In a significant ruling on September 6, 2023, the U.S. Court of Appeals for the Second Circuit vacated and remanded a district court’s decision that rejected defendants’ usury defense on grounds of waiver and collateral estoppel. The full decision presents a shift in different courts’ approach towards usury in breach of loan agreement cases.
The lender, EMA Financial LLC, sued the borrower, a skincare company alongside its affiliates and guarantors for breach of a loan agreement and related guaranties. The defendants’ defense included a point of usury, where they asserted that the loans’ floating-price stock constituted as usury.
Traditionally, the usury defense has been a powerful yet intricate tool for defendants in breach of loan agreement cases. Through it, defendants claim that the interest rates imposed on the loan, or other forms of financial charge, exceed the maximum permissible rates under relevant jurisdictional laws. Consequently, contracts that breach these lending caps are generally treated as “usurious,” and hence, possibly illegal or unenforceable.
In this case, the underlying basis for the Second Circuit’s decision focused on the application of the usury defense, which the district court had initially dismissed on grounds of waiver and collateral estoppel. However, the Second Circuit countered this argument by stating that the usury defense is fundamentally non-waivable.
The implications of this decision are far-reaching, particularly for corporate counsel. It marks a renewed examination of the effectiveness of waivers and potentially catalyzes lenders to ensure their loan agreements and practices are within state and federal lending caps.
Given the complexities of the usury laws, and their implications on loan agreements, it is crucial for every legal professional to keep up-to-date with the evolution of this area of law. This ruling is a reminder of the significance of carefully drafting loan agreements and the need for vigilant compliance with the applicable usury laws.