I hear you but some of the info i have checked out
Post# of 15187
Posted On: 05/27/2016 11:02:16 PM
I hear you but some of the info i have checked out is so contradictory that I can't make heads or tail of it. I came across this case so it made me wonder if the usury laws are different for loans as compared to convertible notes
A creditor purchased two convertible promissory notes from a company. The notes bore interest at 8% and 10%, respectfully. At the creditor’s option, the notes could be converted into unrestricted common stock of the company.
After the purchase, the creditor elected to convert the notes to stock and sent a notice of the conversion to the company as well as the transfer agent that was required to forward the converted stock to the creditor. Neither the company nor agent forwarded any stock to the creditor. As a result, the creditor filed a complaint for breach of contract against both the company and agent. In response, the defendants argued that the notes charged rates that exceeded New York’s criminal usury code and, therefore, were void and unenforceable. The trial court rejected the defendants’ usury defense.
The trial court explained that where a usurious rate is not found on the face of a note, a defendant has the burden of proving that the plaintiff intended the transaction to be usurious at its inception. As neither note bore an interest rate that exceeded the criminal usury code, the defendants were required to show that the creditor had intended the transaction to be usurious when it purchased the notes. Because the defendants’ had failed to make that allegation, the court rejected their usury defense.
The court also noted that usury law is only applicable where there has been a loan or forbearance. Once the creditor elected to convert the notes into stock the transaction was properly characterized as an investment and, therefore, was not subject to the criminal usury code.
LG Capital Funding, LLC v Sanomedics Intl. Holdings, Inc., 2015 N.Y. Misc. LEXIS 4294 (N.Y. Sup. Ct. Nov. 23, 2015)
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A creditor purchased two convertible promissory notes from a company. The notes bore interest at 8% and 10%, respectfully. At the creditor’s option, the notes could be converted into unrestricted common stock of the company.
After the purchase, the creditor elected to convert the notes to stock and sent a notice of the conversion to the company as well as the transfer agent that was required to forward the converted stock to the creditor. Neither the company nor agent forwarded any stock to the creditor. As a result, the creditor filed a complaint for breach of contract against both the company and agent. In response, the defendants argued that the notes charged rates that exceeded New York’s criminal usury code and, therefore, were void and unenforceable. The trial court rejected the defendants’ usury defense.
The trial court explained that where a usurious rate is not found on the face of a note, a defendant has the burden of proving that the plaintiff intended the transaction to be usurious at its inception. As neither note bore an interest rate that exceeded the criminal usury code, the defendants were required to show that the creditor had intended the transaction to be usurious when it purchased the notes. Because the defendants’ had failed to make that allegation, the court rejected their usury defense.
The court also noted that usury law is only applicable where there has been a loan or forbearance. Once the creditor elected to convert the notes into stock the transaction was properly characterized as an investment and, therefore, was not subject to the criminal usury code.
LG Capital Funding, LLC v Sanomedics Intl. Holdings, Inc., 2015 N.Y. Misc. LEXIS 4294 (N.Y. Sup. Ct. Nov. 23, 2015)
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