If you run a business, you likely send your clients invoices monthly for all goods delivered or charges incurred. You indicate in your initial agreement and subsequent invoices that payment is due within 30 days, and that any invoice paid beyond that period incurs a late fee of 10% interest per month. But what happens if your client doesn’t pay? Can you include the late payment fees as part of your debt collection case or will that violate New York usury law?
Normally, in New York, any charged interest amount above 16% is civilly “usurious,” meaning you can be sued if you try to enforce a loan that exceeds 16% interest per year. Charging more than 25% interest per year is considered criminally usurious. You can be charged in criminal court under New York’s penal code for trying to enforce a loan that exceeds 25%.
Interest and Late Payment Fees
If an invoice provides for a late fee of 10% interest per month and continues to be late for 12 months, that would be 120% interest per year (10% x 12 months). While you might think that would violate the penal code for charging more than 25% interest, this is not the case. The law is clear that the code on usury, the New York General Obligations Law, only applies to a loan of money or a forbearance of money. Multiple cases in New York have ruled that interest payments on outstanding invoices do not constitute a loan or forbearance.
The transaction above was not usurious because it involved interest to be paid based upon a contingency within the control of the debtor–default in the payment of an agreed-upon obligation. The debtor could have avoided the imposition of such charges simply by paying the invoices promptly.
However, that is not the whole story. Even though the transaction in question does not technically violate the New York penal code on usury, the court will review the amount of interest involved and decide whether the amount is “unreasonable and confiscatory in nature.” The court will determine whether the late charges on the invoice are enforceable. Should the court find the interest unreasonable and confiscatory, the court will deem the late charges and interest unenforceable. Regarding the example above, the court would likely deem 120% annual interest unreasonable and confiscatory and therefore said fees unenforceable.
It should be noted that the common business practice is to charge between 1.5% and 2% interest per month. It should also be noted that if there is no signed agreement between the parties and the seller is charging these fees only because the invoice provides for said charges, the late fees and interest are not enforceable without signed documentation. The debtor must agree to the late charges in a signed agreement before the creditor can enforce a provision allowing the creditor to enforce payment.
If you have a debt collection matter that you need assistance with, contact Frank, Frank, Goldstein and Nager. We have the experience that pays.
