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Florida Courts Should Apply New York’s Adar Bays Analysis to Determine Usury

Usurious loans have been the scourge of finance since early times. Despite being condemned as wrong and sinful for over 4000 years, usurious interest rates always seem to find their way into modern financial transactions. Less than a century ago, the Florida Supreme Court stated that the “purpose of the statute prohibiting usury is to bind the power of creditors over necessitous debtors and prevent them from extorting harsh and undue terms in the making of loans.” Chandler v. Kendrick, 146 So. 551, 552 (Fla. 1933). Unlike New York’s well developed body of usury laws, today, Florida courts provide little guidance as to what constitutes interest on a loan. Nevertheless, Florida, like many other states, has imposed a cap on the amount of interest a lender can charge.[1] Personally, I don’t believe interest changes its shape just because you cross a state's border.

Florida Usury Statutes

Florida law specifies two levels of usury, civil and criminal. Under Florida's usury laws, it is considered usurious and unlawful to charge a rate of interest more than 18% for any loan, money advance, line of credit, or other obligation where the principal balance is $500,000 or less. See Fla. Stat.§ 687.03(1). A creditor who willfully violates Florida's usury law is liable to the borrower for double the amount of interest collected. See Fla. Stat. § 687.04; Jersey Palm-Gross, Inc. v. Paper, 639 So.2d 664, 667 (Fla. 4th DCA 1994). For criminally usurious loans, the lender forfeits all interest and the entire debt becomes unenforceable. Fla. Stat. § 687.071(7). If liable for criminal usury under Fla. Stat.§ 687.071(2) and (3), the lender is facing enhanced penalties ranging from first-degree misdemeanor to a third-degree felony. The lender may also be liable for damages double the amount of interest collected and borrower’s attorney’s fees. Fla. Stat. §§ 687.147; 687.04.

Fla. Stat. § 687.03 prohibits lenders from reserving, charging or obtaining “an advance of money, line of credit, forbearance to enforce the collection of any sum of money, or other obligation a rate of interest greater than the equivalent of 18 percent per annum simple interest, either directly or indirectly, by way of commission for advances, discounts, or exchange, or by any contract, contrivance, or device.” Further, if the loan, line of credit, or promissory note exceeds $500,000 in value or amount, “it shall not be usury or unlawful to reserve, charge, or take interest thereon unless the rate of interest exceeds the rate prescribed in § 687.071.”[2] Additionally, if the loan exceeds $500,000, “stock options and interests in profits, receipts, or residual values are examples of the type of property the value of which would be excluded[3] from calculation of interest” under Fla. Stat. § 687.03(5)(a)[4] and § 687.03(5)(b)[5]. This is of course obvious because it is next to impossible to predict how much a lender can make based on future sales. However, fixed percentage discounts are a different story as such provisions guarantee the lender the same return for each conversion made, no matter what the value of the property is.

In accord, Florida courts impose four requisites for usurious transactions: (1) a loan, express or implied; (2) an understanding between the parties that the money lent shall be returned; (3) payment or agreement to pay a greater rate of interest than is allowed by law; and (4) a corrupt intent to take more than the legal rate for the use of the money loaned. Video Trax, Inc. v. NationsBank, N.A., 33 F. Supp. 2d 1041, 1056 (S.D.Fla. 1998) citing Dixon v. Sharp, 276 So. 2d 817, 819 (Fla. 1973); See also Pinchuck v. Canzoneri, 920 So. 2d 713, 715 (Fla. 4th DCA 2006); Jersey Palm-Gross, Inc. v. Paper, 639 So. 2d 664, 666 (Fla. 4th DCA 1994). .Similarly, New York law allows usurious intent to be established when a borrower sufficiently “intends to borrow,” rather than to “engage in a joint transaction or exchange money for some other reason,” and a lender intends to accept such payment. Szerdahelyi v. Harris, 67 N.Y.2d 42, 46 (N.Y. 1986); see Adar Bays, LLC. v. GeneSYS ID, Inc., 37 N.Y3d 320, 339 (N.Y. 2021) (holding that “stock conversion options should be considered when determining the interest charged on a loan transaction and usurious loans to corporations” because “usurer usually seeks to conceal the usury, and to accomplish [the] purpose by indirect methods”) (quoting Meaker v. Fiero, 145 N.Y. 165, 169 (1895)).

In determining usury, the court looks to the substance of the transaction, rather than the form. In re Marill Alarm Sys., Inc., 81 B.R. 119, 124 (S.D.Fla. 1987). This is consistent between New York and Florida. Whether a transaction is either civilly or criminally usurious is determined “at the inception of the loan.” Oregrund Ltd. P'skip v. Shelve, 873 So.2d 451, 458-59 (Fla. 5th DCA 2004); Home Credit Co. v. Brown, 148 So.2d 257, 259 (Fla. 1962); see also Tchlenoff v. Dyner, 36 N.Y.S.2d 514 (Sup. Ct. 1942). Most importantly, a corrupt intent must be established: not if the lender received more interest but if the lender intended to do so. This is also consistent with New York law. Adar Bays, LLC v. GeneSYS ID, Inc., 341 F. Supp. 3d 339, 353 (S.D.N.Y. 2018). Corrupt intent is shown by evidence of the lender knowingly charging or receiving excessive interest. Oregrund Ltd. P’ship v. Sheave, 873 So.2d 451, 459 (Fla. 5th DCA 2004) (citations omitted). In both, Florida and New York, an illegal agreement is void ab initio.[6] While the Florida usury statute prescribes what constitutes a usurious interest rate on a loan, it does not enumerate which charges are considered in interest calculation. Thus, the Florida courts have provided us with limited guidance of what charges are deemed interest for purposes of usury. However limited, some Florida courts have identified certain fees, advances, and expenses that can and may be considered interest on a loan. Florida courts hold that if a borrower is required to pay a bonus or other consideration at the inception of the loan as an inducement to the lender to make the loan, such inducement may be considered interest and can render an otherwise proper loan usurious. See Cooper v. Rothman, 63 Fla. 394, 57 So. 985, 988 (1912); Jersey Palm-Gross, Inc. v. Paper, 639 So.2d 664, 667 (Fla. 4th DCA 1994), aff'd, 658 So.2d 531 (Fla. 1995). Similarly, if a lender retains a substantial portion of the loan proceeds without allowing a corresponding abatement of interest on the amount retained, that retention effectively increases the interest charged on the amounts actually advanced to the borrower, thereby rendering an otherwise proper loan usurious. See Mindlin v. Davis, 74 So.2d 789, 793 (Fla. 1954). This is typically referred to as an “original issue discount”. The Florida Supreme Court held that where the contract is not usurious at the inception, it is not rendered usurious because of exercise of the option of prepayment by the maker and the demand and receipt of interest by payee for the full length of the contract. Dezell v. King, 91 So.2d 624 (Fla. 1957). This “prepayment” feature is a typical provision in convertible notes, and even several NY courts have struggled on whether to include such charges as interest. LG Capital Funding, LLC v. PositiveID Corp., No. 17-CV-1297, [2019 BL 282324], 2019 WL 3437973, at *11 (E.D.N.Y. July 29, 2019) (collecting cases); see also e.g., Coastal Inv. Partners, LLC v. DSG Global, Inc., No. 17-CV-4427, [2018 BL 201399], 2018 WL 2744719, at *7 (S.D.N.Y. June 6, 2018); Feldman v. Kings Highway Sav. Bank, 102 N.Y.S.2d 306, 307 (App. Div. 2d Dept 1951). A lender; therefore, cannot hide interest in a form of fees and advances to disguise usury in a loan. Treatment of these types of charges are consistent between Florida and New York.

But what about the conversion feature of a convertible note and the discount it provides to the lender. How should Florida treat that? New York’s highest court has said a fixed discount (floating rate) in a convertible note does constitute interest. My colleagues in our New York office did a masterful job challenging a convertible notes conversion discount feature which the New York Court of Appeals ruled that such charge is interest under New York law. The focus is on the “value” of the conversion feature that was bargained for, and reserved to the lender, at the time the transaction was entered into. That “value” doesn’t change just because you cross state lines.

New York Court of Appeals ruled that convertible loans are subject to Usury Laws

A fairly novel but critically important issue was decided in New York regarding stock conversion options as part of the usury calculation. In Adar Bays, the Second Circuit certified two questions to the New York Court of Appeals:

  1. “Whether a stock conversion option that permits a lender in its sole discretion, to convert any outstanding balance to shares of stock at a fixed discount, should be treated as interest for the purpose of determining whether the transaction violates N.Y. Penal Law § 190.40, the criminal usury law; and

  2. If the interest charged on a loan is determined to be criminally usurious under N.Y. Penal Law § 190.40, whether the contract is void ab initio pursuant to N.Y. Gen. Oblig. Law § 5-511.”

Adar Bays, LLC v. GeneSYS ID, Inc., 962 F.3d 86, 94 (2d Cir. 2020).

Both questions were answered by New York’s highest court in the affirmative providing clarity that corporate loans with convertible discount options are subject to usury laws. Analyzing the second question first, the court concluded that, text, history and legislative purpose of the NY usury laws show that if a borrower successfully proves a defense of usury, the usurious loans are void ab initio, and thus, unenforceable. In answering the first question, the Court noted that the value of a floating-price convertible option, such as a stock conversion option, is considered interest. In this unprecedented case, the plaintiff issued a defendant a loan for $35,000 with 8% interest rate that would mature in one year. The loan agreement specified that the plaintiff could —at his sole discretion—convert some or all of the debt into shares of defendant’s stock at a discount of 35% from the lowest trading price of defendant’s stock over a 20-day period prior to the date on which the plaintiff requests a conversion. Deciding in favor of the borrower, the Court further noted that the value of the floating-price option and the methodology of calculation is left to the fact finder (jury or judge). Clarifying that the law has not changed in almost a century, the New York Court of Appeals brought relief to many injured borrowers, especially small publicly traded companies..

Will Florida follow New York’s ruling in Adar Bays?

I believe it will. The value conferred by the conversion discount is bargained for by the lender before the transaction is consummated. It is not the type of contingency as is contemplated in Kraft v. Mason, 668 So.2d 679, 684 (Fla. DCA 4th 1996) (“[A] loan or financing agreement will not be deemed usurious when repayment is made subject to the occurrence of a contingency.”). The convertible note reserves this additional interest charge for the benefit of the lender, and that additional charge has a value. The point of Adar Bays is for the courts to determine the value of the conversion option to get a real, true picture of what the lender intended to charge and did in fact reserve to itself.

In Continental Mortgage Investors v. Sailboat Key, Inc., a Massachusetts corporation (CMI) made a $3,500,000 commercial loan to a Florida real estate development corporation (Sailboat). Continental Mortgage Investors v. Sailboat Key, Inc., 354 So.2d 67 (Fla. 3d DCA 1977). While the main issue in the case was which choice of law should govern, another important issue, answered by the District Court of Appeals, and the key issue for our purposes, is whether the value of the borrower’s corporate stock was correctly considered as interest where the stock had a specific value at the time it was issued to the lender and such value was not contingent upon the success of the venture which was financed by the loan. Based upon the uncontested testimony, the judge found that at the time the stock was issued to CMI, the parties agreed that the total value of all the Sailboat Key stock was $1,975,000 and, therefore, the value of CMI's 50% equity was $987,500. CMI basically contends that the value of the equity in the project which it received (a so called "equity kicker") substantially depended upon the success of the venture and should have been excluded from the calculation of interest as provided in Section 687.03(4), Florida Statutes (1974). Id. at 72-73. However, the Appellate Court held that the trial judge did not err in calculating it as interest because the evidence showed the stock received by CMI was worth $987,500 at that time and this value did not depend upon the success of the venture. Id. The Florida Supreme Court did not answer this question since it found Massachusetts law to be controlling and remanded the case to the trial court.

For instance, the Fourth District Court of Appeals explained that when a lender is compensated for out-of-pocket expense for services provided, courts will deem the expense as a service charge, not interest for purposes of usury. Abromowitz v. Barnett Bank, 356 So.2d 329 (Fla. 4th DCA 1978). Holding that a “mortgage loan discount” deducted from a loan proceeds is a question of fact and cannot be decided in a summary judgment proceeding, the court stated that it is irrelevant whether the charge is titled “mortgage loan discount” or a “service charge” because the purpose of the charge determines if it is interest, not the title of it. Id. In that case, a $4,000 fee was charged by the lender as a mortgage loan discount but was in fact, a service charge. Id. Based on the testimony from the bank’s president “only a portion of the $4,000” was used to pay for the inspection asserting that a portion of the $4,000 could be treated as interest but even if the court finds that the interest rate exceeds 10% once remanded, the loan is still not usurious unless corrupt intent is present, which is a question of fact. Id. at 330-31.

Similarly, an agreement in the form of an investment in which the return is labeled “profit,” as opposed to “interest,” will be deemed a loan if the substance of the transaction is a loan. In Pinchuck v. Canzoneri, the borrower and lender entered into an agreement in which the borrower would repay the amount borrowed plus an “investment profit.” Pinchuck v. Canzoneri, 920 So. 2d 713 (Fla. 4th DCA 2006). The effective interest rate amounted to 144 percent of return on principal. Id. at 715. The court found that the term “investment profit,” which was used to describe the amount to be paid above the principal, could not be used to conceal usury. Id.

It is only a matter of time before Florida courts catch up to this novel issue of conversion discount options used to disguise usury. As the highest court in New York resolved this issue by protecting the borrower from these shylocking businesses that prey on the desperate, different jurisdictions will eventually follow. Unlike New York, where usury is claimed only as an affirmative defense, Florida usury law allows a borrower to assert a claim of usury either as a cause of action[7] or an affirmative defense. Florida; however, has not yet answered whether a convertible discounted option is subject to usury law, but it is clear: if at the inception of the agreement, the amount of money is reasonably ascertained, courts will look at it as an interest. On the other hand, if the compensation is speculative, it is not interest. Consequently, the borrower carries the burden to prove that the payment obligation is clearly ascertained at the inception of the loan. As in New York, the court need not decide the value or the method of calculating the conversion option but only if the value can be reasonably established at the inception of the agreement. Based on the similarities between both jurisdictions, Florida will likely follow New York’s highest court finding that floating-price discount options must be used in usury analysis because often, the value of the discount option is reasonably ascertainable at the inception of the loan, as Florida requires.

Agapija Cruz, Esq. is a securities litigation attorney at The Basile Law Firm P.C. and the firm's resident Florida attorney managing the firms’ Naples office. Agapija can be reached at To learn more about what we can do for you, please call us today at 516.455.1500 ext. 117 for a free initial consultation. With offices in New York, Texas, and Florida, the firm serves public companies and shareholders nationwide.

[1] The maximum rate of interest is 18% for any loan, money advance, line of credit, or other obligation where the principal balance is $500,000 or less. See Fla. Stat. § 687.03(1). If the interest rate is more than 25% but less than 45%, it is a criminal offense of second degree misdemeanor. Fla. Stat. § 687.071(2). Interest rate exceeding 45% per annum is punishable as a third degree felony. Fla. Stat. § 687.071(3).

The Texas maximum interest rate is 10% per annum, and if the maximum rate exceeds, it is punishable as a misdemeanor. See Tex. Finance Code §§ 304.001; 304.002. In New York, the maximum interest rate is 16% per annum for loans under $250,000 (unless to a corporation, but subject to criminal usury), and if exceeded, the lender is liable for civil usury; the agreement is void ab initio. N.Y. Gen. Oblig. Law §§ 5-501; 5-511. If charged more than 25% per annum, the lender is liable for criminal usury in the second degree. N.Y. Penal Law § 190.40. In Massachusetts, if the interest rate is more than 20% per annum a person is liable for criminal usury and “shall be guilty of criminal usury and shall be punished by imprisonment in the state prison for not more than ten years or by a fine of not more than ten thousand dollars, or by both such fine and imprisonment.” Mass. Gen. Laws Ch. 271, § 49(a).

[2] See Fla. Stat. § 687.071(1).

[3] See Fla. Stat. § 687.03(4).

[4] Fla. Stat. § 687.03(5)(a) states stock options “[s]hall apply only to loans, advances of credit, or lines of credit made on or subsequent to July 1, 1979, and to loans, advances of credit, or lines of credit made prior to that date if the lender has the legal right to require full payment or to adjust or modify the interest rate, by renewal, assumption, reaffirmation, contract, or otherwise.”

[5] Fla. Stat. § 687.03(5)(b) states stock options “[s]hall not be construed as diminishing the force and effect of any laws applying to loans, advances of credit, or lines of credit, other than to those mentioned in paragraph (a), completed prior to July 1, 1979.”

[6] “A contract which violates a provision of the constitution or a statute is void and illegal and will not be enforced in our courts.” Cardegna v. Buckeye Check Cashing, Inc., 894 So.2d 860, 864 (Fla. 2005) citing Harris v. Gonzalez, 789 So.2d 405, 409 (Fla. 4th DCA 2001).

[7] Oregrund Ltd. P’ship v. Sheave, 873 So.2d 451, 453 (Fla. 5th DCA 2004) (Florida district court reversed the dismissal of a usury claim, concluding that appellants sufficiently stated a cause of action based upon violation of the usury statutes).

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