In Re Venture Mortgage Fund, L.P., David Schick, Venture Mortgage Corp. And a & D Trading Group, L.L.C. Debtors, Theodore Brodie and Atassco v. John F. Schmutz, as Chapter 11 Trustee for the Estate of Venture Mortgage Fund, L.P. And Aurora Cassirer, as Chapter 11 Trustee for the Estate of David Schick and Venture Mortgage Corp.

Citations: 282 F.3d 185; 2002 U.S. App. LEXIS 3297Docket: 01-5010

Court: Court of Appeals for the Second Circuit; February 28, 2002; Federal Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Appellants Theodore Brodie and ATASSCO appeal a decision from the Southern District of New York, which upheld a Bankruptcy Court order expunging their unsecured claims against Venture Mortgage Fund, L.P. under New York's usury laws. Venture Mortgage, controlled by David Schick, who was convicted of fraud related to a Ponzi scheme, is the subject of the bankruptcy. The appellants contend that they were victims of Schick's scheme, not loan sharks, and argue that the usury statutes should not protect fraudulent actors. They assert three points: (i) usury laws aim to protect vulnerable individuals, not schemers; (ii) they were misled by a 27% interest offer and had no intent to violate usury laws; and (iii) a trust relationship with Schick, who drafted the loan documents and was a lawyer they consulted, should prevent the trustees from invoking usury laws against them. The court affirmed the lower courts' rulings, stating that the loans exceeded the 25% interest limit set by New York's usury statute, rendering them void ab initio under both statutory and public policy grounds. The opinion also notes an unresolved issue of New York law that was not raised by the parties, highlighting its potential significance in future bankruptcy cases without deciding it.

In the early 1990s, Schick approached appellants with a business opportunity requiring 'earnest money' to bid on distressed mortgage pools, promising substantial profits through 'mortgage flip' transactions. Schick solicited investments, assuring appellants that their funds would remain safe in escrow and yield over 20% interest. Consequently, Brodie lent $500,000 in August 1992, and ATASSCO contributed $2.75 million in July 1995, with Venture Mortgage fulfilling its obligations on these loans. Appellants, encouraged by the returns, sought additional lending opportunities, leading Schick to accept three more loans at a 27% interest rate. These later loans, totaling $2.05 million, were later voided by the bankruptcy court.

In May 1996, creditors initiated an involuntary Chapter 11 petition against Schick, and appellants filed claims to recover their loans. The bankruptcy trustees moved to expunge these claims based on usury grounds, a motion granted by the bankruptcy court and affirmed by the district court. Appellants argued that New York's usury statutes aim to protect the impoverished, contrasting their victim status against Schick's fraudulent enrichment. However, the court stated that the plain language of the usury statutes is paramount and does not account for the distinctions drawn by appellants. The court emphasized that intent is irrelevant in determining usury; a loan is considered usurious if the lender charges interest exceeding legal limits, regardless of the lender's intent to violate the statute.

Appellants contend that the trustees are estopped from using usury as a defense due to a special relationship with the lender, Schick, who drafted the loan documents and was previously consulted by the appellants. However, the court agrees with the district court's finding that no such special relationship exists, and even if it did, there was no reliance by Brodie or ATASSCO on Schick’s assurances regarding the legality of the loans. The ruling assumes that transactions constituting criminal usury are void under New York law, a premise that remains unchallenged. The court notes an unresolved issue regarding whether a loan is void if it breaches the criminal usury statute without violating the civil usury statute, highlighting that this could arise in future cases. It further clarifies that New York’s usury law appears to void only loans violating the civil usury statute, which applies to loans under $250,000, and questions whether loans of $250,000 or more are void even if they exceed criminal interest rates. The consequences of voiding usurious loans are severe, relieving borrowers of all payments and nullifying any mortgages, thus the courts are cautious in extending usury laws beyond their explicit statutes. Notably, New York's usury laws do not regulate loans over $2.5 million, implying that such transactions are considered safe from usury claims.

In Hufnagel v. George, 135 F.Supp.2d 406 (S.D.N.Y. 2001), Judge McMahon considered the issue of whether criminally usurious loans might not be void but ultimately rejected this notion, citing an implicit resolution by the bankruptcy court in the case under appeal. Hufnagel argued for voiding such loans based on public policy, referencing Fareri v. Rain's International, Ltd., 187 A.D.2d 481 (App. Div. 2d Dep't 1992), which voided a criminally usurious loan but did not address the specific question and seemingly overlooked it. Fareri relied on precedent from Szerdahelyi v. Harris, 67 N.Y.2d 42 (1986), which involved a civil usury violation in a loan under $250,000. The legal status of whether criminally usurious loans are void remains unresolved under New York law.

The Honorable Gerard E. Lynch presided over a case in the United States District Court for the Southern District of New York. The bankruptcy court determined that the only significant relationship between the parties was a financial one, where an investor with substantial funds sought profitable opportunities through a deal maker. The court noted that the primary motivation for the appellants to invest was the enticing promise of significant returns that appeared unrealistic. 

According to Section 5-521 of the New York General Obligations Law, a corporation may only raise a usury defense in cases of criminal usury. If a successful defense based on criminal usury effectively voids the loan, it suggests that such loans are void ab initio. However, if the defense only eliminates interest obligations while preserving the principal, the implications remain uncertain. 

New York's civil usury law (Section 5-501) establishes a maximum interest rate of 16% per annum, while the criminal usury law (Section 190.40 of the Penal Law) penalizes any interest rate exceeding 25% per annum. Section 5-511 states that loans exceeding the civil usury limit are void, but it does not specifically address loans that breach the criminal usury limit, leaving a gap regarding their enforceability. 

Section 5-501(6) outlines exceptions to the usury law for loans over $250,000 and $2.5 million, removing them from civil usury regulations. In this context, Brodie's $200,000 loan violated both civil and criminal usury statutes, while ATASSCO's loans of $1.1 million and $850,000 violated only the criminal usury statute, as they were exempt from civil usury due to their amounts. The legal authority to void the ATASSCO loans remains an open question.