NV One, LLC v. Potomac Realty Capital, LLC
84 A.3d 800, 2014 R.I. LEXIS 17, 2014 WL 606584 (2014)
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Rule of Law:
A usury savings clause in a commercial loan document is unenforceable as a violation of public policy and cannot validate a contract that is otherwise void for charging a usurious interest rate.
Facts:
- In July 2007, NV One, LLC entered into a loan agreement with Potomac Realty Capital, LLC (PRC) for a principal amount of $1,800,000 to renovate a property.
- The loan documents included a 'usury savings clause' intended to automatically reduce any interest charged to the maximum legal rate if it exceeded the statutory limit.
- PRC never disbursed the full $1.8 million loan amount to NV One; the maximum amount ever disbursed was $1,007,390.52.
- PRC established 'interest reserve' and 'renovation reserve' accounts but did not segregate these funds, and the loan documents specified NV One would not earn interest on them.
- Despite not disbursing the full amount, PRC consistently charged NV One interest calculated on the entire $1,800,000 face value of the note.
- This method of calculation resulted in effective annual interest rates that exceeded Rhode Island's statutory maximum of 21%.
- After NV One allegedly defaulted, PRC imposed a default interest rate of 24%, which was facially usurious and resulted in an effective rate of over 43% when calculated against the disbursed amount.
- PRC sent NV One a notice of default and initiated foreclosure proceedings on the property.
Procedural Posture:
- NV One, LLC and its guarantors (plaintiffs) filed a complaint against Potomac Realty Capital, LLC (PRC) in Rhode Island Superior Court (trial court), alleging usury and seeking an injunction to prevent foreclosure.
- The plaintiffs moved for partial summary judgment on the issue of liability for the usury violation.
- The Superior Court justice granted the plaintiffs' motion, finding the loan usurious and declaring the usury savings clause unenforceable.
- The trial court entered an order declaring the loan void and removing PRC's mortgage lien from the property records.
- PRC (appellant) appealed the Superior Court's order to the Supreme Court of Rhode Island. NV One, LLC and its guarantors are the appellees.
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Issue:
Does a usury savings clause in a commercial loan document validate a contract that is otherwise usurious under Rhode Island law?
Opinions:
Majority - Chief Justice Suttell
No. A usury savings clause does not validate an otherwise usurious contract because such clauses are unenforceable as against the public policy of Rhode Island. The court determined that the loan was clearly usurious because PRC charged interest on the full $1.8 million face value of the loan while only disbursing a little over $1 million. Under Rhode Island law, the interest rate must be calculated based on the funds actually received by the borrower, and PRC's calculation method resulted in an effective interest rate well above the 21% legal limit. The court reasoned that Rhode Island has a long-standing, strong public policy against usury, which places the burden of compliance squarely on the lender. Enforcing a usury savings clause would contravene this policy by incentivizing lenders to charge excessive rates, knowing that the only penalty would be a reduction to the legal limit upon challenge, thereby shifting the burden of vigilance to the borrower. The legislature's creation of a specific, narrow exception for certain large commercial loans (which PRC failed to utilize) further demonstrates its intent to strictly enforce the usury statute in all other cases.
Analysis:
This case establishes for the first time in Rhode Island that usury savings clauses are void as against public policy. The decision reinforces the state's strict liability approach to usury laws, meaning a lender's intent is irrelevant. By invalidating these clauses, the court prevents lenders from using boilerplate language to circumvent statutory penalties for charging illegal interest rates. This ruling solidifies that the entire burden of ensuring a loan complies with usury statutes rests on the lender, and failure to do so can render the entire loan agreement void, not merely reformable to the legal rate.
