New York Supreme Court Vacates Confession of Judgment Based on a Criminally Usurious Contract

The Supreme Court of New York, Westchester County, recently granted defendant’s motion to vacate a confession of judgment entered against it, voiding the underlying written merchant agreement, and cancelling and enjoining prosecution of the agreement on the ground that the transaction was usurious. See Merchant Funding Services, LLC v. Volunteer Pharmacy Inc., 44 N.Y.S.3d 876 (Sup. Ct. 2016).  In the case, plaintiff filed an affidavit of nonpayment with the County Clerk in support of the entry of a confession of judgment against defendant.  The affidavit of nonpayment stated, in relevant part, that defendant entered into a secured merchant agreement pursuant to which “[plaintiff] agreed to buy all rights of the Defendant[’s] future accounts receivable, having a face value of $74,750.00.  The purchase price for these receivables was $50,000.00.”  Defendant moved to vacate pursuant to CPLR §5015 on the ground that the underlying Merchant Agreement constituted a usurious loan, cloaked as a purchase of defendant’s receivable, and that enforcement of a judgment based on a usurious contract is improper and against public policy.  CPLR 5015(a)(3) provides that the court may vacate a judgment on grounds of “fraud, misrepresentation, or other misconduct of an adverse party.”  Specifically, defendant argued that the Merchant Agreement is criminally usurious and void ab initio as a matter of law because it contemplates payment by the corporate defendant of interest at a rate of 167%, well above the legal rate for a corporation pursuant to Penal Law §190.40.  Plaintiff argued that the Agreement is not usurious because it memorialized a purchase and sale of future accounts receivable rather than a loan. 

In granting defendant’s motion, the Court held: “upon review of the documents and consideration of the parties’ respective arguments, the Court comes to the inevitable conclusion that the real purpose of the Agreement was for plaintiff to lend money to defendants at the usurious interest rate set forth therein, and that defendant agreed to borrow the money based on the same usurious terms dictated by plaintiff. . . . Denominating a loan document by another name, as in this case, by calling it a Merchant Agreement, and including in it verbiage of [plaintiff’s] purported purchase of accounts receivable that is unsupported by actual [defendant] receivables dedicated to repayment, does not shield it from the judicial determination that it contemplates a criminally usurious transaction, which is void ab initio as a matter of law.”  Among other things, the Court referenced the fact that the Merchant Agreement had guarantors and that there were no provisions for the forgiveness of the advanced money if plaintiff was unable to collect, both of which indicated that the transaction was a loan.  The court also rejected plaintiff’s argument that defendant’s motion is procedurally defective because defendant did not proceed by way of a plenary action, holding that a plenary action is not necessary in cases where criminal usury is clear from the submissions attendant to a motion under CPLR §5015(a)(3). 

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.comMichael Crowley at or Clarissa Gomez at