Rutgers School of Law, OAL case ACPE118

90 N.J.L.J. 749
November 16, 1967

ADVISORY COMMITTEE ON PROFESSIONAL ETHICS

Appointed by the New Jersey Supreme Court

OPINION 118

Usury - Corporate Individual Borrowers

    Inquiry has been made as to whether it is ethical for an attorney to represent a client who participates in any of the following transactions:
    1. Negotiation and closing of a mortgage loan from a lending institution to a corporation bearing interest at 7 percent per annum and possibly requiring a bonus of 1 to 5 points. Guaranties by the individual principals of the mortgagor corporation may be required.
    2. Representation of an established business corporation borrowing money from a bank on a promissory note bearing interest at 7 percent per annum, with the general endorsement or guaranty by the individual principals of the borrowing corporation.
    3. A transaction in which an individual lender accepts a mortgage from an established business corporation engaged in the business of erecting and selling one-family dwelling houses. The mortgage is secured by a building lot and is subordinate to a prospective institutional construction mortgage. The mortgage bears interest at 12 percent to 24 percent per annum with payment guaranteed by the individual principals of the borrowing corporation.

    4. A transaction in which a private lender makes a loan to an individual or a partnership, for business purposes, on a promissory note calling for interest at the rate of 18 percent per annum. Both the borrower and lender are advised that insofar as the note calls for the payment of any interest whatsoever, the same constitutes no more than an informal memorandum of the agreement between the parties, which is unenforceable. Interest is not deducted in advance. The full interest is set forth on the note, and there is no deduction from the loan on account of excessive interest in order to avoid negotiation to a holder in due course who has no notice of the basis of the transactions.
    Our Supreme Court has recently stated that an attorney who represents a borrower or a lender in a usurious transaction is participating in an illegal undertaking, and is therefore guilty of unethical conduct. In re Giordano, 49 N.J. 210 (1967), in which our Opinion 71, 88 N.J.L.J. 170 (1965), is cited with approval.
    The initial problem to be resolved is whether any of the foregoing transactions is usurious in whole or in part. In the first three cases, the borrower is a bona fide corporation, i.e.; one not formed for the purpose of evading the Usury Statute N.J.S.A. 31:1-1 et seq.). Section 6 of that statute provides that a corporation may not plead the defense of usury. The inquirer expresses some concern that footnote 2 of the opinion. In re Giordano (at page 223) implies that even though a corporation is involved, the transaction is nevertheless usurious and therefore an

attorney may not represent either party. We do not believe the opinion should be so construed. It is common knowledge that New Jersey corporations frequently borrow money in the open market at rates in excess of 6 percent. Many persons have apparently concluded that N.J.S.A. 31:1-6, in providing that a corporation may not plead the defense of usury has, in effect, established an exemption from the application of the law on usury to loans to corporations. In these circumstances, since the precise question has not been adjudicated by our courts, an attorney should not be criticized for representing either party in such a loan transaction where the borrower is an existing bona fide corporation.          Furthermore, representation of a party to any of the first three transactions is not affected by the requirement that individuals guarantee or otherwise obligate themselves on the loan. If the loans are actually made to the corporation, usury is not a defense even to the endorsers of the corporate obligations. Gelber v. Kugel's Tavern Inc., 10 N.J. 191, 196 (1952).
    In the fourth transaction, it is stated that the loan is for business purposes and that both parties are thoroughly advised of their rights, particularly that the memorandum as to interest is unenforceable. While the nature of the transaction and the presumed sophistication of the parties indicate that there is no over-reaching involved as appears in Giordano, supra, and In re Greenberg, 21 N.J. 213 (1956), nevertheless, the loan is to an individual at a usurious rate of interest. Such a transaction, whether the parties clearly understand it to be unenforceable or not, is an illegal transaction. As we said in our Opinion 71:         If, in fact, the loan is usurious, and the attorney knows or has reason to know it, he must refrain from participating in the transaction.

    We see no reason to qualify this opinion simply because certain parties may be more knowledgeable in transactions of this sort than others. Accordingly, participation in such a transaction on behalf of either party would be unethical.

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