NV One, LLC v. Potomac Realty Capital, LLC

• Decision Date: 18 February 2014
• Docket Number: No. 2012–262–Appeal.,2012–262–Appeal.
• Citation: 84 A.3d 800
• Parties: NV ONE, LLC, et al. v. POTOMAC REALTY CAPITAL, LLC, et al.
• Court: Rhode Island Supreme Court

84 A.3d 800

NV ONE, LLC, et al.

v.POTOMAC REALTY CAPITAL, LLC, et al.

No. 2012–262–Appeal.

Supreme Court of Rhode Island.

Feb. 18, 2014.

Richard G. Riendeau, Esq., Providence, for Plaintiff.

Kurt T. Kalberer II, Esq., Providence, for Defendant.

Present: SUTTELL, C.J., GOLDBERG, FLAHERTY, ROBINSON, and INDEGLIA, JJ.

OPINION

Chief Justice SUTTELL, for the Court.

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 § 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.

IFacts and Procedural History ¹

In 2007, plaintiffs sought a loan to rehabilitate and renovate a former post office located at 1190 Main Street in the Town of West Warwick (property). On July 17, 2007, NV One entered into a loan agreement with PRC and signed a promissory note (note) for the principal amount of $1,800,000; as security for the loan, NV One granted a mortgage, assignment of leases and rents, security agreement, and fixture filing with respect to the property. The plaintiffs Nicholas E. Cambio and VincentA. Cambio also personally guaranteed the loan.

In addition to the note, mortgage, and related documents, at the closing of the loan the parties executed a Sources and Uses of Funds sheet and a Loan Disbursement Authorization (all collectively, the loan documents). The loan documents established both an “interest reserve” and a “renovation reserve,” set initially at $62,500 and $940,000, respectively. Monthly interest-only payments were due on the first day of each calendar month until the loan's maturity date of August 1, 2008, on which date final payment of both the unpaid interest and unpaid principal was to be made. The note set an interest rate at “the greater of 5.3% or the LIBOR Rate, plus 4.7%.” ² The note also set a “default 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.” The loan documents also imposed fees, including an exit fee of $18,000 and an origination fee of $25,000. The Sources and Uses of Funds sheet also notes a previous deposit of $15,000, raising the total value of the loan to $1,815,000.

At the heart of this case are the maximum interest provisions contained in both the note and the mortgage; as the trial justice noted in his decision, “[t]hese provisions attempt to conform the instruments to the local usury laws, and they are commonly known as usury savings clauses.” Section 4.4 of the note, titled “Maximum Amount,” provides a usury savings clause, which reads in pertinent part:

“A. It is the intention of Maker [NV One] and Payee [PRC] to conform strictly to the usury and similar laws relating to interest from time to time in force, and all agreements between Maker and Payee, whether now existing or hereafter arising and whether oral or written, are hereby expressly limited so that in no contingency or event whatsoever, whether by acceleration of maturity hereof or otherwise, shall the amount paid or agreed to be paid in the aggregate to Payee as interest hereunder or under the other Loan Documents or in any other security agreement given to secure the Loan Amount, or in any other document evidencing, securing or pertaining to the Loan Amount, exceed the maximum amount permissible under applicable usury or such other laws (the ‘Maximum Amount’).

“B. If under any circumstances Payee shall ever receive an amount that would exceed the Maximum Amount, such amount shall be deemed a payment in reduction of the Loan owing hereunder and any obligation of Maker in favor of Payee * * * or if such excessive interest exceeds the unpaid balance of the Loan and any other obligation of Maker in favor of Payee, the excess shall be deemed to have been a payment made by mistake and shall be refunded to Maker.”

Although the parties executed the loan documents, the entire $1.8 million principal balance was not disbursed at the closing of the loan, nor was it ever fully disbursed to NV One. The trial justice attributed this, in part, to the holdbacks for the $940,000 renovation reserve and the $62,500 interest reserve. ³ Although the loan documents required both reserves to be placed in escrow, PRC never actually placed funds in escrow, nor did it segregate the funds in any way. Critically, section 2.12 of the note provided that NV One would not accrue any interest on the reserved funds.

At the time of closing there was a net funding disbursement of $761,478.54; and, in January 2008, a disbursement of $143,877.50 was made from the renovation reserve at the request of NV One.

The note contained a provision in section 2.7 allowing the parties to extend the date of maturity for up to an additional twelve months, provided certain conditions were met. Pursuant to that provision, on August 1, 2008, NV One paid PRC $18,000 in consideration for the execution of an allonge,⁴ which extended the maturity date by ten months to June 1, 2009. The $18,000 and the interest payments on the allonge were paid out of the interest reserve. By September 2008, NV One had received $995,997.50 of the $1.8 million loan. By November 2008, the interest reserve was exhausted. By the new date of maturity, NV One received, at most, $1,007,390.52 on the $1.8 million loan.

Although PRC never disbursed the entire $1.8 million loan amount, it routinely charged NV One interest for the entire loan amount. In his decision, the trial justice noted that “[p]rior to the allonge, PRC charged interest at ten percent (10%) of the total $1.8 million, when as little as $761,478.54 was disbursed.” From the time of the execution of the allonge in August 2008 through February 2009, “PRC charged NV One interest at a rate of twelve percent (12%) of the total $1.8 million, despite the fact that at its height, $1,007,390.52 was actually disbursed to NV One.” On February 23, 2009, PRC sent NV One a notice of default for failing to complete renovations within the time provided in the security agreement, and provided a thirty-day cure period, after which it would impose the default interest rate. In March 2009, at the end of the thirty days, “PRC charged NV One the [d]efault rate of twenty-four percent (24%) interest calculated upon the $1.8 million face amount of the [n]ote.” The trial justice found that “[w]hen the interest charged is applied in the context of the amount actually disbursed, the rate exceeds twenty-one percent (21%) essentially throughout the loan.” The trial justice further found that “PRC never adjusted the amount of interest charged to lower it below twenty-one percent (21%).”

Due to NV One's alleged failure to pay off the loan by the maturity date of June 1, 2009, on October 9, 2009, PRC sent NV One a notice of default and payment demand. On November 5, 2009, pursuant to its rights under the mortgage, PRC sent a foreclosure notice to NV One.⁵ In addition, on or about November 19, 2009, PRC sent a demand notice to plaintiffs Nicholas E. Cambio and Vincent A. Cambio demanding payment pursuant to their personal guarantees. On December 14, 2009, plaintiffs filed a verified complaint against PRC claiming fraud, breach of contract, and usury, and seeking injunctive relief preventing foreclosure on the property and collection from the personal guarantors.⁶ On August 16, 2011, plaintiffs filed a motion for summary judgment with respect to liability on count 3 of the complaint, alleging violations of the Rhode Island usury law.⁷

On December 16, 2011, the trial justice filed a written decision granting plaintiffs' motion for partial summary judgment. On January 11, 2012, the trial justice entered an order ⁸ declaring the loan usurious and void, voiding the mortgage, and removing the liens on the property from the land records. In his written decision, the trial justice found that “[i]t is clear on the record of undisputed facts that the rate was undoubtedly usurious, at least for some period.” In reaching that decision, the trial justice stated that the Rhode Island usury statute generally sets the maximum allowable rate of interest at 21 percent. He further noted that “[t]o determine whether an interest rate is usurious, the value for computing the maximum permissible interest is not the amount on the face of the loan, but, rather, the actual amount received by the borrower.” He then analyzed the interest rates PRC charged during each period of the loan (10 percent, 12 percent, and 24 percent) and determined that, because these percentages were calculated using the entire $1.8 million loan amount—as opposed to the $1,007,390.52 PRC actually distributed to NV One—“[t]here can be no doubt that these interest amounts charged exceeded twenty-one percent (21%) of the disbursed loan.”

The trial justice next considered the applicability of the usury savings clause “in light of the public policy, legislative intent, and plain meaning of the Rhode Island usury law.” The trial justice embarked on an extensive analysis of the policies behind Rhode Island usury jurisprudence, as well as the law in states with substantially developed usury law, such as Texas, Florida, and North Carolina. In ultimately declining to honor the usury savings clause and...