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Court Applies New York Usury Cap Despite Choice-of-Law Provision

The U.S. District Court for the Southern District of New York recently refused to apply a contractual choice of Delaware law, because the provision violated fundamental New York public policy – its usury limits. The lawsuit involves a credit card consumer debtor who challenged the collection of the credit card debt by non-bank assignees, even though the underlying contract was made by a national bank with the consumer.  Plaintiff alleged violations of: (1) the Fair Debt Collection Practices Act (FDCPA); (2) New York’s civil and criminal usury laws; and (3) state unfair deceptive acts and practices (UDAP) based on the defendants’ alleged misrepresentations that they were permitted to collect interest at the usurious rate.

Defendants moved for summary judgment, arguing plaintiff’s state-law claims were preempted by the National Bank Act (NBA). Judgment was entered for the defendants, but overturned by the Second Circuit Court of Appeals, which held the NBA did not preempt state-law usury statutes under these circumstances. The Court of Appeals left open the question of the applicable state law, given the choice-of-law contractual provision. The choice-of-law question was important because Delaware law provides no usury cap, while New York law provides for a cap of 25%.

On remand, the defendants once again moved for summary judgment. The district court judge found that the New York criminal statute setting forth the usury cap did not provide a private right of action for the plaintiff to bring suit under state law. Moreover, the parties agreed that the civil usury cap did not apply. Judgment was therefore entered for the defendants on plaintiff’s state law claims that were based strictly on the violation of New York State’s civil and criminal usury caps. However, even though the plaintiff could not bring suit under New York’s criminal statute, the criminal usury cap still applied to the plaintiff’s debt, and was therefore available as a predicate for the FDCPA claims if New York law applied.

As to choice-of-law, the defendants argued that Delaware law applied because of the contractual provision, so there was no predicate act for liability under the FDCPA. The district court judge noted that New York courts enforce choice-of-law provisions where a reasonable relationship exists between the state selected and the agreement, and the law does not violate a fundamental public policy of New York. The defendants argued that because the account would be issued and administered by a Delaware entity a reasonable relationship was created. The district court judge did not reach a conclusion regarding whether there was a reasonable relationship between New York and the agreement, but stated that most of the facts did not support such a finding.

However, even if a reasonable relationship existed, application of Delaware law would violate a fundamental New York public policy. New York has a long tradition of usury caps, “to protect desperately poor people from the consequences of their own desperation.” In addition, a number of New York State court cases had applied New York’s usury provisions despite the parties’ choice of another forum’s laws. The choice-of-law provision was therefore unenforceable on that basis. New York law applied, and violation of the usury statute was therefore available as a theory for a predicate act under the FDCPA.