Authored By: Kenneth Neuman and Stephen McKenney
You have likely seen language to the following effect in a lending instrument: “Borrower agrees to pay the maximum legal interest rate if it is determined that the other contractual terms impose an illegal interest rate.” Such “usury savings clauses” are akin to a blue pencil rule with the aim of permitting a court finding an interest rate to be unlawful to simply lower the interest rate within the bounds of Michigan’s usury laws. In a June 23, 2023 Opinion authored by Justice Cavanagh, the Michigan Supreme Court uprooted the enforceability of such provisions to save facially usurious interest rates in Soaring Pine Capital Real Estate & Debt Fund II, LLC v. Park St. Grp. Realty Servs., LLC, MSC No. 163320 (June 23, 2023).
The plaintiff Soaring Pine was a nonbank investment group. It had lent defendant Park Street $1 million to “flip” tax-foreclosed homes in Detroit. The mortgage note had a stated interest rate of 20%, but there were additional fees and charges that, if considered interest, pushed the effective interest rate above 25%. The mortgage note also contained a “usury savings clause” stating that the note should not be construed to impose an illegal interest rate. After Park Street stopped paying the loan, Soaring Pine sued to collect the outstanding principal, interest, fees, and charges. Park Street responded by arguing that the note violated the criminal usury statute, MCL 438.41, by exceeding 25% and therefore was barred by the wrongful-conduct rule. Soaring Pine countered that the fees and charges associated with the loan were not interest, that the note had a usury savings clause, and that even if the note was usurious, it could still recover the loan principal.
On cross motions for summary disposition, the trial court ruled that Soaring Pine’s purported fees and expenses were disguised interest. Those fees and expenses, coupled with the 20% stated interest on the mortgage note, exceeded 25% – the criminal usury ceiling set forth in MCL 438.41. However, the trial court agreed that the usury savings clause was enforceable and therefore the note itself was not facially usurious. Based on its ruling, the trial court ordered that Park Street was not liable for payment of the interest, but was not relieved of its obligation to repay the principal.
Both Soaring Pine and Park Street were granted interlocutory leave to appeal by the Michigan Court of Appeals, which affirmed the trial court’s rulings on summary disposition. The Michigan Supreme Court later ordered oral argument on the parties’ applications on issues including whether a usury-savings clause is void as a violation of public policy.
The Michigan Supreme Court reversed, holding in part “that a usury savings clause is ineffective if a note otherwise facially requires the borrower to pay a usurious interest rate, even if the stated interest in the note is not usurious.” Its reasoning began with the maxim that, “Courts have a duty to refuse to enforce a contract that is contrary to public policy.” Such public policies include those that, “have been adopted by the public through our various legal processes, and are reflected in our state and federal constitutions, our statutes, and the common law.” In the context of Michigan’s usury statues, the Court concluded that the “pertinent statutes and caselaw provide a ‘definite indication’ that the public policy behind Michigan’s usury statutes is to protect borrowers from excessive interest rates imposed by lenders.” Such indication includes that throughout its statehood, Michigan has enacted both civil and criminal usury statutes. Drawing on its prior precedent, the Court reasoned that it “has held that lenders cannot avoid civil remedies for usury through creative contracting or by claiming ignorance.” Moreover, the public policy reflected in Michigan’s usury statutes “indicates a legislative intent beyond merely ensuring that the interest actually paid in a particular case is not usurious,” including “seeking to punish lenders who engage in usurious conduct and prevent future attempts to collect excessive interest.”
Having found Michigan’s usury statutes reflective of its public policy, the Court “agree[d] with those jurisdictions that hold that it is contrary to public policy to enforce a usury savings clause if the interest provided in the loan agreement is otherwise facially usuriousat the time of contracting.” (Emphasis added). In so holding, the Court clarified that “we do not suggest that enforcing a usury savings clause violates public policy in every circumstance.” Such a circumstance in which a usury savings clause could be enforced included, “when the interest due later becomes usurious because of an event outside the control of the parties, it would not be inconsistent with public policy to permit the lender to recover at the maximum legal rate.”