The State of Florida is one jurisdiction that has statutes that impose the penalty of forfeiture by the creditor of the entire loan principal on those making usurious loans bearing interest over 25% per annum (see Section 687.071, Florida Statutes - Criminal usury, loan sharking; shylocking; criminal prosecutors can also get involved in such situations, if they "catch wind" of the transaction).
Because the statute requires that the money lender "willfully" or "knowingly" charged or accepted an illegally excessive interest rate on the loan in order to trigger the statute, I feel compelled to at least briefly touch on the following cases that deal with the issue of "intent" in a usury case, including the use of a "usury savings clause" by a creditor in a loan agreement in an attempt by a creditor to "create an opportunity" to "claim" that he/she/it "didn't really mean" to charge an illegally excessive rate of interest in the event usury is raised as an issue in the enforcement of a loan agreement.
The facts of the case are as follows:
1) The borrower, a partnership, needed funds to (a) pay off a $1.1 million mortgage on unimproved land, and (b) build an office building on the unimproved land.
2) Borrower obtained a commitment from a bank for most of the needed capital but was $200,000 short.
3) Borrower approached an individual ("Lender") who was an experienced real estate developer and suggested he become an equity partner for $200,000.
4) After becoming fully apprised of the borrower's urgent need for the funds, Lender refused to become an equity partner but instead, offered to lend the borrower the $200,000 at 15% for 18 months.
5) Shortly before the loan closing, Lender presented the borrowers with loan documents which included a demand for a 15% equity interest in the partnership as additional consideration for making the loan. Lender made no attempt to hide its motives, even though he had previously agreed to loan the money at a 15% interest rate. Lender knew the value of the partnership based on the borrowers' disclosures and was aware of the borrowers' urgent need for funds. The borrowers were in desperate financial straits. With closing imminent, they were in no position to bargain or to seek another source of the money. The borrowers accepted the loan on the revised terms.
6) After ultimately defaulting on the loan, Lender brought suit, and borrower asserted a usury defense, claiming that between the stated rate on the loan, plus the value of the 15% equity interest in the partnership that Lender received upfront, the total consideration for the loan totaled 45% per annum.
In determining that the lender knowingly and willfully intended to charge interest in excess of the maximum amount allowed by Florida law, the Florida District Court of Appeal made the following observations (bold text is my emphasis):
1) "We agree that mathematical calculations alone do not equate with usurious intent." [citation omitted]
2) "However, here the lender knew at the outset the total value of the amount he was receiving in consideration for making the loan. [Lender] is a developer with 40 years experience and not an unsophisticated lender. He knew that the borrowers had an urgent need for the money. He dictated the terms of the loan. The fact that the borrowers were "in distress" or "necessitous" when the loan was made is as significant as the fact that the lender dictated the terms of the loan. [citation omitted]. Our supreme court explained the purpose of Florida's usury statute:
- "The very purpose of statutes 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 the loans.""
Dixon, 276 So. 2d at 820, citing Chandler, 146 So. at 551.
4) [Lender's] testimony that he did not intend to charge an unlawful rate of interest is also not determinative. Rollins. Obviously, such testimony is self-serving."
5) "Despite the lender's assertions to the contrary, the requisite intent was established by proving the lender's
- knowledge of the amount of interest to be received and
- intent to receive the amount charged."
North American Mortg. Investors v. Cape San Blas Joint Venture, 378 So. 2d 287, 291 (Fla. 1979); Dixon; Shorr; Rollins; Curtiss Nat'l Bank of Miami Springs v. Solomon, 243 So. 2d 475, 477 (Fla. 3d DCA 1971); River Hills, Inc. v. Edwards, 190 So. 2d 415, 424 (Fla. 2d DCA 1966).
6) "The evidence thus fully supports the trial court's conclusion that the lending scheme resulted in interest in excess of 25% per annum and that such result was intended by the lender."
7) "A more troublesome question is whether the existence of a contractual disclaimer of intent to violate the usury laws commonly known as a "usury savings clause" in the loan documents in this case removes the determination of usurious intent from a factual inquiry and conclusively proves as a matter of law that the lender could not have "willfully" or knowingly charged or accepted an excessive interest rate. [omitted footnote] The trial court held that "the exculpatory language [usury savings clause] inserted into the $ 200,000.00 Promissory Note does not negate Plaintiff's knowledge that it was charging and intended to charge consideration for making the loan in excess of 25% of the value thereof."
8) "While we are unwilling to hold that usury savings clauses are unenforceable as against this state's public policy, neither are we willing to hold that the insertion of a usury savings clause in one of several documents to a loan transaction will shield the lender from the reach of Florida's usury laws as a matter of law."
9) "A usury savings clause is one factor to which the finder of fact should look in determining whether all of the circumstances surrounding the transaction support a finding of intent on the part of the lender to take more than the legal rate of interest for the use of the money loaned."
10) "Where the actual interest charged is close to the legal rate, or where the transaction is not clearly usurious at the outset but only becomes usurious upon the happening of a future contingency, the clause may be determinative on the issue of intent."
11) "Here, the amount charged for the loan exceeded the lawful rate of interest by 27%."
12) "The usurious amount was exacted at the outset, and did not depend on the occurrence of a future contingency, which might or might not have made the loan usurious."
13) "The borrowers were in desperate need of money. The lender had full knowledge of the borrower's financial situation and took full advantage of the situation by overreaching."
14) "The usurious charges did not occur by happenstance, but through the lender's purposeful actions."
15) "We find that the insertion of a usury savings clause in a single document does not save this lender under these circumstances from the usury penalties, nor preclude the trial court's finding of usurious intent."
Jersey Palm-Gross v. Paper, 658 So. 2d 531; (Fla. 1995)
The Florida Supreme Court was asked to review the state District Court of Appeal decision, above. The appeal dealt solely with the question of whether the mere existence of a "usury savings clause" in the loan documents conclusively proves that a money lender could not have "willfully" or knowingly charged or accepted an illegally excessive interest rate on the loan. In affirming the Florida appellate court, the Supreme Court held as follows:
- "[W]e conclude that a usury savings clause cannot, by itself, absolutely insulate a lender from a finding of usury. Rather, we approve and adopt the Fourth District's holding, that a usury savings clause is one factor to be considered in the overall determination of whether the lender intended to exact a usurious interest rate. Such a standard strikes a balance between the legislative policy of protecting borrowers from overreaching creditors and the need to preserve otherwise good faith, albeit complex, transactions which may inadvertently exact an unlawful interest rate."
-------------------------The Florida Supreme Court went on to explain its rationale (bold text is my emphasis):
1) "In rejecting the use of a savings clause as an absolute bar to a usury claim, we note, as have other courts, that a contrary holding would permit a lender to "relieve himself of the pains and penalties visited by law upon such an act by merely writing into the contract a disclaimer of any intention to do that which under his contract he has plainly done."" First State Bank v. Dorst, 843 S.W.2d 790, 792 (Tex. Ct. App. 1992)(quoting Nevels v. Harris, 129 Tex. 190, 102 S.W.2d 1046, 1050 (Tex. 1937)).
2) "If approved, we believe this practice would undermine public policy as set by the legislature and defeat the purpose of Florida's usury statute."
3) "Indeed, such a practice might encourage lenders to charge excessive interest, since, even if caught, the only penalty would be the loss of the excess interest."
4) "However, we also believe that savings clauses serve a legitimate function in commercial loan transactions and should be enforced in appropriate circumstances. For instance, we agree with Judge Pariente's illustration, in the majority opinion below, of the proper utilization of a savings clause:
- "Where the actual interest charged is close to the legal rate, or where the transaction is not clearly usurious at the outset but only becomes usurious upon the happening of a future contingency, the clause may be determinative on the issue of intent.""
Jersey Palm-Gross, 639 So. 2d at 671.
5) "While not exhaustive, this illustration captures the essence of the legitimate use of a savings clause. This illustration is also consistent with the way savings clauses were discussed or applied in Szenay and First American Bank & Trust."
Foreclosure rescue operators may be vulnerable to claims of usury in their sale leaseback deals with financially strapped homeowners if a court recharacterizes their transaction as an equitable mortgage / disguised loan. How they will attempt to avoid usury claims in the case the transaction is recharcterized remains to be seen.
However, as the Florida District Court of Appeals has held (and as noted above), the requisite intent can be established simply by proving the lender's:
- knowledge of the amount to be received, and
- intent to receive the amount charged.
Claiming ignorance of the law or providing self-serving testimony won't carry the day. Further, it appears that slipping a "conditional" usury savings clause into a sale leaseback agreement (conditional on the transaction being recharacterized as a loan / equitable mortgage), may not provide the needed safety net either, inasmuch as Florida Supreme Court, in approving the intermediate appellate court's approach regarding such a clause, appears to be saying that the effectiveness of such clauses are limited to legitimate, good faith attempts by a creditor to avoid charging or receiving usurious interest.
In the transaction that was the subject of these cases, Lender, according to the Florida appeals court:
- "knew at the outset the total value of the amount he was receiving in consideration for making the loan",
- "[was] a developer with 40 years experience and not an unsophisticated lender"
- "knew that the borrowers had an urgent need for the money"'
- "dictated the terms of the loan. The fact that the borrowers were "in distress" or "necessitous" when the loan was made is as significant as the fact that the lender dictated the terms of the loan."
In the view of both Florida courts, the lender, here, could hardly qualify as a creditor legitimately attempting, in "good faith", to avoid charging or receiving of usurious interest.
A foreclosure rescue operator offering a sale leaseback, coupled with a buyback option, to a financially strapped homeowner desperate to "save" his or her home, will often earn a return on investment in excess of the maximum amount allowed by the usury statute. In that event (assuming a court recharacterizes the transaction as a disguised loan / equitable mortgage), in my view, said foreclosure rescue operator should find itself in the same or similar shoes as the Lender in the above cases.
For Florida cases addressing the issue of usury in the context of an equitable mortgage claim, see:
- Equitable Mortgage & Usury In Sale Buyback Deals In Florida, and
- More On Equitable Mortgage & Usury (Florida).
florida equitable mortgage alpha