NV One, LLC v. Potomac Realty Capital, LLC
2014 R.I. LEXIS 17
| R.I. | 2014Background
- In 2007 NV One, LLC obtained a $1.8M commercial loan from Potomac Realty Capital (PRC); NV One granted a mortgage and two individuals personally guaranteed the loan.
- The loan documents created an interest reserve and renovation reserve (totaling roughly $1,002,500) that PRC never segregated or placed in escrow; NV One received at most about $1,007,390.52 of the $1.8M.
- PRC calculated interest on the $1.8M face amount throughout the loan (charging 10–12% pre-default and a 24% default rate), producing effective rates above Rhode Island’s 21% statutory cap when measured against funds actually disbursed.
- The note contained a usury-savings clause (a “Maximum Amount” clause) purporting to limit interest to the lawful maximum and to treat excess as repayment or refundable.
- Plaintiffs moved for partial summary judgment on usury; the Superior Court held the loan usurious and the usury-savings clause unenforceable; PRC appealed.
- The Rhode Island Supreme Court affirmed, holding the loan usurious and that usury-savings clauses cannot be enforced where they would undermine the statutory public policy protecting borrowers.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Was the loan usurious under § 6-26-2 given interest charged on the face amount rather than disbursed funds? | NV One: yes — interest must be measured against amounts actually received, producing rates >21%. | PRC: factual calculation not disputed but defense focuses on clause enforcement. | Held: Yes — measured against disbursed funds, effective rates exceeded 21%; loan was usurious and void. |
| Is a usury-savings clause in a commercial loan enforceable to cure otherwise usurious charges? | NV One: no — enforcing it would frustrate statutory public policy and shift burden to borrower. | PRC: yes — parties are sophisticated commercial entities and bargained for the clause; enforcement respects contract freedom. | Held: No — unenforceable as contrary to Rhode Island’s strong public policy protecting borrowers and strict lender responsibility. |
| Does lender intent or sophistication of parties affect usury liability? | NV One: lender’s intent immaterial; statute imposes strict responsibility on lender. | PRC: parties’ sophistication should permit enforcement of contractual risk allocation. | Held: Lender’s subjective intent or borrower sophistication is immaterial; statute is strict and provides its own commercial exception if conditions are met. |
| Could PRC invoke the commercial-entity exception in § 6-26-2(e)? | NV One: PRC did not satisfy prerequisite (pro forma CPA analysis) so exception unavailable. | PRC: argued commercial nature; sought to rely on clause instead of statutory exception. | Held: Exception not met (no pro forma CPA); PRC remains subject to statutory cap. |
Key Cases Cited
- Burdon v. Unrath, 132 A. 728 (R.I. 1926) (lender’s lack of intent to violate usury statute is no defense)
- Colonial Plan Co. v. Tartaglione, 147 A. 880 (R.I. 1929) (borrower cannot contract to pay more than statute allows; statute protects small borrowers)
- Nazarian v. Lincoln Finance Corp., 78 A.2d 7 (R.I. 1951) (legislature intended severe penalties to prevent usurious transactions)
- Industrial Nat’l Bank of R.I. v. Stuard, 318 A.2d 452 (R.I. 1974) (maximum interest is calculated on amount actually received, not loan face)
- DeFusco v. Giorgio, 440 A.2d 727 (R.I. 1982) (recognizing strong public policy against usurious transactions)
- In re Swartz, 37 B.R. 776 (Bankr. D.R.I. 1984) (even a small overcharge can render entire loan usurious; strict lender responsibility)
- Swindell v. Fed. Nat’l Mortgage Ass’n, 409 S.E.2d 892 (N.C. 1991) (usury-savings clauses shift statutory burden to borrower and contravene public policy)