On September 5, 2023, Justice Doyle of the 7th Judicial District Commercial Division issued a decision in Samson Lending LLC v. Greenfield Mgt. LLC, 2023 NY Slip Op. 23267, refusing to enforce a choice of law provision that would have saved a contract that was usurious under New York law, explaining:
Parties to a contract are typically free to enter into choice-of-law provisions that will be enforced by New York courts.. We begin with the basic premises that courts will generally enforce choice-of-law clauses and that contracts should be interpreted so as to effectuate the parties’ intent. In a case based on New York law, the United States Supreme Court held that a choice-of-law provision in a contract may reasonably be read as merely a substitute for the conflict-of-laws analysis that otherwise would determine what law to apply to disputes arising out of the contractual relationship.
The freedom to contract, however, has limits. Courts will not, for example, enforce agreements that are illegal or where the chosen law violates some fundamental principle of justice, some prevalent conception of good morals, some deep-rooted tradition of the common weal.
The agreement herein states that Virginia law is to be applied, and Virginia law would allow enforcement of the interest rate mandated by the loan agreement. Defendants argue that regardless of the agreement’s provision that Virginia substantive law would apply to the agreement’s terms, that the application of Virginia law (which would allow a 34% interest rate) would be so violative of New York’s public policy that the choice-of-law provision is invalid.
The Court agrees.
Certainly, New York has a sufficient nexus to the case to allow this Court to consider the defendants’ public policy argument. Plaintiff is a corporation authorized to conduct business in New York, is located in New York, made all its business decisions relevant to the agreement in New York, and the loan was made in New York. In short, the entire loan agreement and resultant transactions were conducted in New York. The prohibition against usury contained in GOL § 5-501 clearly states no person or corporation shall charge an usurious interest rate, and there is not a geographic limitation on that language limiting its application to only New York residents. Thus, New York has a strong public policy to prohibit corporations that are conducting business in the state, such as plaintiff, from charging usurious interest rates no matter whether the borrower is a New York resident or a New York non-domiciliary.
Under the public policy exception, when otherwise applicable foreign law would violate some fundamental principle of justice, some prevalent conception of good morals, some deep-rooted tradition of the common weal, the court may refuse to enforce it. This public policy exception is reserved for those foreign laws that are truly obnoxious. The party seeking to invoke the exception bears a heavy burden of proving that application of the chosen law would be offensive to a fundamental public policy of this State.
Virginia law allows interest rates that would be criminally usurious in New York. Given New York’s deeply-rooted public policy against usury (300 years old) the Court holds that the policy against usury is fundamental to New York’s principles of justice and the application of Virginia law to the instant action would violate some fundamental principle of justice, some prevalent conception of good morals, some deep-rooted tradition of the common weal.
Multiple court decisions have determined that New York laws against usury constitute fundamental public policy. Further, New York has chosen to make it a felony to charge more than 25% annual interest. That New York chose to criminalize such conduct is further evidence that its usury prohibition is a fundamental public policy.
Furthermore, when compared to other instances wherein New York appellate courts have determined that a foreign jurisdiction’s laws violate New York public policy such that a choice-of-law provision should be void, it is clear that New York’s usury statutes satisfy the heavy burden of proving that application of the chosen law would be offensive to a fundamental public policy of this State.
Given the Court of Appeals recognition of the historical basis for New York’s usury statutes in Adar Bays, LLC v. GeneSYS ID, Inc., supra, as well as the harms those statues seek to avoid, the Court must conclude that the application of Virginia’s usury laws to the agreement and thus allowing a New York business to charge interest that would be usurious under New York law would be offensive to the fundamental public policy of this State. Although other states may allow usurious interest rates to be charged, the history of New York usury laws establish that rates of interest that New York deems criminally usurious cannot be charged and doing so violates a fundamental policy of New York State.
Thus, the choice-of-law provision is void, and New York law will apply to the agreement.
(Internal quotations and citations omitted).