[co-author: Milind Mishra, Summer Associate]
On June 1, 2023, the U.S. District Court for the Southern District of New York held, after a bench trial, that various loans that included a floating-price conversion option were not criminally usurious under New York law. From 2017 to 2019, Golock Capital, LLC and DBW Investments, LLC issued several loans to VNUE, Inc., a music technology company, that included fixed-price conversion options. When VNUE could not pay its obligations, the conversion options on certain loans were amended to floating-price conversion options—allowing the lenders to convert unpaid interest and principal into common shares of VNUE at a set discount. Following VNUE’s continued failure to repay the loans, Golock and DBW sued to recover the unpaid principal, interest, and default interest due under the loans.
As its sole defense to its lenders’ claims, VNUE asserted that the floating-price convertible options made the loans criminally usurious—which, under New York law, would render the loan agreements void ab initio—because the exercise of the options could lead to an interest rate in excess of the New York 25% cap. Judge Cote disagreed. While floating-price convertible options should be included in the usury calculation if the valuation can be proven by “reasonable methods,” the court held, VNUE failed to show that the floating-price conversion options resulted in a criminally usurious interest rate (25%). Moreover, the court found that VNUE failed to show that Golock and DBW had usurious intent—that is, that they intended to take and receive usurious interest when the loans were issued, a necessary element of the defense. In reaching its decision, the court explained that the mere possibility that a loan “may” result in a usurious interest rate does not render the loan criminally usurious on its face. The court thus entered judgment for the lenders.
The case is Golock Capital, LLC v. VNUE, Inc., No. 21-cv-8103 (S.D.N.Y. June 1, 2023). Golock and DBW are represented by Daniel S. Steinberg P.C. VNUE is represented by the Basile Law Firm P.C. The Opinion and Order is available here.
