Article courtesy of Kevin P. Braun of Morgan, Lewis & Bockius LLP
(1) Despite Misrepresentation by Borrowers, Lenders Not Able to Rely on Borrower’s Representation that Statutory Analysis Was Done Demonstrating Usurious Loans Were Capable of Repayment, for Exception to RI Usury Law; (2) Forbearance Agreement Release Didn’t Release Usury Claim Under “Coercive” Circumstances Where Borrowers’ Options Were to Repay Loan or Enter Forbearance and (3) MA Choice-Of-Law Provision Overridden as Contrary to RI Public Policy, so that RI Usury Law Governed Loans.
Commercial Park Realty, LLC v. HR2-A Corp., 253 A.3d 1258 (R.I. 2021)
Beginning in 1997, Defendants Massachusetts entities HR2-A Corp. and HR4-A Corp. (“Lenders”) issued commercial loans to Plaintiffs (“Borrowers”), secured by hundreds of acres of property in Rhode Island, for which Borrowers owed Lenders a total of over $14,000,000, in the case of the HR2-A loan, and $7,000,000, in the case of the HR4-A loan, each maturing July 2000.
In July 2000, the Rhode Island General Assembly amended the state’s usury statute and created an exception to the maximum permitted interest rate for commercial loans. Under amended statute, although no interest rate on a loan shall exceed 21% per annum, there was no limitation on the interest rate for loans exceeding $1,000,000 to commercial entities where the repayment of the loan was not secured by a mortgage against the principal residence of the borrower, as long as the borrower obtained a pro forma analysis indicating that the loan is capable of being repaid.
After this legislation was enacted, the Lenders demanded payment on the then-matured debt. After Borrower could not make payment, the parties agreed to refinance. The Lender then began charging new interest rates (effective annual interest rates of 34% in the case of the $14,000,000 and 26% in the case of the $7,000,000 loan). As required by the exception to the usury statute, Lender required Borrower to obtain the analysis showing that the loan is capable of being repaid. Borrower was unable or refused to obtain the analysis. Instead, Borrower certified that it had obtained the analysis in connection with the refinancing. The parties later amended and refinanced the loans, and still no analysis was conducted and no certification regarding the analysis was obtained. When Borrower again could not pay, the parties executed a forbearance agreement. The forbearance agreement required Borrowers to waive any defenses and forever released Lenders from all claims. In December 2000 and March 2003 respectively, Lender granted additional promissory notes in the amounts of $4,300,000 and $350,000, secured by property in Rhode Island, and with an effective annual interest rate of over 23%. The notes had a choice-of-law provision indicate that Massachusetts law would govern the notes.
In 2011, Borrowers sued Lenders claiming that, among other things, the loans were usurious and argued that the $350,000 and $4,300,000 loans were governed by Rhode Island law, notwithstanding choice-of-law provision indicating that Massachusetts law, which effectively does not have a maximum legal interest rate on loans, would govern. The Superior Court entered partial summary judgment in favor of the Borrowers on the usury claim.
On appeal, the Supreme Court of Rhode Island found that the even though the Borrowers certified to Lenders that the required analysis was done, there was no evidence that the analysis was actually performed before Lenders began charging interest over the statutory maximum 21%. Therefore, the exception to the Rhode Island usury law did not apply and the Lenders exceeded the statutory maximum interest rate on the loans.
The court went on to hold that the release language in the forbearance agreement did not prohibit the usury claim because the nature and execution of the forbearance agreement was highly coercive. The Lenders gave Borrowers two options: either pay off the loans with interest, which the Borrowers were unable to do, or enter into the forbearance agreement, which the Borrowers did to avoid foreclosure.
The court further determined that Rhode Island law governed the $350,000 and $4,300,000 loans because Rhode Island had a materially greater interest in the legality of the loans. The court noted that the loans were secured by property in Rhode Island, the agreements were executed in Rhode Island, and the Borrowers are all domiciled/organized in Rhode Island. The court noted that because the case involves the issue of usurious loans, it would be against Rhode Island public policy to apply Massachusetts law. Therefore, the Supreme Court of Rhode Island affirmed the lower court’s partial summary judgment in favor of the Borrower.
