E.2d 7. (quoting Angelo v. Brenner,
90 A.D.2d 131, 133, 457 N.Y.S.2d 630 (1982)).
However, a "special relationship" is limited to a small class of
relationships: attorney-client, fiduciary or trustee, or a longstanding
friendship or its equivalent. Venture Mortgage Fund, 245 B.R. at 475; see
also Abramovitz v. Kew Realty Equities, Inc., 180 A.D.2d 568,
580 N.Y.S.2d 269, 270 (N.Y.App.Div. 1992) (finding a special relationship
where defendant-borrowers, experienced and sophisticated businessmen and
lawyers, took advantage of plaintiff's long-standing friendship and trust
in his attorney, one of the defendants, who drafted the original
documents and set the financial terms that defendants later claimed were
usurious). In addition, it is usually characterized by superior
knowledge, experience or sophistication, which enables a borrower to
induce the lender to make the loan at a usurious rate. See id.; Hammond
v. Marrano, 88 A.D.2d 758, 451 N.Y.S.2d 484 (N.Y.App.Div. 1982) (finding
a special relationship where defendant-borrower had 20 years' experience
borrowing and lending money, and was a close friend of the reluctant
plaintiff-lender, who lent money only because of the close personal
relationship with the defendant); Seidel, 79 N.Y.2d at 741,
586 N.Y.S.2d 240, 598 N.E.2d 7 (finding a special relationship where a
third party who
was both a principal of the borrower and the lawyer of the lender drafted
the documents relied on by the lender); Angelo v. Brenner, 90 A.D.2d 131,
457 N.Y.S.2d 630 (3d Dep't 1982) (finding a special relationship where
lender, totally inexperienced in business matters, entered into
transaction out of sympathy for borrower's financial plight, and relied
upon borrower's friendship and superior expertise in setting a rate of
Hufnagel and George did not have the sort of "special relationship"
that would allow such a usurious rate of interest to stand. In fact, they
enjoyed no "special relationship" whatever. Hufnagel argues that he and
George had several conversations in the months leading to the
transaction, which "laid the foundation for the relationship between the
parties, wherein Hufnagel gradually became acquainted, and comfortable,
with George's self-professed expertise in such matters." See Plaintiff's
Letter Brief, December 22, 2000, at 4. Hufnagel asserts that George
conceived the entire transaction, and that Hufnagel's involvement was
limited to executing the contract and providing the money. See id. Yet
there was no attorney-client, fiduciary, or long-standing personal
relationship between them that could have induced Hufnagel, himself a
sophisticated businessman, to rely on George's superior expertise. See
Venture Mortgage Fund, 245 B.R. at 475. The fact that the borrower
suggests the interest rate, standing alone does not relieve the lender of
the defense of usury. See id. (citing Pemper v. Reifer, 264 A.D.2d 625,
695 N.Y.S.2d 555, 557 (N.Y.App.Div. 1999)).
Because this was a loan, not a joint venture, and because the "special
relationship" exception does not apply, it is subject to the usury laws
of New York State, and its void. The following portions of the court's
November 3, 2000 decision are hereby vacated: the decretal paragraphs
granting summary judgment to plaintiff at pages I and 13 and conclusions
of law 4, 5 and 6 at pages 10-11. The findings of fact, conclusions of
law 1-3 regarding plaintiff's claim, and the order dismissing defendant's
counterclaim are not vacated. Plaintiff's complaint is dismissed.
Plaintiff's pending motion for attorneys fees is dismissed as moot.
Plaintiff is, of course, free to approach the authorities if he believes
himself to be the victim of a crime.
This constitutes the decision and order of the court.