In re Venture Mortgage Fund, LP, Bankruptcy No. 96 B 45033(SMB)

• Decision Date: 02 March 2000
• Docket Number: 96 B 42902(SMB),Bankruptcy No. 96 B 45033(SMB),96 B 46282(SMB).,96 B 43969(SMB)
• Citation: 245 BR 460
• Parties: In re VENTURE MORTGAGE FUND, L.P., Debtor. In re David Schick, Venture Mortgage Corp., and A & D Trading Group, L.L.C., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

245 B.R. 460 (2000)

In re VENTURE MORTGAGE FUND, L.P., Debtor.

In re David Schick, Venture Mortgage Corp., and A & D Trading Group, L.L.C., Debtors.

Bankruptcy Nos. 96 B 45033(SMB), 96 B 42902(SMB), 96 B 43969(SMB), 96 B 46282(SMB).

United States Bankruptcy Court, S.D. New York.

March 2, 2000.

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Curtis, Mallet-Prevost, Colt & Mosle, LLP, New York City, Eliot Lauer, Steve J. Reisman, Paul R. Niehaus, of Counsel, for John F. Schmutz, Chapter 11 Trustee for the Estate of Venture Mortgage Fund, L.P.

Parker Chapin Flattau & Klimpl, LLP, New York City, Amos Alter, of Counsel, for Aurora Cassirer, as Chapter 11 Trustee for the Estate of David Schick and Venture Mortgage Corp.

Law Office of Charles L. Mester, New York City, Charles L. Mester, of Counsel, for Theodore Brodie.

Robinson Brog Leinwand Reich Genovese & Gluck, P.C., New York City, Christine H. Black, of Counsel, Zane & Rudofsky, New York City, Eric Horowitz, Of Counsel, for ATTASCO.

Berlack, Israels & Liberman LLP, New York City, Martin S. Siegel, of Counsel, for Official Committee of Unsecured Creditors.

MEMORANDUM DECISION SUSTAINING TRUSTEES' OBJECTIONS TO CLAIMS ON GROUNDS OF USURY

STUART M. BERNSTEIN, Chief Judge.

These proceedings concern the defense of criminal usury. Two creditors, Theodore Brodie and ATTASCO, independently advanced substantial sums to the debtor Venture Mortgage Fund L.P. ("Venture"), and the debtor David Schick either guaranteed repayment or co-signed the promissory notes. Their loans bore interest at the annual rate of 27%. After these bankruptcies were commenced, Brodie and ATTASCO filed timely claims. The Schick and Venture trustees objected to the claims, arguing that the annual interest exceeded 25%, New York's criminal usury rate.

The Court tried the objections separately, but with one exception, they raise the same factual and legal issues. As more fully explained below, both sets of claims are barred by the defense of usury, and accordingly, will be expunged.

BACKGROUND

A. Theodore Brodie

1. Introduction

Brodie worked in the apparel business from 1961 through 1990. (Transcript of Brodie trial, held Nov. 4, 1999 ("Brodie Tr."), at 56.) After retiring in June 1990, he lived off of investments and disability payments.¹ (Id. at 56.) In late 1991, Harry Sussman, the owner of Leisure Apparel, approached Brodie to borrow $200,000.00. (Id. at 57-60.) Brodie agreed to make the loan if Sussman met his four conditions: (1) the loan would be fully secured, (2) the loan would bear interest at 24% per annum, (3) Brodie's attorneys would draw up the loan documents, and (4) Sussman would pay Brodie's legal fees. (Id. at 59-60.)

The Sussman loan led Brodie to David Schick. Brodie needed an attorney, and a neighbor, Naftuli Silberberg, recommended Schick. (Id. at 60-61.) Schick was a partner in the law firm of Frenkel & Hershkowitz where Silberberg's son, Michael, also worked as an associate. (Id. at 61.) Brodie, his wife and his accountant subsequently met with Schick and Silberberg, retained Schick to prepare the documents for the Sussman loan transaction, (id. at 62-63), and Schick and Silberberg worked together on the Matter. (See id. at 144.) Satisfied with the services, Brodie returned to Schick six months later when Brodie agreed to lend Sussman an additional $75,000.00. (Id. at 66.) During the same period, Brodie again used Schick's services in connection with a dispute he was having with several partners in a real estate transaction. (Id. at 79.)

2. The 1992 Transaction

Up to this point, Schick served solely as Brodie's attorney, and did not participate in the underlying transactions. During the summer of 1992, however, Silberberg approached Brodie to arrange a meeting at Schick's request regarding a potential loan transaction. (Id. at 67.) At the subsequent meeting, Schick proposed that Brodie advance $500,000.00. Schick would maintain the money in an escrow account, it would remain there until repayment, and Schick would pay Brodie interest at the annual rate of 20%. Schick assured Brodie that he was Brodie's attorney, the loan was risk free, and the only danger was that the bank might fail.² (Id. at 68-70.)

Brodie tentatively agreed. First, however, he had to satisfy himself that his lending conditions (other than the 24% interest rate) were met, and his wife had to agree. In addition, his accountant had to review the agreement and assure him that there was no risk. (Id. at 70.) A couple of days later, Brodie received a $500,000.00 promissory note, dated August 10, 1992, signed by Schick on behalf of Mortgage Venture Ltd. (Brodie Trustees' Exhibit ("BTX") 108), and wiring instructions from Silberberg. (BTX 107.) The note called for monthly interest payments in the sum of $8,333.34 (i.e., 20% per annum), commencing in September of 1992. Unpaid interest and the entire principal were due on December 9, 1992. Evidently satisfied with the documentation, and in accordance with Silberberg's instructions, Brodie wired $500,000.00 into a Frenkel & Hershkowitz IOLA.³ (Brodie Tr. 72-73; BTX 109.)

Brodie and Schick also executed a "shtar iska." Brodie and Schick are Orthodox Jews, and Jewish law prevented Brodie from charging Schick interest. See Daniel Klein, Note, The Islamic and Jewish Laws of Usury: A Bridge to Commercial Growth and Peace in the Middle East, 23 Denver J. Int'l L. & Policy 535, 541-42 (Summer 1995) ("Klein"). Accordingly, although the promissory note is purely a secular document evidencing a loan, the parties structured their transaction as a "heter iska," or a type of joint venture to avoid the prohibition against charging interest. See Leibovici v. Rawicki, 57 Misc.2d 141, 290 N.Y.S.2d 997, 1000 (N.Y.City Civ.Ct.1968), aff'd, 64 Misc.2d 858, 316 N.Y.S.2d 181 (N.Y.Sup.App.Term 1969); Klein 543. In a "heter iska," the moneys advanced are treated as a contribution to the venture. Id. The venturer who advances the funds (i.e., the lender) is entitled to an accounting, but the accounting is an onerous process requiring two trustworthy witnesses. (See BTX 115.) In lieu of the accounting, the parties execute a "shtar iska" which obligates the other venturer (i.e., the borrower) to pay a fixed monthly return (corresponding to the interest payments called for under the promissory note), and requires the lender to waive any further profits. (BTX 115); see Arnav Indus., Inc. Employee Retirement Trust v. Westside Realty Assocs., 180 A.D.2d 463, 579 N.Y.S.2d 382, 382 (N.Y.App.Div.1992).) In fact, both claimants in these proceedings initially argued that the transactions with Schick and Venture were not loans — and the monthly payments were not, therefore, interest subject to the usury laws — but they have since abandoned these arguments. Nevertheless, the execution of the "shtar iskas" is significant, and will be revisited later.

Brodie regularly received the monthly $8,333.34 payment. (Brodie Tr. 76.) Further, Schick did not return the principal in December, and Brodie continued to receive monthly payments throughout 1993, 1994, and 1995. (See id. at 76-78.) According to Brodie, he could have demanded the return of the principal at any time, but never did; the deal was just too good. (See id. at 97.) During this three year period, Brodie received $300,000.00 in interest on his $500,000.00 loan. (Id. at 103-04.)

3. The December 1995 Rollover

In late 1995, Schick called Brodie with an even better deal. (Id. at 78-80.) According to Brodie, Schick told him that he was a valuable client and a reputable person who he liked, and wanted to restructure the loan to pay him more "iska." (Id. at 80.) Schick proposed returning $300,000.00 to Brodie through his attorney, Michael Silberberg,⁴ now practicing on his own, and rolling over the remaining $200,000.00 into another, similar escrow transaction. (See id. at 81.) Silberberg's $300,000.00 participation paid 24% annually. (Id. at 86.) Schick's rollover paid 2.25% per month, or 27% annually. (Id. at 126-27.)

Brodie could not believe his good fortune. He thanked Schick for his "benevolence," telling him "certainly I'll take it, because where else can I get such Iska payments anywhere else." (Id. at 81.) According to Brodie, both parties acknowledged that Schick was his lawyer, and Brodie sought and received assurances that the transaction was legal. (See id. at 82.) Although Brodie implied that he accepted the proposal in reliance on his trust in Schick and the assurances he received, it was the money that moved him:

Q: Did you rely on anything Schick did or told you before agreeing to split up the $500,000.00?

A: I relied on Iska payments coming every month on time for three and a half years or so, and all the agreements that he had structured, to my knowledge, were terrific, and that is what I relied on, nothing else.

(Id. at 97-98.)

The deal did not require another advance; Schick simply signed and delivered a new $200,000.00 promissory note, dated December 20, 1995, individually and on behalf of Venture Mortgage Fund, Ltd. (BTX 113.) The parties also signed an escrow agreement, (BTX 114), and a "shtar iska." (BTX 115.) The note called for monthly interest of $4,500.00, and repayment of the principal amount on March 21, 1996. Brodie received the monthly interest payments aggregating $10,500.00 on the two transactions in January, February and March 1996. (Brodie Tr. 89-91.) He did not receive any further interest payments from Schick on the $200,000.00 loan, and the principal was never repaid. (Id. at 95-96.) After the various Schick-related bankruptcy cases were filed, Brodie submitted proofs of claim, each in the sum of $200,000.00, in the Venture Mortgage Fund, L.P., (BTX 132), Schick (BTX 133), and Venture Mortgage Corp. cases. (BTX 134.)

4. The Amended Tax Returns

Ordinarily, this would end the story, but the Brodie matter has a strange twist. Brodie always reported the...