## Facts

- Venture Mortgage Fund, L.P. was controlled by David Schick, who ran a Ponzi scheme in part through the entity.
- Schick solicited “earnest money” supposedly to be held in escrow for bids on distressed mortgage pools, promising risk-free, high-yield returns.
- In August 1992, Theodore Brodie loaned $500,000 to Venture Mortgage at a rate ultimately set at about 27% per year.
- In July 1993, ATASSCO and other investors loaned a total of $2.75 million to Venture Mortgage at similarly high annual rates (above 25%).
- Contrary to representations, the funds were not maintained in escrow and were used in the fraudulent scheme.
- After the collapse, Venture Mortgage, Schick, and related entities entered Chapter 11 proceedings.
- Brodie and ATASSCO filed unsecured claims in the Venture Mortgage bankruptcy based on their loan agreements.
- The Chapter 11 trustees objected and sought expungement, asserting the loans were criminally usurious under New York law and therefore void.

## Issues

1. Whether loans bearing interest above 25% per year violate New York’s criminal usury statute and are void ab initio.
2. Whether the usury defense should be unavailable because the borrower was a Ponzi schemer and the lenders were fraud victims rather than predatory lenders.
3. Whether a lender’s lack of subjective intent to violate usury laws prevents a finding of criminal usury or voidness.
4. Whether an alleged special relationship (Schick drafting the documents and having provided legal services) equitably estops bankruptcy trustees from asserting usury to defeat the claims.

## Decision

- The Second Circuit affirmed the district court, which had affirmed the bankruptcy court’s order sustaining the trustees’ objections and expunging Brodie’s and ATASSCO’s claims.
- The court held the loans’ undisputed interest rates exceeding 25% violated New York Penal Law § 190.40.
- The court held criminally usurious loans are void ab initio under New York General Obligations Law § 5-511 and/or public policy, leaving no enforceable contractual basis for the claims in bankruptcy.
- The court rejected arguments for a borrower-specific or equity-based exception to the usury statutes, including an asserted “victim” status of the lenders.
- The court rejected the argument that lack of subjective intent to violate the usury law avoids voidness where the agreed rate exceeds the statutory cap.
- The court rejected equitable estoppel against the trustees based on Schick’s role as drafter and prior lawyer, emphasizing that trustees act for the estate and creditors generally.
- The court noted, without deciding, that New York law had not clearly resolved whether a lender on a criminally usurious loan may obtain restitution of principal in some circumstances; the issue was not presented on appeal.

## Legal Principles

- Under New York Penal Law § 190.40, charging interest exceeding 25% per year constitutes criminal usury.
- A loan that is criminally usurious under New York law is void ab initio under New York General Obligations Law § 5-511 and/or public policy, and is unenforceable as a contractual claim.
- Courts will not create a borrower-specific exception to the criminal usury statute based on the borrower’s misconduct or the lenders’ asserted innocence.
- Voidness for criminal usury does not depend on proof that the lender specifically intended to violate the usury laws when the contract rate exceeds the statutory maximum.
- Equitable estoppel generally does not bar a bankruptcy trustee from asserting usury to defeat a claim, even where the debtor induced the transaction or drafted the documents, because the trustee represents the estate and all creditors.

## Conclusion

The Second Circuit held that high-interest loans exceeding New York’s 25% criminal usury cap were void from inception, allowing Chapter 11 trustees to invoke usury as a defense and expunge the lenders’ bankruptcy claims, while leaving open (but not deciding) whether restitution of principal may ever be available under New York law.


In re Venture Mortg. Fund, L.P., 282 F.3d 185 (2d Cir. 2002)