Since bankruptcy lawyers work all day in the world of debt and shady loans, you would think they would come across violations of the usury laws, concerning illegally high interest rates, all the time.
You would be wrong.
For some reason, although millions of people file bankruptcy every year, invocations of state usury law is comparatively rare.
So it’s a bit noteworthy that bankruptcy judge Melvin Hoffman invoked the Massachusetts criminal usury statute recently in an opinion concerning the bankruptcy of the Shifting Sands motel and condo in Dennisport on Cape Cod.
The law in question, Massachusetts General Laws chapter 271, section 49, makes it a crime to charge more than 20% annual interest on a loan, with only a few specified exceptions.
Judge Hoffman looked at the claim submitted in the bankruptcy case by the lenders who financed Shifting Sands and concluded that between all the different fees they were charging, the effective interest rate was at least 32 percent. He then denied the interest portion of the claim outright. The case is In re Loucheschi, LLC.
Although In re Loucheschi is a Chapter 11 business case, it should raise a couple of questions in the minds of inquisitive consumers thinking about bankruptcy.
First, what happens when a company violates a criminal usury statute? The answer, according to the Masachusetts Supreme Judicial Court in their 1980 opinion in the Begelfer v. Najarian case, is that just about anything could happen: the SJC gave lower courts a virtual carte blanche to fashion remedies that they consider fair under the circumstances.
Second, debtors may ask why aren’t all my 30% interest rate credit cards running afoul of this usury law? The answer is one of the reasons that you mail you payments to far flung places like Wilmington, Delaware or South Dakota. By claiming that your credit card contract is governed by the laws of those bank friendly states, the card companies think they have exempted themselves from the local usury laws.
Whether or not that remains the case in the future depends in part on whether some bold debtors are able to hook up with bold attorneys and make the challenge . . .
By Doug Beaton