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Cicero v. D’Amico

A-4070-97T3 (N.J. Super. App. Div. 1999) (Unpublished)

USURY—To cause forfeit of interest on a usurious loan, there must be both a greater interest rate than allowed by law and corrupt intent.

A property owner raised the defense of usury under N.J.S. 31:1-1 in response to a foreclosure action . A business owner went to a friend for a loan to help his struggling business. He offered to pay 16% interest. The security for the loan was a third mortgage on the business owner’s residence and on the business’ property. The action was to foreclose the mortgage on the residence because superior lien holders had foreclosed on the business property, but the proceeds were insufficient to satisfy the friend’s loan. The parties stipulated that the highest legal rate of interest applicable at the time the loan was made was 13%. The lower court, relying upon Ditmars v Camden Trust Co., 10 N.J. 471 (1952), refused to apply the forfeiture of interest penalty provided by N.J.S. 31:1-3, and instead, held that the borrower would be credited for payments made above the 13% rate. On appeal, the borrower argued that the lower court’s conclusion flew in the face of the unambiguous statutory provision of the New Jersey statute that provides that in any action to enforce a note or mortgage where the interest rate is higher than that allowed by law, “the amount or value actually lent without interest or costs on the action, may be recovered, and no more.” The statute further provides that any illegal interest is to be deducted from the principal amount due, and, in such cases, the lender may recover only the amount remaining.

The Appellate Division, though questioning how the parties and the lower court reached their conclusion that 13% was the maximum legal interest rate, pointed out that in order for the statute to be applicable, a court must first determine that the agreement was usurious. In Ditmars, the New Jersey Supreme Court observed that usury requires not only a greater interest rate than allowed by law, but also corrupt intent. The burden of proving corrupt intent is on the party who asserts the usury. “If neither party intend it, and act [b]ona fide and innocently, the law will not infer a corrupt agreement.” The borrower unsuccessfully argued two distinguishing points. First, it contended that Ditmars was decided prior to a 1953 amendment to the statute. To this, the Court responded that the statute has been substantially the same since 1864. Second, the borrower contended that in Ditmars, the interest rate was calculated in error, but here, the interest rate was the correctly agreed-upon rate. The Court responded by pointing out that the conclusion of Ditmars was that if there was no intention to evade the usury laws by either party, the statute would not apply. In conclusion, the Court held that where there is no intent to evade the usury laws, the remedy is to allow the lender to collect “what is justly and in good faith due, that is, the amount actually advanced, with lawful interest.”


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