Is it A Usurious Loan or The Sale of a Receivable?

Freiberger Haber LLP

In our last article (here), we examined a choice-of-law provision that, if applied, would violate New York public policy concerning usurious loans. In that case, Virginia law, which does not prohibit usury, was deemed “so violative of New York’s public policy that the choice-of-law provision” at issue was deemed invalid. 

The underlying predicate in that case was an agreement whereby the corporate defendant agreed to pay plaintiff $1,742,000 over the course of 52 weeks in exchange for a loan of $1,300,000 that had a stated interest rate of 34% – a percentage that is significantly higher than the maximum interest rate allowable in New York. Under those facts, there was no question that the court was examining the terms of a loan agreement – a requirement under the General Obligations Law for a finding of usury.1

Sometimes, however, it is not always easy to determine whether the financial instrument at issue is a loan or forbearance or something else, such as the sale of a receivable (the question presented in EBF Partners, LLC v. Creative Sports Concepts LLC, 2023 N.Y. Slip Op. 33073(U) (Sup. Ct., N.Y. County Sept. 6, 2023) (here)). To address this issue, courts look to “the real purpose of the transaction” – that is, “on the one side, to lend money at usurious interest reserved in some form by the contract and, on the other side, to borrow upon the usurious terms dictated by the lender.”2 Notably, “[t]he court will not assume that the parties entered into an unlawful agreement . . . when the terms of the agreement are in issue, and the evidence is conflicting.”3 Nevertheless, “the lender is entitled to a presumption that he [or she] did not make a loan at a usurious rate.”4 

There are three factors that courts consider in determining whether the transaction at issue should be considered a loan or a sale of receivables: “(1) whether there is a reconciliation provision in the agreement; (2) whether the agreement has a finite term; and (3) whether there is any recourse should the merchant declare bankruptcy.”5 No factor is dispositive.6 In addition, courts may consider other factors such as a discretionary reconciliation provision, default provisions entitling the lender to immediate repayment, and collection on a personal guaranty in the event of default or bankruptcy.7 

[Eds. Note: this Blog previously examined the foregoing factors here.]

EBF Partners involved a Payment Rights Purchase and Sale Agreement, pursuant to which plaintiff purchased $99,400.00 worth of the corporate defendant’s future receivables for $70,000. The agreement was guaranteed by the individual defendant. Under the agreement, defendant was entitled to reconcile the daily payment amount to better reflect its actual sales each calendar month. While several events of default were listed in the agreement, a bankruptcy proceeding involving the corporate defendant was not one of them.

Shortly after the agreement was executed, Plaintiff claimed that plaintiff’s daily debit on defendant’s account was blocked, and since that time defendant had not tendered the daily percentage of its receivables to plaintiff or restored plaintiff’s access to the account. 

Plaintiff filed suit claiming, among other causes of action, breach of contract.

On plaintiff’s motion for summary judgment, defendants argued that the agreement was a usurious loan, that plaintiff was barred from enforcing the agreement due to its unclean hands, that the guarantee did not sufficiently bind the individual defendant, and that there were issues of fact related to how much money was actually owed. Relevant to this article, the motion court granted the motion,8 finding that the agreement was not a usurious loan.

The motion court found that the agreement “appear[ed] to be what it states on its face, a purchase of future receivables.”9 In that regard, noted the motion court, “[t]he agreement lacks a finite term, contains a reconciliation provision, and does not provide that [defendant]’s filing for bankruptcy protection is a default under the agreement.”10 As such, weighing the factors discussed above, the motion court concluded that “defendants cannot show that the Agreement is a criminally usurious loan.”11


  1. Under General Obligations Law § 5-501, usury only applies to a “loan or forbearance of any money, goods or things in action.” See also Donatelli v. Siskind, 170 A.D.2d 433, 434 (2d Dept. 1991).
  2. Donatelli, 170 A.D.2d at 434.
  3. Giventer v. Arnow, 37 N.Y.2d 305, 309 (1975).
  4. Id.
  5. LG Funding, LLC v. United Senior Props. of Olathe, LLC, 181 A.D.3d 664 (2d Dept. 2020).
  6. Id. at 666.
  7. Davis v. Richmond Capital Grp., LLC, 194 A.D.3d 516, 517 (1st Dept. 2021).
  8. The motion court found, however, issues of fact with regard to the issue of damages. See Slip Op. at *5.
  9. Slip Op. at *4.
  10. Id.
  11. Id. (citing, Principis Capital, LLC v. I Do, Inc., 201 A.D.3d 752, 754 (2d Dept. 2022)).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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