2nd Circuit remands case to determine whether loans that violate New York’s criminal usury law are void ab initio

Courts Appellate Second Circuit State Issues Usury New York

On March 15, the U.S. Court of Appeals for the Second Circuit vacated a district court ruling that had declined to treat an option that permits a lender, in its sole discretion, to convert an outstanding balance to shares of stock, at a fixed discount, as interest for purposes of New York’s criminal usury law. The district court had also observed, though it had no need to reach the issue, that even if the loan was usurious, it would not necessarily be void ab initio. After the case was appealed, the 2nd Circuit certified both issues to the New York Court of Appeals, which concluded, contrary to the district court, that such an option should be treated as interest for purposes of the usury statute and that loans made in violation of the usury statute are void ab initio. In light of the New York Court of Appeals holdings on these issues of state law, the 2nd Circuit vacated the district court’s order, and remanded to the district court to determine, in the first instance, whether the value of the option rendered the loan usurious.