American E Group LLC v. LiveWire Ergogenics Inc.

Background

American E Group LLC (AEG) loaned LiveWire Ergogenics Inc. $30,000 under a New York-law promissory note. The note required repayment six months later, with interest at 20% per year. It also required LiveWire to provide AEG restricted LiveWire shares worth $50,000 as “additional consideration” for the note. The note contained a clause stating that interest could not exceed 20% and a severability clause addressing invalid provisions.

AEG alleged that LiveWire failed to provide the shares and failed to repay the $30,000 plus interest. AEG’s Second Amended Complaint asserted claims for enforcement of the note, enforcement of a stock-conversion provision, collection costs, tortious interference with contract against Bill Hodson, and unjust enrichment. The stock-conversion provision stated that, after an event of default, the note could be converted into ten times the liquidated value of the debt. Based on the alleged $33,000 debt, AEG sought $330,000 worth of LiveWire stock.

Motion-to-dismiss standard

The court considered LiveWire’s motion under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not state a legally sufficient claim. At this stage, the court generally accepts well-pleaded factual allegations as true and may consider documents attached to or incorporated into the complaint. The court considered the promissory note because AEG attached it, but it did not consider documents AEG attached only to its opposition.

Usury and the note’s meaning

The court rejected AEG’s argument that the note was ambiguous or reflected two separate transactions—one loan and one stock purchase. The court held that the note unambiguously made the stock additional consideration for the loan. Because the note called for stock worth $50,000, the court held that the stock’s value could be included in calculating the transaction’s effective interest rate. Without the note’s interest-limit clause, the effective rate exceeded New York’s 25% criminal-usury limit.

The court then held that the note’s interest-limit clause did not prevent the transaction from being criminally usurious. Under the New York appellate decisions the court followed, a clause that reduces interest to a lawful rate if the transaction is found usurious does not make an otherwise usurious agreement lawful. The court also held that the severability clause did not save the note. It therefore held that the note was criminally usurious on its face.

Why the note was void

The court explained that corporations and limited liability companies generally cannot assert civil usury as an affirmative defense, but a limited liability company may assert criminal usury. The court held that, once LiveWire successfully established criminal usury, New York’s civil-usury voiding provision applied because the loan was less than $250,000 and the note called for interest exceeding 16%.

The court therefore held that the note was void under New York General Obligations Law § 5-511. It dismissed AEG’s claims based on breach of the note and collection costs. The court did not decide the broader question of whether a loan violating only the criminal-usury statute should always be voided, because this loan also violated the civil-usury statute.

Other claims

The court dismissed AEG’s claim seeking ten times the alleged debt under the default provision. Under New York law, a liquidated-damages clause is unenforceable as a penalty when the amount is clearly disproportionate to the likely loss. The court found that a ten-times provision was unreasonably disproportionate and unenforceable as a matter of law.

The court dismissed AEG’s tortious-interference claim against Hodson because that claim required a valid contract, and the note was void. It also dismissed the unjust-enrichment claim. The court treated that claim as an alternative claim in case the note was unenforceable, but held that AEG could not obtain equitable relief because the court followed the rule that a lender charging criminally usurious interest has unclean hands.

Disposition

Judge Gregory H. Woods granted LiveWire’s motion to dismiss. He denied AEG leave to replead because any attempt to amend the claims in the Second Amended Complaint would be futile. The court stated that all claims in the Second Amended Complaint were dismissed with prejudice and directed the Clerk of Court to terminate the pending motion.