962 F.3d 86
2d Cir.2020Background
- GeneSYS ID, Inc. (borrower) received a $35,000 loan from Adar Bays, LLC (lender) in May 2016 documented by a Securities Purchase Agreement and a Convertible Redeemable Note.
- The Note stated 8% annual interest and allowed Adar Bays, at its sole discretion after 180 days, to convert any outstanding balance into common stock at a conversion price equal to 65% of the lowest OTCQB trading price over the prior 20 trading days (i.e., a 35% discount).
- Adar Bays funded $33,000 to GeneSYS (plus $2,000 for counsel); it later attempted to convert $5,000 of the debt but GeneSYS refused and then defaulted, also terminating its transfer agent.
- Adar Bays sued for breach; GeneSYS defended asserting criminal usury under N.Y. Penal Law § 190.40 and argued the 35% conversion discount effectively made the note usurious (over the 25% criminal cap).
- The district court granted summary judgment for Adar Bays, concluding the conversion option did not render the Note criminally usurious; the Second Circuit, finding state-law questions unresolved, certified two questions to the New York Court of Appeals.
Issues
| Issue | Plaintiff's Argument (Adar Bays) | Defendant's Argument (GeneSYS) | Held |
|---|---|---|---|
| Whether a lender’s unilateral stock-conversion option at a fixed 35% discount constitutes "interest" for purposes of N.Y. Penal Law § 190.40 | Conversion, if exercised, converts the debt into an equity investment (not a loan) and thus is not subject to usury; any conversion profit is speculative at contracting | The fixed 35% discount is a contingent additional payment that functions as interest, pushing the effective rate above the 25% criminal cap | The court did not decide; it certified the question to the NY Court of Appeals for authoritative resolution |
| If a loan is criminally usurious under § 190.40, does N.Y. Gen. Oblig. Law § 5-511 render the contract void ab initio? | § 5-511 should not be read into the criminal usury statute; voiding would improperly impose civil consequences not present in the criminal statute | If the transaction is criminally usurious, § 5-511 supports treating the contract as void, relieving the borrower of repayment | The court did not decide; it certified this question to the NY Court of Appeals |
Key Cases Cited
- Seidel v. 18 E. 17th St. Owners, Inc., 598 N.E.2d 7 (N.Y. 1992) (borrower may be estopped from asserting a usury defense if its own conduct caused contract to be void)
- Blue Wolf Capital Fund II, L.P. v. Am. Stevedoring, Inc., 105 A.D.3d 178 (N.Y. App. Div. 2013) (courts look to substance over form; contingent extra payments can constitute interest)
- Gandy Mach. Inc. v. Pogue, 106 A.D.2d 684 (N.Y. App. Div. 1984) (party seeking to impeach transaction for usury bears a heavy burden)
- In re Venture Mortgage Fund, L.P., 282 F.3d 185 (2d Cir. 2002) (courts reluctant to extend harsh consequences of voiding usurious loans beyond statute’s clear scope)
- Penguin Grp. (USA) Inc. v. Am. Buddha, 609 F.3d 30 (2d Cir. 2010) (factors guiding federal court certification of state-law questions to state’s highest court)