Usurious lender may recover principal but not interest

Where a lender charged a usurious interest rate on a loan, the lender may recover the principal sum but not interest and fees.

A second loan contract in this case is unenforceable due to lack of consideration.

Loans

Plaintiff Shannon and defendant Smalls met while both were in jail. After Shannon was released, he gave small amounts of money to Smalls. Shannon said he loaned the money. Small said the payments were gifts.

In December 2017, the two executed a promissory note declaring the payments Shannon made to Smalls since 2014 were loans, repayable with interest.

In March 2019, the two “executed a second promissory note (the ‘March 2019 Note’) wherein Smalls again promised to repay the money Shannon previously conveyed to him. The March 2019 Note set the interest rate at ‘the published Visa Card Daily Variable Rate.’ The parties do not dispute that this rate averaged at 8.75%. …

“However, Smalls made no payment on this note. Shannon alleges that the principal amount owed is $4,310.59, plus interest.

“On April 13, 2019, the parties executed a third promissory note (the ‘April 2019 Note’) wherein Shannon agreed to lend Smalls future money. Per the note, Smalls would repay the loan with interest at the ‘daily published American Express Card Daily Rate.’

“The parties do not dispute that this rate averaged 21.52%. Shannon claims he loaned Smalls $4,332.91 under this note [.] …However, Smalls made no payments.” The statutory interest cap is 12 percent in this case.

Shannon sued for breach of contract for each note.

Inconsistent statutes

The April 2019 note is usurious and void. “As a result, the Court must now determine what, if anything, Shannon can recover from Smalls.

“‘Any [usurious contract] is void and no person shall have the right to collect, receive, or retain any principal, interest, fees, or other charges in connection with the contract.’ VA. CODE Aim. § 6.2-303(F). Smalls argues that this provision of the Code bars a usurious lender from recovering any amount he loaned a borrower – principal, interest, or fees.

“Shannon highlights a facial inconsistency to this seemingly absolute forfeiture rule. A related statute reads: ‘If the court determines that the contract is usurious, judgment shall be rendered only for the principal sum.’ VA. CODE ANN. § 6.2-304. Yet another statute reads: ‘If interest in excess of [12%] is paid upon any loan, the person paying may recover … 1. The total amount of the interest paid to such person in excess of that permitted.’ VA. CODE ANN. § 6.2-305.

“Shannon argues that these two statutes expressly permit him to recover from Smalls the loan principal, plus 12% interest. …

“When statues are in apparent conflict with one another the Court is bound ‘if reasonably possible, to give them such a construction as [would] give force and effect to each.’”

Interpretation

“The Court holds Virginia Code §§ 6.2-303(F), 6.2-304, and 6.2-305(A) to be in equipoise. …

“The first statute is an absolute statement that a usurious contract is void. VA. CODE ANN. § 6.2-303(F). This represents the general policy statement that no person may extend a usurious loan nor take such a loan – they are void contracts.

“Importantly, this statute is mutually applicable. It says that a lender may not collect principal, interest, fees, or other charges. It also says that a borrow[er] may not retain principal.

“However, the General Assembly clearly recognized that there would be situations, such as the present one, where parties would enter such a void contract and that money would change hands. It did not want to unjustly enrich borrowers or unduly burden lenders.

“With a void contract a lender could not sue for breach of contract to recover the loan principal stripped of interest and a borrower could not sue to recover usurious interest he paid. After all, one cannot sue for breach of a void contract.

“So, the General Assembly enacted Virginia Code § 6.2-304 for lenders and § 305(A) for borrowers. Consequently, if a lender actually paid loan money to a borrower on the statutorily void usurious contract, the law permits him to recover his principal on quasi-equitable grounds. VA. CODE ANN. § 6.2-304.

“Conversely, if a borrower actually paid unlawful interest on the void usurious contract, the law permits him to recover double the interest he has paid over 12% on the same quasi-equitable grounds. VA. CODE ANN. § 6.2-305(A).”

Application

“In the present case, Shannon’s and Smalls’ attempt to enter their usurious contract failed – it was immediately void. There was, therefore, no contract between the parties.

“Neither party had the right to convey interest, the principal, or any other fees under the attempted contract to the other party, since there was no legal duty between them. Shannon had no legal duty to convey the principal sum to Smalls. Smalls had no legal duty to make interest payments to Shannon.

“As a result, neither had the right to retain, collect, or receive any payments from the other. Any general breach of contract claim for Smalls failing to make payments fails, since Smalls had no duty to do so, and Shannon had no right to collect, receive, or retain those payments.

“However, in the present case money changed hands pursuant to this void contract. Under Virginia Code § 6.2-304, Shannon can sue Smalls to recover the unreimbursed principal he paid Smalls under the void April 2019 Note. Shannon had no duty to extend the loan proceeds to Smalls under the void contract, but he did so. Smalls cannot just keep the money.

“Under § 6.2-304, the Court can restore Shannon to his position before the void contract occurred. … There is no statutory provision that permits Shannon to collect the interest rate of up to 12% that he should have charged Smalls. …

“The Court finds Shannon conveyed a principal sum of $4,332.91 to Smalls under the void April 2019 Note. Smalls paid nothing on this loan – neither principal nor interest. Shannon may recover this principal from Smalls and judgment will issue against Smalls. However, Shannon may not recover the 12% interest he could have lawfully charged from Smalls.”

March 2019 note

“Unlike the usurious April 2019 Note, the March 2019 Note sets forth a lawful interest rate. Unfortunately for Shannon, the Note is unenforceable because (1) it lacked consideration and, alternatively, (2) it improperly and inaccurately recast a series of gifts from Shannon to Smalls as loans. …

Shannon alleges he extended loans to Smalls in December 2014, and continued until December 2017, with the March 2019 Note memorializing the past payments. Thus, even according to Shannon, the March 2019 Note merely recounted alleged prior agreements.

“There was no new consideration to support it – Shannon already made the loans to Smalls (assuming they were loans). As a result, the Court finds the March 2019 Note unsupported by consideration, and thus unenforceable.”

Shannon v. Smalls II, Record No. CL-2022-7030, Nov. 28, 2022. Fairfax County Circuit Court (Oblon). Samuel A. Leven for plaintiff, Sheridan England for defendant. VLW 022-8-077, 10 pp.