In Adar Bays, LLC v GeneSYS ID, Inc., the New York Court of Appeals (the “Court”) held that the conversion price of a convertible option could be classified as an interest potentially falling within the jurisdiction of the criminal usury laws of New York.


In 2016, Adar Bays provided GeneSYS with a loan of $ 35,000 in exchange for a one-year, eight percent interest note. This note contained an option for Adar Bays to convert, in whole or in part, the amount of the debt into GeneSYS shares at a discount of 35% from the lowest price quoted on the stock exchange during the 20 days preceding the request for conversion. Six months and four days after the note was issued, Adar Bays sought to convert $ 5,000 of the debt into shares of GeneSYS. This request was denied and litigation began with Adar Bays alleging a breach of contract by GeneSYS and GeneSYS deciding to dismiss the case on the grounds that the loan violated New York’s criminal usury laws.

The Federal District Court rejected GeneSYS ‘argument that the contract should be considered void due to the loan interest rate exceeding the 25% criminal usury rate. Following a favorable ruling in favor of Adar Bays, GeneSYS appealed and, on appeal, the Second Circuit noted that many federal district courts had not classified similar conversion options as interest under the laws. on New York Usury, but some New York State courts have included future contingent payments in the Analysis. With this distinction in mind, the Second Circuit certified two questions to the Court:

  1. The fact that a share conversion option allows a lender, in its sole discretion, to convert any outstanding balance into shares at a fixed price should be treated as interest in order to determine whether the transaction violates NY criminal law. § 190.40, criminal usury law; and
  2. If interest charged on a loan is found to be criminally usurious under NY Criminal Law § 190.40, if the contract is void ab initio under NY Gen. Oblig. Law § 5-511.

The Court decided both of these questions in the affirmative.

To analyse

The Court began with the second question and provided an in-depth analysis of the civil and criminal usury laws of New York, as well as a history of the laws of usury in New York. The Court examined the interplay between civil and criminal usury laws and held that while civil laws do not provide a usury defense for corporations, a violation of criminal usury laws can be invoked by a company as a defense in a civil case. Further, although the criminal usury laws do not expressly say that usurious loans are void and unenforceable as civil laws do, the Court held that Parliament intended a violation of the usury laws. Criminal usury results in the repayment of the loan, both in principal and in interest. null and inapplicable.

Of added significance, the court clarified that loans over $ 2.5 million are not subject to New York usury laws.

In analyzing the first question, the Court held that “New York law requires that the value of the conversion option, like all other property exchanged in consideration for the loan, be included in determining the interest rate of the loan. loan for the purposes of usury laws, to the extent that this value, when measured at the time of contracting, can be reasonably determined. The hypothetical possibility that a future exercise of a variable price conversion option could result in a return greater than 25% does not render a loan usurious on its face. “

Key points to remember

New York is one of the most popular loan document laws, in large part because there is no usury limit on loans over $ 2.5 million. However, lenders should be aware of the possible usury issues with stock options related to loans under $ 2.5 million. The court ruling suggests that in the future, business loans will be scrutinized with a greater level of scrutiny and that defaulting borrowers are likely to raise a criminal defense for usury in a civil action resulting from default on payment.

In addition, it is advised that in the future, lenders keep a detailed ledger detailing their calculations in the event that the value of a conversion option is in question. Since the Court held that the analysis is based on the intention of the parties at the time the loan was entered into, a lender must prove its intention that the expected interest rate present on the loan does not exceed 25%. so as not to come up against the criminal laws on usury. Practitioners may also consider including a usury provision stating that the conversion price will be deemed to be changed to the minimum extent required to ensure that the deemed interest is not usurious.

Finally, while New York law is often considered the default applicable law for loan documents, lenders may want to consider the laws of another state to the extent that the locations of the parties allow. State usury laws vary widely from state to state, so lenders can rely on applicable law with more flexibility to avoid the pitfalls of usury.

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