Beware Of Usury Laws When Receiving A Loan As A Business

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*This article was written with the assistance of Junior Ndlovu is a summer extern with Vandeventer Black. He is a second-year law student at the Washington & Lee School of Law.

“‘Usury’ is generally defined as a premium or compensation paid or stipulated to be paid for the use of money borrowed at a greater rate of interest than is allowed by law.”i Usury laws prevent a lender from charging excessive interest rates on a loan. The primary purpose of usury laws is to prevent borrowers from paying exorbitant interest rates. However, in Virginia, certain business entities are not protected by usury laws when they default on loans with excessive interest rates. Virginia Code section 6.2-308 prohibits the following entities from asserting usury as a defense to failure to pay the loan:

  • corporations,
  • partnerships that are required to file a certificate pursuant to the Virginia Revised Uniform Limited Partnership Act (or that were required to file a certificate pursuant the Act’s predecessors) or that are formed under laws other than those of the Commonwealth,
  • limited liability companies,
  • business trusts, or
  • joint ventures organized for the purposes of holding, developing, and managing real estate for profit.

Virginia Code section 6.2-303, with a few exceptions, sets the maximum legal rate of interest at 12% per year.  That limitation does not apply to the business entities identified above.  In fact, Virginia Code 6.2-308 effectively implies that there is no cap on the interest rate that may be charged on loans to such entities. Furthermore, this cap on interest rates does not apply to guarantors and sureties assuring the payment of a business loan.ii This means that an individual who personally guarantees a business loan cannot claim usury as a defense. Courts have upheld interest rates that were as high as 18% per year.iii Most boilerplate loan agreements have a standard clause which allows the lender to charge the “maximum interest allowed by law” under certain circumstances. Business borrowers should carefully review such clauses before signing and should consult a professional if there is any uncertainty as to the maximum rate.

[1] Pearsall, Jr., Residential Financing, in 2 Real Estate Transactions in Virginia ¶ 10.801 (Kessler & Richmond, Jr. eds., 3d ed. 2012) (citing Carter v. Hook, 116 Va. 812, 83 S.E. 386 (1914)).

[2] See Tuttle v. Haddock, 213 Va. 63, 64 (1972) (Virginia Supreme Court holding that “when a statute withdraws the defense of usury from a corporation, the individual guarantors, sureties and indorsers [sic] of corporate obligations, as well as the corporation, are precluded from interposing usury as a defense.”)

[3] See Agri-Tech, Inc. v. Brewster Heights Packing, Inc., Nos. 92-2007, 92-2011, 1993 WL 398486, at *7—*8 (4th Cir. Sept 28, 1993) (finding that the Virginia Code makes it lawful for corporations to contract to pay 18% in interest rates); see also Vianix Delaware LLC v. Nuance Communications, Inc., No. 3801-VCP, 2010 WL 3221898, at *25 (Del. Ch. Aug 13, 2010) (finding that Virginia statutory law sets no ceiling on interest rates chargeable on corporations).

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