285 F. Supp. 3d 698
S.D. Ill.2018Background
- Adar Bays loaned Aim Exploration $45,000 under an 8% convertible, redeemable Note and a related SPA dated November 6, 2014, with conversion rights into Aim common stock and a reservation of 1,168,000 shares for conversion.
- The Note matured November 6, 2015, and included default remedies: a 24% default interest rate and daily/percentage penalties for certain breaches (e.g., failure to deliver shares after conversion).
- Aim effected partial redemptions/conversions in 2015–2016, but failed to deliver shares after a December 21, 2016 conversion notice and later failed to redeem the Note under a January 2017 repayment agreement.
- Adar Bays sued for breach of contract and unjust enrichment; Aim defended asserting the Note is unenforceable as criminally usurious.
- Aim moved under Rule 12(c) to dismiss/judgment on the pleadings arguing (inter alia) that the 45% conversion discount, share reservation, and default penalties constitute usurious interest exceeding New York’s criminal cap.
- The Court denied Aim’s Rule 12(c) motion, finding Aim had not carried its heavy burden to show the Note was criminally usurious on the pleadings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether conversion discount counts as interest for criminal-usury purposes | Conversion right is uncertain and contingent; discount is not interest | 45% conversion discount functionally guarantees lender excess return and must be included in interest calculation | Court: Discount too speculative to treat as interest on pleadings; plausible claim that it is not interest — deny dismissal |
| Whether share-reserve provision constitutes interest/value taken for loan (civil usury analog) | Reserve merely implements conversion right; not an independent charge; civil-usury statute inapplicable to criminal-usury defense | Reserving 1,168,000 shares is a value taken that makes the loan void under civil-usury principles | Court: §5-511 is a civil-usury provision and not directly applicable to criminal-usury defense; reserve is a conversion mechanism; deny dismissal |
| Whether post-default rates/penalties make loan criminally usurious | Post-default/enhanced rates need not be included in criminal-usury calc; many courts exclude default-only rates | Penalties and default interest are disguised interest that push effective rate above criminal cap | Court: State of law unsettled on criminal cap applying to defaulted debts, but Aim failed to show on pleadings that penalties/discreet provisions render overall rate usurious; any unenforceable penalties can be addressed later |
| Whether Note is void for usury or shows usurious intent from its four corners | Even if some provisions were usurious, equitable adjustment is appropriate; intent not shown on face | Note demonstrates usurious intent and should be void | Court: Aim did not meet heavy burden to establish criminal usury or intent on the pleadings; court did not decide voidness or intent issues |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (plausibility standard for pleadings)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (pleading must state a claim that is plausible)
- Cleveland v. Caplaw Enters., 448 F.3d 518 (2d Cir. 2006) (12(c) standard same as 12(b)(6))
- In re Venture Mortg. Fund, L.P., 282 F.3d 185 (2d Cir. 2002) (discussing interplay of civil and criminal usury)
- Manfra, Tordella & Brookes, Inc. v. Bunge, 794 F.2d 61 (2d Cir. 1986) (usury laws do not apply to defaulted obligations)
- Scantek Med., Inc. v. Sabella, 582 F. Supp. 2d 472 (S.D.N.Y. 2008) (criminal usury statute described; corporate plaintiffs limited regarding civil-usury defense)