On February 18, 2014, in a case of first impression in Rhode Island, the Rhode Island Supreme Court rendered an opinion in NV One, LLC v. Potomac Realty Capital, LLCholding that usury savings clauses – provisions commonly found in loan agreements – are void against public policy and unenforceable. Defendant Potomac Realty Capital (“Potomac”) entered into a loan agreement with plaintiff NV One, LLC (“NV One”) under which Potomac agreed to loan NV One up to $1.8 million for the purchase and renovation of real estate. Due to certain holdbacks for interest and renovations, the entire $1.8 million loan amount was not disbursed to NV One at the closing of the loan, nor was it ever disbursed. Notwithstanding these holdbacks, Potomac charged NV One interest for the entire loan amount under the terms of the loan documents.
After a dispute arose between the parties, NV One brought suit against Potomac claiming, among other things, that the interest charges were usurious and violated Rhode Island’s usury law. R.I. Gen. Laws 6-26-2(a) provides that interest rates in excess of 21 percent per annum are usurious and void. Potomac did not dispute that the rate was usurious, but argued that the loan documents contained a usury savings clause providing that any amounts paid by NV One in excess of the maximum allowable amount would be deemed payments to reduce the principal of the loan. The Superior Court held that the usury savings clause, in light of the public policy, legislative intent, and plain meaning of Rhode Island’s usury law, was unenforceable. On appeal, the Rhode Island Supreme Court agreed. The Court held that “the enforcement of usury savings clauses would entirely obviate any responsibility on the part of the lender to abide by the usury statute, and would, in essence, swallow the rule.” In reaching this holding in NV One, the Rhode Island Supreme Court followed a group of other jurisdictions that adopted an absolute view that usury savings clauses are per se invalid because the intent of the lender is irrelevant based on the language of the state’s usury statute.
The validity of usury savings clauses has received increased attention in recent years as lenders have sought to apply new forms of fees and charges on loans made to borrowers. Its important that lenders be aware of the validity of usury savings clauses in the relevant jurisdiction given that their potential unenforceability could lead to harsh outcomes, such as forfeiture of interest, the loan becoming entirely void, or penalities being assessed on the illegal interest.
Notably, the holding in NV One may not have not an impact on sizeable commercial loans. The Rhode Island usury statute has an exception for commercial loans that (1) exceed $1 million; (2) do not secure the borrower’s primary residence; and (3) are certified by a certified public accountant pursuant to a pro forma analysis as capable of being repaid.
A copy of the NV One decision is available here.