Hillair Capital Investments, L.P. v. Integrated Freight Corp., 963 F. Supp. 2d 336

In Sept. and Nov. 2011, Plaintiff (a hedge fund) made two debenture loans to Integrated Freight Systems (IFC): $165,000 (repay $178,200) and $149,500 (repay $161,460), both due April 1, 2012. Each loan required a $15,000 non-accountable legal fee reimbursement.
IFC issued restricted common stock to Plaintiff as part of each transaction (500,000 and 453,030 shares); shares were unregistered and subject to six‑month transfer restrictions; market price fell markedly during the holding periods.
The debentures contained: (1) an acceleration/default ‘‘Mandatory Default Amount’’ equal to 130% of outstanding principal plus other costs; (2) a usury‑avoidance clause limiting interest to the maximum lawful rate; and (3) New York governing law.
IFC defaulted on the loans in April 2012; guarantors did not pay. Plaintiff sued; defendants sought leave to amend their answer to assert criminal usury as an affirmative defense.
At the pre‑discovery stage, the court denied Plaintiff’s motion for summary judgment and granted Defendants leave to amend, finding the usury defense not futile because factual issues exist about calculation of the effective interest rate.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether defendants may amend to assert criminal usury defense	Loans show ~16% interest and are enforceable; summary judgment appropriate	Usury defense has merit because fees and stock transfers may increase effective rate above 25%	Leave to amend granted; summary judgment denied (issues of fact exist)
Whether $15,000 ‘‘legal fee’’ payments should be included in interest calculation	Fees are legitimate reimbursements, not interest	Fees may be disguised loan payments and should be included in principal for rate calc.	Fact question whether fees were bona fide; may be considered if pretextual
Whether value of restricted stock must be considered in interest calculation	Stock issuance not part of interest calculation; headline rate controls	Stock sales effectively increased the loan consideration and could push effective rate above legal limit	Value of stock (and its restricted status) is relevant; potential that rate exceeds 25% warrants defense
Whether default/penalty provisions convert the loan into usurious rate	Default penalties are separate from contractual interest and don’t show usury	Default provisions (130% mandatory default) reflect punitive interest and bear on usury inquiry	Default charges are not used to calculate the contractual interest rate, but reasonableness of penalties can be challenged

Milanese v. Rust-Oleum Corp., 244 F.3d 104 (2d Cir. 2001) (leave to amend standard under Rule 15)
Lloyd Corp. v. Henchar, 80 N.Y.2d 124 (N.Y. 1992) (borrower may pay reasonable loan‑related expenses; fees can be pretext for higher interest)
Gandy Mach., Inc. v. Pogue, 106 A.D.2d 684 (N.Y. App. Div.) (usury is an affirmative defense and burden on party asserting it)
Brown v. Robinson, 224 N.Y. 301 (N.Y. 1918) (fees can be considered in usury analysis when acting as disguised interest)
Manfra, Tordella & Brookes, Inc. v. Bunge, 794 F.2d 61 (2d Cir. 1986) (usury law does not apply to default‑only charges)
Blue Wolf Capital Fund II, L.P. v. Am. Stevedoring Inc., 105 A.D.3d 178 (N.Y. App. Div.) (criminal usury can render loan transaction void)
Chirra v. Bommareddy, 22 A.D.3d 223 (N.Y. App. Div.) (unjust enrichment may be available even where a loan is void for illegality)