R.I. Supreme Court Case Summaries: February 20, 2014.

 
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Byline: Rhode Island Lawyers Weekly Staff Report

Editor's note: The full text of these decisions can be found on Lawyers Weekly's website, rilawyersweekly.com. Commercial Usury - Savings clause Where a promissory note charged a usurious amount of interest, a usury savings clause did not prevent the note from being invalid. Public policy "In a case of first impression, we are asked to determine whether a usury savings clause in a commercial loan document validates an otherwise usurious contract. In view of the facts and circumstances of this case, we conclude that it does not; we hold, therefore, that the promissory note at issue is void as a matter of law. "The defendant, Potomac Realty Capital, LLC, (PRC or defendant) appeals from the Superior Court's grant of partial summary judgment in favor of plaintiffs, NV One, LLC, Nicholas E. Cambio, and Vincent A. Cambio (collectively, NV One or plaintiffs). The defendant asserts that the trial justice erred when he granted plaintiffs' motion for partial summary judgment on liability for violation of the usury statute, G.L. 1956 s.6-26-2, by declaring the usury savings clause of the parties' loan agreement unenforceable. For the reasons set forth in this opinion, we affirm the judgment of the Superior Court. ... "Because PRC and NV One entered into a valid loan contract, and the 23.17 percent interest rate that PRC charged exceeds the 21 percent maximum interest rate set out in s.6-26-2, it is clear to us that the loan was usurious and therefore void. "However, one need not engage in complex arithmetic in order to discern usury in PRC's loan. In the event of default by NV One, the note imposed a default interest rate at 'the lesser of (a) twenty-four percent (24%) per annum and (b) the maximum rate of interest, if any, which may be collected ... under applicable law.' This 24 percent interest rate is usurious on its face. ... The 24 percent rate is facially usurious irrespective of the loan amount; however, when calculated against the actual disbursed amount, that rate skyrockets to 43.48 percent per annum, more than double the maximum permissible interest rate. Therefore, it is apparent to this Court that not only did PRC charge a usurious interest rate, but it made no attempt to lower the interest charges to conform to the maximum permissible interest rate. ... "... Because the lender's intent to charge an interest rate exceeding the permissible maximum is immaterial to a determination of usury (and the invocation of penalties resulting therefrom), it is clear that the Legislature intended an inflexible, hardline approach to usury that is tantamount to strict liability. "This rigid approach is borne out in the historically strict enforcement of the statute and its predecessors through the years. ... (T]he underlying policy consistent throughout the decisions is readily apparent: Usurious interest rates are to be avoided at all costs and the onus is on the lender to ensure compliance with the maximum rate of interest. ... "... For protection of the borrower, it is incumbent upon the lender to ensure full compliance with the provisions for maximum rate of interest, and, apart from the explicit exception in s.6-26-2(e), anything short of full compliance renders the transaction usurious and void. ... "... In our view, the enforcement of usury savings clauses would entirely obviate any responsibility on the part of the lender to abide by the usury statute, and would, in essence, swallow the rule. As articulated supra, there is a strong public policy against usurious transactions, with lenders - typically in a better position to understand the terms of the loan - bearing the burden of compliance. ... If lenders could circumvent the maximum interest rate by including a boilerplate usury savings clause, lenders could charge excessive rates without recourse. This would have the reverse effect of incentivizing lenders to attempt to charge excessive interest rates because, at worst, the lender could invoke the savings clause and the interest rate would simply be reduced to the highest acceptable rate without any penalty to the lender. There is no doubt that such a mechanism runs completely afoul of the clear public policy against usurious transactions. "In addition to incentivizing...

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