Giventer v. Arnow

Greenblott, J.

This is an appeal from an order of the Supreme Court at Special Term, entered March 21, 1973 in Albany County, which enjoined any further prosecution upon a promissory note signed by defendants, and ordered said note to be canceled and surrendered to the defendants within 90 days of the entering of the order.

Plaintiff’s testator, an attorney at law, drafted a promissory note dated July 1, 1970 pursuant to which he loaned defendants the sum of $13,410.67. The note recites that the obligation became due July 1,1971 and was payable “ with interest at 7%% per annum, compounded quarterly ”. No payments having been made, plaintiff moved for summary judgment, while the defendants cross-moved for summary judgment, relying upon the affirmative defense of usury. Agreeing with defendants, Special Term found the agreement to be violative of the express language of section 5-501 of the General Obligations Law and, accordingly, declared it void (General Obligations Law, § 5-511).

The effective yield of 7.72% is only realized when the interest accruing in each quarter is added to the principal of the debt. It is well settled that a provision for compound interest will not be enforced as contrary to public policy (Young v. Hill, 67 N. Y. 162; Stewart v. Petree, 55 N. Y. 621; Kellogg v. Hickok, 1 Wend. 521), and if effect is given to this principle so as to prohibit the addition of accrued interest or principal, the interest on the debt itself ‘ ‘ does not increase the rate of interest upon the amount of the original loan ” (32 N. Y. Jur., Interest and Usury, § 56). As stated in Kelloggr. Hiekok (supra, p. 521), “compound interest has nothing to do with the question of usury. It is illegal upon a different principle.” “ The result is that the penalty for exacting a compound interest obligation is refusal to allow recovery of the additional interest, and not avoidance of the entire obligation under the general usury statute ” (32 F. Y. Jur., supra). This conclusion is buttressed by “the established principle that the presumption is against the taking of usury, which must be established by clear evidence as to all the elements essential thereto. (Rosenstein v. Fox, 150 N. Y. 354)”. (Grannis v. Stevens, 216 N. Y. 583, 591.)

It is, therefore, our conclusion that application of the usury statute so .as to work a forfeiture of the entire debt is unwarranted in this case. The only relief to which the defendant is entitled is a declaration of the illegality of the provision for quarterly compounding of the interest.

The order should be reversed, on the law, without costs, and the summary judgment granted in favor of plaintiff in the face amount of the promissory note, together with interest at the rate of 7%% per annum.