Facts: A syndicator was ordered to pay an investor damages for committing fraud in the sale of real estate limited partnership interests. The syndicator and investor entered into multiple forbearance agreements to delay the syndicator’s payment of the judgment. Each extension agreement required the syndicator to pay a new forbearance fee. When combined, the fees exceeded 10% of the judgment amount. The syndicator paid all the forbearance fees along with the principal and interest due to the investor.
Claim: The syndicator later sought treble money losses from the investor, claiming the forbearance fees violated California usury law since the forbearance fees became part of the judgment and the total amount of the forbearance fees exceeded the judgment’s maximum interest rate of 10%.
Counter claim: The investor claimed the forbearance fees did not violate California usury law since forbearance agreements are separate from the judgment and are not subject to usury law.
Holding: A California court of appeals held the forbearance fees did not violate usury law and the syndicator was not entitled to compensation since California usury law only protects a borrower from overpaying interest on a loan, but does not apply to forbearance fees agreed to by parties of a court ruling, which are separate from the judgment’s interest. [Bisno v. Kahn (April 25, 2014)_CA4th_]
Editor’s note – For an additional discussion of California usury law, see first tuesday Real Estate Finance Chapter 41: Usury and the private lender.