Soaring Pine Cap. Real Est. & Debt Fund v. Park St. Grp. Realty Serv.

• Docket Number: Docket No. 163320
• Decision Date: 23 June 2023
• Citation: 999 N.W.2d 8,511 Mich. 89
• Parties: SOARING PINE CAPITAL REAL ESTATE AND DEBT FUND II, LLC, Plaintiff/Counterdefendant-Appellee/Cross-Appellant, v. PARK STREET GROUP REALTY SERVICES, LLC, Park Street Group, LLC, and Dean J. Groulx, Defendants/Counterplaintiffs-Appellants/Cross-Appellees.
• Court: Michigan Supreme Court

999 N.W.2d 8

511 Mich. 89

SOARING PINE CAPITAL REAL ESTATE AND DEBT FUND II, LLC, Plaintiff/Counterdefendant-Appellee/Cross-Appellant,

v.PARK STREET GROUP REALTY SERVICES, LLC, Park Street Group, LLC, and Dean J. Groulx, Defendants/Counterplaintiffs-Appellants/Cross-Appellees.

Docket No. 163320

Supreme Court of Michigan.

Argued on application for leave to appeal January 12, 2023

Decided June 23, 2023

Martha D. Anderson, J.

Conlin, McKenney & Philbrick, PC (by W. Daniel Troyka) and Mark Granzotto PC, Royal Oak (by Mark R. Granzotto) for Soaring Pine Capital Real Estate and Debt Fund II, LLC.

Plunkett Cooney, Bloomfield Hills (by Mary Massaron) for Park Street Group Realty Services, LLC; Park Street Group, LLC; and Dean J. Groulx.

Bodman PLC, Detroit (by Thomas J. Rheaume, Jr. and Fawzeih H. Daher) for the Business Law Section of the State Bar of Michigan, amicus curiae.

BEFORE THE ENTIRE BENCH

OPINION

Cavanagh, J.

₉₄This case involves Michigan’s long-standing prohibition on excessive interest rates for certain loans (known in legal circles as "usury laws").We take this opportunity to resolve two issues of first impression under Michigan usury law.

The first issue is whether a court may enforce a "usury savings clause," i.e., a contractual term requiring a borrower to pay the maximum legal interest rate if the court determines that the other contractual terms impose an illegal interest rate.We hold that in determining whether a loan agreement imposes interest that exceeds the legal rate, a usury savings clause is ineffective if the loan agreement otherwise requires a borrower to pay an illegal interest rate.This is so even if some of the interest is labeled something else, such as a "fee" or "charge."Enforcing a usury savings clause in this circumstance would undermine Michigan’s usury laws because it would nullify the statutory remedies for usury, thereby relieving lenders of the obligation to ensure their loans have a legal interest rate.In short, "[a] lender cannot avoid the consequences₉₅ of contracting for a usurious interest rate simply by including a savings clause in the contract."Armstrong v Steppes Apartments, Ltd,57 S.W.3d 37, 47(Tex App.2001).

The second issue is whether a lender commits a crime if they seek to collect an unlawful interest rate in a lawsuit.We hold that seeking to collect an unlawful interest rate in a lawsuit, standing alone, is insufficient to trigger criminal liability under Michigan’s criminal usury statute, MCL 438.41.The Legislature did not intend to criminally punish a lender for up to five years in prison for merely invoking the judicial process to collect on a debt.Seeking relief in a court of law—rather than through extrajudicial means—is generally encouraged, not punished with a felony conviction.The appropriate remedy for a lender’s abusive lawsuit is success for the borrower in that lawsuit and appropriate civil sanctions, not a criminal conviction for usury.

We reverse the decisions of the Court of Appeals and the Oakland Circuit Court to the extent that they are inconsistent with these holdings, vacate the remainder of those decisions, and remand this case to the circuit court for reconsideration in light of this opinion.

I.FACTS & PROCEDURAL HISTORY

Plaintiff, Soaring Pine Capital Real Estate and Debt Fund II, LLC(Soaring Pine), is a nonbank investment group that lent defendant Park Street Group Realty Services, LLC (Park Street)¹ $1,000,000 to "flip" tax-foreclosed₉₆ homes in Detroit, i.e., to acquire such homes, renovate them, and then sell them for a profit.²The mortgage note for this loan had a stated interest rate of 20%, but there were fees and charges associated with the loan that, if considered interest, pushed the effective interest rate above 25%.The mortgage note also contained a provision stating that the note should not be construed to impose an illegal interest rate.³The parties and lower courts refer to this provision as a "usury savings clause."

[1] After paying more than $140,000 in interest on the loan, Park Street discontinued further payments.₉₇Soaring Pine sued, alleging multiple counts of breach of contract and fraud.⁴The parties eventually filed cross-motions for summary disposition under MCR 2.116(C)(10).Park Street argued that Soaring Pine violated the criminal usury statute by knowingly charging an effective interest rate exceeding 25% and therefore is barred by the wrongful-conduct rule from recovering on the loan.SeeMCL 438.41.⁵Soaring Pine countered that the fees and charges associated with the loan are not interest and, regardless, the note has a usury savings clause that prevents it from charging a usurious rate.Soaring Pine further argued that, assuming it had engaged in criminal usury, it can still recover the loan principal and would only be precluded from collecting the interest.

The circuit court granted in part and denied in part both parties’ motions for summary disposition.The court agreed with Park Street that the purported fees ₉₈and expenses tied to the loan are really disguised interest and that, with this interest included, Soaring Pine is seeking to collect an interest rate above 25%.⁶The court further held that there was no question of fact that Soaring Pine charged a criminally usurious interest rate in violation of MCL 438.41.However, the court agreed with Soaring Pine that the usury savings clause is enforceable and therefore the note itself is not facially usurious.Finally, the court agreed that the appropriate remedy is to relieve Park Street of its obligation to pay the interest on the loan but not its obligation to repay the principal.⁷

Both parties filed interlocutory applications for leave to appeal challenging different aspects of the circuit court’s decision.The Court of Appeals granted both applications and affirmed.Soaring Pine Capital Real Estate & Debt Fund II, LLC v Park Street Group Realty Serve., LLC,337 Mich App 529, 976 N.W.2d 674(2021).Relevant for our purposes, the Court of Appeals held that the usury savings clause in the parties’ mortgage note is enforceable and that, read together ₉₉with a stated interest rate below the legal limit, the note is not facially usurious.Id. at 540-547, 976 N.W.2d 674.However, it held that Soaring Pine nonetheless violated the criminal usury statute by "seeking to collect (‘take or receive’) through this lawsuit an effective interest rate above the statutory maximum."Id. at 551, 976 N.W.2d 674, quotingMCL 438.41.⁸

Both parties sought leave to appeal in this Court, and in lieu of granting leave to appeal, we ordered oral argument on the applications.We directed the parties to address

(1) whether a usury-savings clause is void as a violation of public policy; (2) whether the plaintiff violated the crimi- nal usury statute, MCL 438.41, by seeking to collect on the contract in court or by engaging in any other acts that violated the statute; and (3) if the plaintiff violated MCL 438.41, whether it is barred by the wrongful conduct rule from recovering the principal on the loan.[Soaring Pine Capital Real Estate & Debt Fund II, LLC v Park Street Group Realty Sen’s., LLC,509 Mich. 875, 875-876, 970 N.W.2d 676(2022).]

₁₀₀II. STANDARDOF REVIEW

[2–4] Whether a contractual provision is unenforceable as against public policy is a question of law that we review de novo.Terrien v Zwit,467 Mich. 56, 60-61, 648 N.W.2d 602(2002).We also review de novo questions of statutory interpretation.In re Reliability Plans of Electric Utilities for 2017-2021,505 Mich. 97, 118, 949 N.W.2d 73(2020)."Reviewing an issue de novo means that we review the legal issue independently, without deference to the lower court."Id. at 118-119, 949 N.W.2d 73.

III.THE ENFORCEABILITY OF USURY SAVINGS CLAUSES

[5, 6]We first consider whether a usury savings clause can be enforced to avoid an illegal interest rate.We hold that a usury savings clause is ineffective if a note otherwise facially requires the borrower to pay a usurious interest rate, even if the stated interest in the note is not usurious.⁹This holding is consistent with longstanding Michigan public policy that protects borrowers from excessive interest rates by placing the primary burden on the lender to know and comply with the law when imposing interest, fees, and charges on a loan.However, a usury savings clause may be enforceable in circumstances where this public policy is not undermined, such as if the interest due is pushed ₁₀₁above the legal amount because of a future contingency or event after the loan is entered.

We leave it to the circuit court on remand to reassess, as necessary, the note in this case and its effect on Soaring Pine’s claims.

A.LEGAL BACKGROUND

[7, 8]"[C]ourts have a duty to refuse to enforce a contract that is contrary to public policy."Sands Appliance Servs, Inc v Wilson,463 Mich. 231, 239, 615 N.W.2d 241(2000).Thus, while the general rule is that the parties’ contractual agreement should be "enforced as written," this rule does not apply if a "provision would violate law or public policy."Rory v Continental Ins Co,473 Mich. 457, 470, 703 N.W.2d 23(2005).

[9–11]"Public policy" in this context is a legal term of art. that refers to policies that are "clearly rooted in the law."Terrien,467 Mich. at 67, 648 N.W.2d 602.Relatedly, there must be " ‘definite indications in the law of the sovereign to justify the invalidation of a contract as contrary to [public] policy.’ "Id. at 68, 648 N.W.2d 602, quotingMuschany v United States,324 U.S. 49, 66, 65 S Ct 442, 89 L Ed 744(1945).However, a contractual provision can violate public policy even if there is no statute or prior caselaw expressly prohibiting that contractual provision.SeePeople v Smith,502 Mich. 624, 918 N.W.2d 718(2018)(in which a majority of the Court agreed, as a matter of first impression, that a "bar-to-office" plea agreement violates public policy under the common law in certain...