In Soaring Pine Capital Real Estate & Debt Fund II, LLC v. Park Street Group Realty Services, LLC, the Michigan Supreme Court considered whether a court may enforce a usury savings clause in a mortgage agreement. A usury savings clause is a contractual term requiring a borrower to pay the maximum legal interest rate if the court determines that the other contractual terms impose an illegal interest rate.
In that case, the plaintiff loaned $1 million to the defendant to enable it to purchase and renovate tax-foreclosed homes in Detroit and “flip” the properties for a profit. The note for the loan had a stated interest rate of 20%, but also imposed fees and other charges that, if considered to be interest, pushed the effective interest rate above 25%. Additionally, the note included a usury savings clause stating that the agreement should not be construed as imposing an illegal interest rate.
When the defendant stopped making payments on the note, the plaintiff filed a lawsuit for breach of contract and fraud. The defendant argued that the plaintiff could not recover on the loan because it violated Michigan’s criminal usury statute by knowingly charging an effective interest rate exceeding 25%. In response, the plaintiff argued: (a) the fees and charges were not interest; and (b) the note had a usury savings clause that prevented it from charging a usurious rate. The parties filed cross-motions for summary judgment. The circuit court found the plaintiff indeed charged a criminally usurious interest rate, but the usury savings clause was enforceable and therefore the note itself was not facially usurious. The court held that the appropriate remedy was to relieve the defendant of its obligation to pay the interest on the loan but not the principal. The appellate court affirmed. The parties appealed to the Michigan Supreme Court.
The supreme court rejected the plaintiff’s arguments, holding that when determining whether a loan agreement imposes interest above the legal rate a usury savings clause is ineffective. The court also found that such agreements are unenforceable “even if some of the interest is labeled something else, such as a ‘fee’ or ‘charge.'” Further, the court found that giving effect to the savings clause at issue would be contrary to Michigan public policy, stating, “[e]nforcing a usury savings clause in this circumstance would undermine Michigan’s usury laws because it would nullify the statutory remedies for usury, thereby relieving lenders of the obligation to ensure their loans have a legal interest rate. In short, a lender cannot avoid the consequences of contracting for a usurious interest rate simply by including a savings clause in the contract.”
Although the court refused to enforce the usury savings clause in the loan agreement at issue, it noted that such clauses do not violate public policy in all circumstances. Specifically, the court recognized that such clauses may be enforceable in situations where a transaction was not clearly usurious at the outset but only became so upon the happening of a future event that was outside the control of the parties.
Further, while the court determined that the plaintiff could not enforce the loan agreement, it also held that the plaintiff did not violate the law by filing suit to try to enforce the contract. Rather, the court held that seeking to collect a usurious interest rate in a civil action, standing alone, does not violate Michigan’s criminal usury statute.
The takeaway from this case is that while a usury savings clause may be effective if future circumstances cause the interest rate to exceed Michigan’s statutory limit, such provisions cannot save a loan agreement that provides for an interest rate above 25%.