On September 6, 2023, the U.S. Court of Appeals for the Second Circuit vacated and remanded a district court’s decision rejecting borrower defendants’ usury defense on grounds of waiver and collateral estoppel. The lender, EMA Financial LLC, sued the borrower, a skincare company, along with its affiliates and individual guarantors for breach of a loan agreement and related guaranties. Among other things, the defendants raised the defense of usury, arguing that the loans’ floating-price stock conversion option made the interest rate exceed 25 percent, the limit under New York law. Finding waiver, the district court granted partial summary judgment in favor of the lender. The corporate defendants, whose counsel withdrew and was not replaced, defaulted after summary judgment but before trial. The remaining defendants went to trial, and the district court found in favor of the lender on other claims and defenses.

On appeal, the individual defendants argued that the district court erred in finding waiver of the usury defense. The Second Circuit concluded that although the defendants had pleaded usury in a conclusory fashion in their initial complaint, and merely incorporated by reference all affirmative defenses raised in their amended complaint, the pleadings were sufficient to put the lender on notice of the usury defense. The lender had a full and fair opportunity to respond to the defense. Taking these points into account, the Second Circuit reversed the district court.

The case is EMA Financial, LLC v. Chancis, Nos. 22-274(L) and 22-402(XAP) (2d Cir. Sept. 6, 2023). EMA is represented by the Law Office of Jeffrey Fleischmann P.C. The defendants are represented by the Basile Law Firm P.C. A copy of the opinion is available here.