BKNS Management LLC v. Frysta Management LLC

Background

BKNS Management LLC and Frysta Management LLC signed a promissory note on April 19, 2023, for a principal amount of $2 million. The note required 25% annual interest and required repayment of the principal in one lump sum by the earlier of six months after execution or an event of default. It also provided that, if an amount remained overdue for at least 30 days, BKNS could collect an additional $125,000.

Frysta made payments totaling $480,000 between December 2023 and March 2024, but did not make the scheduled payment on March 27, 2024. BKNS sent a notice of default and later sought summary judgment under New York’s procedure for actions based on instruments requiring payment of money. After Frysta removed the case to federal court, that motion was treated as a motion for summary judgment under Federal Rule of Civil Procedure 56. BKNS sought $2,121,388.89, consisting of the unpaid principal and part of the late fee, plus additional interest.

Frysta asserted a criminal-usury defense. New York’s criminal-usury law prohibits knowingly charging or collecting interest above 25% annually, and a corporation may assert that defense. Frysta argued that the $125,000 late fee should be counted as interest, which would make the note exceed the statutory limit. BKNS argued that the fee applied only after default and therefore should not be included in the interest calculation.

Legal Standard

The court could grant summary judgment only if there was no genuine dispute about any material fact and BKNS was entitled to judgment as a matter of law. BKNS established a basic claim by producing the note and evidence that Frysta had not fully paid it. The burden then shifted to Frysta to present a valid defense supported by evidence sufficient to create a triable factual dispute.

Criminal Usury and the Late Fee

The court applied New York law. It concluded that the note was not criminally usurious on its face. The court relied on Sumner v. People, an 1864 decision of the New York Court of Appeals, which held that a payment conditioned on the borrower’s failure to perform an obligation is not necessarily interest for usury purposes when the borrower can avoid the payment by performing the obligation. The court also relied on later New York authorities using the same reasoning for default-related charges.

Following what it described as the majority view among federal district courts in the Second Circuit, the court held that the $125,000 late fee did not itself make the note facially usurious. The court rejected Frysta’s argument that the note was facially usurious because avoiding the fee depended partly on obtaining an $8 million loan from a separate lender. The court stated that obtaining that loan was, at least in part, a contingency within Frysta’s control. It also concluded that default on an agreed payment obligation is within the borrower’s control because the borrower can avoid the charge by paying promptly.

Factual Dispute About a Cover for Usury

The court nevertheless held that the analysis did not end with the conclusion that the note was not usurious on its face. Under New York law, a note can still be usurious if an added fee is actually a device to conceal interest above the legal limit. Whether a fee is a genuine penalty or a cover for usury is generally a question of fact.

Frysta argued that the note’s structure showed that the $125,000 “additional interest” was not a genuine post-default charge. In particular, Frysta contended that the note created a situation in which the borrower was treated as already 30 days late on the supposed default date because of a retroactive resetting of the due date. Frysta characterized that drafting as an effort to evade the usury laws. The court found that the sparse record left a genuine dispute about this issue and that BKNS had not carried its burden on summary judgment.

Disposition

The court denied BKNS Management LLC’s motion for summary judgment. It did not decide that the note was ultimately usurious; it held only that the remaining factual dispute prevented judgment at this stage. The court directed the parties to appear for a status conference on June 10, 2025, to discuss a trial date.