By Eric T. Berkman
A defaulting borrower should be allowed to proceed with its usury claim against a lender, even where language in a forbearance agreement purported to release the lender from any prior obligation or default, a Superior Court judge has ruled.
The borrower argued that the release did not cover its underlying claim because statutory causes of action enacted out of public-policy concerns, like the state's criminal usury statute, cannot be waived by contract.
Judge Allan van Gestel agreed, granting partial summary judgment to the borrower.
"Where a statute 'rests on grounds of public policy, it is not the power of one who may be directly affected by it to contract in advance that it may be disregarded,'" wrote van Gestel. "[The usury law] is sufficiently infected with public policy such that it cannot be the subject of any ordinary release or waiver."
The five-page decision is LR5-A Limited Partnership v. Meadow Creek, LLC, et al., Lawyers Weekly No. 12-348-07.
Cautionary note
Richard E. Briansky of Boston, who represented the borrower, said the decision provides a cautionary note to lenders that a broad, general release will not necessarily be enough to waive or release a usury claim.
"Lenders should anticipate that the court will impose a higher level of scrutiny when reviewing a waiver or release of a usury claim to make sure that the waiver or release is not merely an attempt to avoid the statutory protections set forth in the usury statute," he said.
Accordingly, Briansky advised lenders to consider including provisions to remedy any original usury violation. "These may include purging the usurious taint or providing new independent consideration in exchange for the release," he said.
Boston attorney David H. Rich, who represented the lender, warned that the decision could potentially chill commercial lenders' willingness to forbear under the terms of loan agreements with borrowers in default.
"In this instance, we have a situation where a borrower is admittedly in default, is represented by counsel, and, on two occasions, negotiated and executed forbearance agreements containing full and complete releases," he said. "I suspect that commercial lenders will be less inclined to engage in workout negotiations where apparently a party releasing all claims may not mean that they're releasing all claims."
Rich also noted that this was not a situation where the borrower was asked to give a release at the beginning of the loan.
"That would be no good," said Rich. "But in a forbearance agreement where the loan has accrued, courts [in other jurisdictions] have all determined that these kinds of releases are valid and entitled to be enforced according to their terms, including by releasing previously alleged claims."
Finally, Rich emphasized that his client intended to proceed with the litigation, which was initiated by his client's attempt to enjoin the borrower from interfering with its efforts to foreclose, adding that there had been no factual determination that the original loan had, in fact, violated the usury statute.
Release language
A commercial lender called Realty Financial Services, referred to in court documents as "LR5-A Group," issued a series of loans to Meadow Creek LLC, a real estate developer, for a project in Dracut.
Unspecified problems occurred that caused the borrower to default on the loans, which necessitated additional financing and foreclosure activities.
On Feb. 13, 2003, and again on Feb. 17, 2006, the parties executed forbearance agreements in connection with the additional financing.
Each agreement included language purporting to release the lender from any and all prior obligations and defaults.
Disputes between the two parties ultimately resulted in Superior Court litigation when the lender sought to enjoin the borrower from interfering with its right to foreclose.
Meanwhile, the borrower filed a counterclaim alleging that the terms of the loan — which carried a 21 percent per annum interest rate, compounding monthly based on the balance on the principal — violated the state criminal usury statute, G.L. c. 271, Sect. 49.
The lender, however, maintained that any such claim was barred by the release language in the forbearance agreement.
Policy interests
Van Gestel rejected the lender's argument that the releases — executed by two commercial entities represented by counsel — included claims under the usury law.
According to the lender, if the court were to rule otherwise, no lawsuit alleging such a violation would ever settle, since the releases would be subject to collateral attack as being against public policy.
But van Gestel looked to the Supreme Judicial Court's 1980 decision in Begelfer v. Najarian, which held that the usury statute was a clear statement of Massachusetts policy that was a "matter of grave legislative concern."
Because the usury statute was effectively entrenched in public policy, it could not be subject to an ordinary release or waiver, van Gestel ruled.
Nonetheless, the judge emphasized that the borrower would not necessarily prevail on the usury issue itself, since there had been no factual determination as to whether the lender had protected itself from liability under the statute by filing the necessary notices with the state attorney general, or whether all the circumstances surrounding the loan did in fact amount to usury.
"What remains with regard to the other grounds promoting the release language or attacking it, are all too factually intensive to be resolved on the present motions," said van Gestel, granting a partial summary judgment to the borrower.
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October 29, 2007
