Court of Appeals Holds Interest Specified by Loan Agreement Was Usurious and Thus Forfeited

ByDouglas C. Melcher

In Sloan v. Allen, 323 A.3d 439 (D.C. 2024), the D.C. Court of Appeals considered, inter alia, whether a loan agreement “contained an unlawful usurious interest rate.” Id. at 441. The Court held that it did and thus the lender was precluded from recovering any interest pursuant to the agreement. However, the lender nonetheless was entitled to post-judgment interest.

By way of background, “in the District, parties cannot agree to interest rates ‘exceeding 24% per annum.'” Id. at 441 (quoting D.C. Code § 28-3301). A contract is considered “usury” if it contains a higher interest rate and “when a contract is tainted with usury, all of the interest charged by the creditor is forfeited.” Id. (internal quotation marks omitted). However, “the usurious rate does not destroy the obligation to repay the principal.” Id. (internal quotation marks omitted).

The loan agreement in this case provided for a loan of $60,000 with an initial term of sixty-days at a 20% interest rate, thus resulting in $72,000 being due within sixty days. Id. It further provided that if the borrower failed to pay on time that the $72,000 would be subject to interest of “another 2% over the following sixty days, [and] then another 2% over the next sixty days.” Id. Another provision stated that “the $72,000 was ‘subject to the maximum amount of interest permitted by the Laws of the District of Columbia’ if it was not paid back within sixty days.” Id. (quoting loan agreement).

The Court held that, “[o]n its face, the loan’s interest rate was patently usurious.” Id. at 442. “The $60,000 principal loan ballooned to $74,908.80 after just 180 days, which is a 24.848% interest rate after not even half a year.” Id. “And then, for the remaining 185 days of the year, the terms of the loan dictated that the balance was ‘subject to the maximum amount of interest permitted by the Laws of the District of Columbia,’ i.e., 24% per year, so that the loan would have ballooned to roughly $84,000 by the end of the first year, yielding an annual interest rate of about 40% on the $60,000 principal.” Id.

The Court then went on to consider, inter alia, whether the provision stating that the balance was “subject to the maximum amount of interest permitted by the Laws of the District of Columbia” operated as a “savings clause” having the effect of capping the overall interest at the highest rate permitted by law notwithstanding the other provisions in the agreement. Id. at 444-45.

In addressing that issue, the Court noted that there are “two competing approaches” that have been used by courts in other jurisdictions for dealing with such a savings clause, which it referred to as a “usury savings clause.” Id. at 444. Courts in some jurisdictions have ruled that “usury savings clauses, like the one [in this case], can never operate to rescue an otherwise facially usurious rate.” Id. Those decisions take the position that “[t]he animating force of usury statutes is to relieve the borrower of the necessity for expertise and vigilance regarding the legality of rates he must pay, putting that onus instead on the lender to set the rate in clear terms that are within the bounds of the law.” Id. (internal quotation marks and brackets omitted).

In other jurisdictions, however, courts have been “slightly more lenient on creditors, and will give effect to usury savings clauses where it was not the lender’s intention to charge a usurious rate.” Id. This may occur where complications involved in calculating interest cause the rate to “just slightly” exceed the allowable rate, or the rate “becomes usurious because of an event outside the control of the parties.” Id.

The Court concluded that it did not need to decide which of these two competing approaches to follow because the intention of the lender in this case was unquestionably “to charge the usurious rate” as was “apparent from the face of the loan’s terms.” Id. at 444-45. Furthermore, in earlier proceedings in the case, the lender explicitly attempted to enforce the usurious rate. Id. at 445. Accordingly, the Court held that the interest specified by the loan agreement was usury and thus the lender forfeited it. Id.

However, the Court distinguished post-judgment interest. Id. at 445. It explained that post-judgment interest arises by operation of statute (specifically, D.C. Code § 15-109) and not contract, and thus the rule that a lender forfeits any interest arising from a contract tainted by usury does not preclude post-judgment interest. Id.

Douglas C. Melcher

I am a licensed attorney with about twenty years of experience in the private practice of law. I focus my practice on advising and representing individuals, small businesses, and non-profits in civil litigation, including trial court proceedings, appeals, administrative hearings, mediation, and arbitration. I have written numerous articles for D.C. Law Blog and other publications, and am the author of Tort Claims and Defenses in the District of Columbia, which is a handbook for lawyers about civil claims for injury to persons, property, reputation, and commercial interests. Please feel free to contact me if you would like to inquire about assistance with a legal matter. I can be reached at dmelcher@melcherlaw.com or 202-427-5753. For further information about my background, click here.