Szerdahelyi v. Harris

• Decision Date: 13 February 1986
• Citation: 490 N.E.2d 517,499 N.Y.S.2d 650,67 N.Y.2d 42
• Parties: , 490 N.E.2d 517 Nelly SZERDAHELYI, Appellant, v. Barbara L. HARRIS, as Executrix of Martin Harris, Deceased, et al., Respondents.
• Court: New York Court of Appeals Court of Appeals

Page 650

499 N.Y.S.2d 650

67 N.Y.2d 42, 490 N.E.2d 517

Nelly SZERDAHELYI, Appellant,

v.

Barbara L. HARRIS, as Executrix of Martin Harris, Deceased,

et al., Respondents.

Court of Appeals of New York.

Feb. 13, 1986.

The issue is whether a lender, by tendering a return of excess interest paid by a borrower on a usurious loan, may establish a right to recover the loan principal plus legal interest. Section 5-511 of the General Obligations Law provides otherwise but defendants claim that the 1965 amendment to section 5-519 of the General Obligations Law, not previously interpreted by this court, permits them to relieve themselves of the illegality and revive the void contract. We hold that it does not.

The question arises from these facts. Plaintiff and Patrick Laurent were tenants in an apartment building that was convert to cooperative ownership. Plaintiff elected to purchase their apartment but she was unable to secure a conventional mortgage without Laurent, who was then out of the country. Accordingly, she consulted Martin Harris who was attorney for Laurent and his brother. Harris tried to secure a mortgage but when he was unable to do so, he approached some of his clients in an effort to arrange a short-term loan for plaintiff that could be superseded by a mortgage upon Laurent's return. Defendant Mensch was one of those Harris approached. She agreed to make the loan by liquidating all or part of her interest in a Dreyfus account that paid a return of approximately 18% per year, provided that the loan was fully secured and that the return was sufficient to compensate her for any loss arising from the liquidation of her account. Harris claimed that to ensure this he contacted the Banking Department and was told that a return of 21% was permissible. In fact, the maximum allowable interest rate at the time, as fixed by Banking Law § 14-a, was 16%.

On November 17, 1981, plaintiff purchased the cooperative apartment. The purchase was financed by her check for $14,161.33 and a check for $25,000 drawn on the Mensch account with Dreyfus Liquid Assets, Inc. payable to the order of attorney Harris, as her agent, and indorsed by him. Harris delivered the checks to the cooperative's sponsor, and at the same time plaintiff executed and delivered to Harris her note for $25,000, bearing interest at the rate of 21%, and payable within one year. The note was guaranteed by Laurent's brother. As additional security, plaintiff delivered to Harris a stock certificate, representing her interest in the cooperative corporation, and an irrevocable stock power.

On November 2, 1982, 15 days before the loan became due and after plaintiff had paid interest for 11 months, plaintiff's attorneys sent a letter to Harris stating that the loan was usurious. Harris then sent plaintiff a check for the excess over the allowable interest on the loan. When the check was returned by her attorneys, Harris sent it to plaintiff once more, denominating it an unconditional tender made pursuant to law. She again rejected it and brought this action seeking judgment declaring that the loan was illegal because usurious, that the note and stock power were void and canceled, and directing that these documents and the stock certificate be returned to her along with all sums paid. Plaintiff moved for summary judgment and Special Term granted her the requested relief.

A divided Appellate Division, 110 A.D.2d 550, 488 N.Y.S.2d 164, reversed and remanded the action for trial. Justice Bloom, writing for himself and Justice Carro, construed General Obligations Law § 5-519 as permitting a lender who tenders back the excess interest on a usurious loan to recover the principal and legal interest. Justice Asch concurred in that result but on different grounds. He viewed the transaction as one involving a purchase-money mortgage and thus exempt from the provisions of the usury laws. Justice Sandler, joined by Justice Lynch, dissented. Although he found the statutory language could be read as inconsistent with the expressed legislative intention of conforming the statute to prior judicial precedent, he believed that the amendment was not intended to overturn decisions holding that a tender back of excess interest does not entitle the lender to recover the underlying debt and unpaid lawful interest. In Justice Sandler's view of the case the lender was entitled to only lawful interest previously paid. We find no inconsistency between amended section 5-519 of the General Obligations Law and prior case law and concur in the dissenters' result. Accordingly, the order of the Appellate Division should be modified to grant plaintiff partial summary judgment declaring the note and stock power void and ordering these, as well as the stock certificate, returned to her, and directing defendants to pay plaintiff the excess over the lawful interest previously paid on the loan.

Preliminarily, Justice Asch's characterization of the transaction as a purchase money mortgage must be addressed. Purchase-money mortgages constitute a narrow exception to the restrictions on interest found in the usury laws and thus if this transaction involved a purchase-money mortgage plaintiff might well have been bound by her agreement (see, Mandelino v. Fribourg, 23 N.Y.2d 145, 151, 295 N.Y.S.2d 654, 242 N.E.2d 823). Defendants did not raise this defense at Special Term. Apparently they never considered their transaction to be in the nature of a mortgage, and correctly so. A purchase-money mortgage is generally defined as "a mortgage executed at the time of purchase of the land and contemporaneously with the acquisition of the legal title, or afterward, but as part of the same transaction, to secure an unpaid balance of the purchase price" (38 N.Y.Jur., Mortgages and Deeds of Trust, § 7, at 25 [citing Boies v. Benham, 127 N.Y. 620, 28 N.E. 657] ). Ms. Mensch, the lender in this case, was neither a seller of real property nor did she take back a mortgage to secure money borrowed to acquire any such property.

Turning to the main issue, the consequences of the lender's offer to tender back to plaintiff the amount of excess interest above the legally authorized rate she paid on this loan are governed by General Obligations Law § 5-519. It provides: "Every person who shall repay or return the money, goods or other things so taken, accepted or received, or the value thereof, shall be discharged from any other or further forfeiture or penalty which he may have incurred under sectio 5-511 or 5-513, by taking or receiving the money, goods or other things so repaid, or returned, as aforesaid." (Emphasis added.) The dispute centers on the italicized words. Defendants contend that nullification of the usurious contract is one of the penalties provided by section 5-511 ¹ and thus the language of section 5-519 permits recovery of the principal and lawful interest if the excess is tendered to the borrower. Plaintiff counters that defendants' construction is inconsistent with judicial precedent and with the intention of the drafters of the legislation and, further, that such a construction permits easy avoidance of the proscriptions against excessive interest because any lender faced with a disavowal of a usurious loan could recover it, notwithstanding the illegality, merely by tendering the excess interest to the borrower.

Analysis starts with an understanding of General Obligations Law §§ 5-511 and 5-513. Section 5-511 deals with two types of lenders. First, referring to loans made by other than banks or savings and loan associations, it declares that all bonds, notes, contracts, deposits of goods, and the like arising within a usurious transaction are void. Thus, when a court deems a transaction to be usurious, it must declare the transaction and its supporting documents void, enjoin prosecution on them and order that all documents and collateral be canceled and surrendered. Second, section 5-511 provides that when the lender is a bank or savings and loan association, the usurious transaction is not void, but any interest thereon is forfeited. A penalty is also assessed: any excess interest paid by a borrower to the institution may be recovered from it in twice the amount paid. Section 5-513 provides that a borrower who is subject to a usurious transaction may bring an action to recover the excess interest paid on the loan.

Contrary to defendants' contentions, section 5-519's bar to further penalties or forfeitures after the tender of illegal interest does not foreclose a judicial determination that a usurious instrument is void, and that the underlying transaction and supporting documents have no legal force or binding effect. Such a determination is not just "another" penalty or forfeiture contained in sections 5-511 or 5-513 and it should not be confused with the penalties or forfeitures imposed by article 5 of the General Obligations Law. A penalty is commonly understood to be the exacting of a sum of money as punishment for performing a prohibited act, or for not performing a required act (see, Black's Law Dictionary, at 1020 [5th ed 1979] ), e.g., the payment of double the amount of excess interest required by section 5-511. A forfeiture is the loss of a right by the commission of a crime or fault (id., at 584), e.g., the forfeiture of interest provided in section 5-511. A legal determination that a transaction governed by section 5-511 is void is not a penalty or a forfeiture. It is no more than the implementation of a statutory expression of the familiar rule that illegal contracts, or those contrary to public policy, are unenforceable and that the courts will not recognize rights arising from them (McConnell v. Commonwealth Pictures Corp., 7 N.Y.2d 465, 469, 199 N.Y.S.2d 483, 166 N.E.2d 494; Sternaman v. Metropolitan Life Ins. Co., 170 N.Y. 13, 19, 62 N.E. 763, rearg. denied 170 N.Y. 616). The law leaves the parties to such agreements where it finds them (Hettich v. Hettich, 304 N.Y. 8, 105...