The California Court of Appeals has held that a general release is ineffective to release usury claims. In Hardwick v. Wilcox, 11 Cal.App.5th 975 (2017), James Hardwick, received several loans at an interest rate of approximately 12% from Albert Wilcox. The latter was unlicensed as a lender and had no other exemption from usury under California law.
Wilcox foreclosed on the loans secured by deeds of trust on Hardwick’s commercial property and, upon Hardwick’s default, began foreclosure proceedings. The parties entered into a forbearance agreement which contained a general release of claims, including future unknown claims, permitted by California state law, known as an “1152 waiver.”
Nine months later, when Hardwick sued Wilcox to recover excess interest, the latter moved to dismiss the suit based on the general release of present and future claims. The release did not specifically mention usury claims. The trial court held that the general release was not made in anticipation of usury claims. As a result, the trial court ruled that the release did not release usury claims and that even if it did, any such release would be against public policy and, therefore, invalid.
The California Court of Appeals affirmed the trial court’s judgment which gave over $200k to Hardwick for damages based on usurious interest. It held that the general release was ineffective to release usury claims since the forbearance agreement obligated Hardwick to make further payments, which were also usurious, and the release, therefore, violated public policy. Also, because there was no mention of usury nor any claim for usury contemplated or made at the time the release was executed, it was not a knowing and voluntary waiver of rights.
If a lender is making million dollar loans, it needs to be licensed or procure another type of exemption from usury. Otherwise, an alternative is to concede a discount below 10% on the interest rate to prevent a usury claim. Based on this case, the only other option may be to risk a legal action based on usurious interest.
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