## Facts

- In 2008, the Ruthie E. Ross Revocable Living Trust (Ross Trust) borrowed $650,000 from the Daniel A. Peyerk Living Trust (Peyerk Trust), secured by a mortgage on the Ross Trust’s real property.
- The mortgage note set interest at 12% per year, required annual payments of $95,435.76 beginning in 2009, and had a maturity date in 2013.
- The note also included provisions stating that (a) missed annual payments would be added to principal (including any unpaid interest) and interest would accrue on the new balance (compounded interest), and (b) the interest rate would increase for each year an annual payment was not paid (with at least a 1% increase tied to changes in the prime rate).
- The Ross Trust made one annual payment of $95,435.84 and later made a second payment of $135,586.39, for a total of $231,022.23, then went into default.
- After default, the Peyerk Trust demanded an amount exceeding $800,000 under the note’s escalation and compounding terms.
- The Ross Trust filed a quiet-title action, alleging that the Peyerk Trust’s charges violated Michigan’s criminal usury statute, which prohibits interest above 25% per year.
- The trial court determined that, based on the way the Peyerk Trust applied the note’s compounding and missed-payment terms, the effective interest rate exceeded 25%.
- Applying MCL 438.32, the trial court limited the Peyerk Trust’s recovery to the remaining principal on the original loan—$418,977.77—and barred recovery of interest and missed-payment amounts.
- The Peyerk Trust appealed, arguing the note called for only 12% interest; during the appeal, it asserted the balance had grown to $2,871,628.24.

## Issues

1. Whether the Peyerk Trust’s use of compounded interest and missed-payment additions (and related rate increases) resulted in an effective annual interest rate above 25% in violation of Michigan’s criminal usury statute, MCL 438.41.
2. If the transaction was criminally usurious, whether MCL 438.32 barred the Peyerk Trust from recovering any interest or missed-payment amounts, limiting recovery to unpaid principal.

## Decision

- The Michigan Court of Appeals affirmed.
- The court held that the Peyerk Trust charged and attempted to collect amounts that, in operation, produced an effective interest rate above 25% per year.
- The court held that MCL 438.32 barred the Peyerk Trust from recovering any interest or missed-payment amounts and limited enforcement to the remaining principal balance.

## Legal Principles

- Under MCL 438.41, criminal usury turns on whether a lender charges, takes, receives, or attempts to collect interest above 25% per year.
- Courts assess the effective interest rate arising from how the contract’s terms operate, not merely the stated nominal rate.
- Contractual mechanisms that increase the cost of forbearance—such as capitalizing missed payments (including unpaid interest) into principal and charging interest on the increased balance—may be treated as interest for usury analysis.
- When criminal usury is established, MCL 438.32 requires forfeiture of interest; the lender may recover only the unpaid principal and may not recover interest-based add-ons tied to the usurious charge.

## Conclusion

The Court of Appeals affirmed the judgment limiting the Peyerk Trust to recovery of the Ross Trust’s remaining principal because the note’s compounding and missed-payment terms, as applied by the lender in its demands, produced an effective annual interest rate exceeding Michigan’s 25% criminal usury cap, triggering forfeiture of all interest under MCL 438.32.


Ross v. Peyerk, 2022 WL 1714582 (2022)