Background
In July 2023, LF Collateral SPV IV, LLC commenced a mortgage foreclosure action against Citadel NY, Inc. and Sevda U. Imranova (as guarantor) for property located in Manhattan and Brooklyn. The defendants answered, asserting as their primary counterclaim that the subject mortgage was criminally usurious and, therefore, void and unenforceable.
LF Collateral moved for summary judgment on the foreclosure complaint, to strike the defendants’ answer, and for an order of reference. The defendants cross-moved to dismiss the complaint and have the mortgage declared a nullity. The Supreme Court, Kings County (Knipel, J.) granted LF Collateral’s motions and denied the defendants’ cross-motion, in two separate orders dated June 17, 2024. The defendants appealed from both orders.
The Court’s Holding
The Appellate Division, Second Department affirmed both orders. On the threshold foreclosure elements, the plaintiff established prima facie entitlement to summary judgment by producing the mortgage, the unpaid note, and evidence of default. The defendants waived any standing defense by failing to raise it in their answer.
On the criminal usury defense—the core dispute—the court applied the settled rule that a corporation or LLC, and the individual guarantor of such an entity’s debt, may not assert civil usury as a defense (General Obligations Law § 5-521[1]; Limited Liability Company Law § 1104[a]). But they may assert criminal usury if the interest rate exceeds the criminal usury threshold (Penal Law § 190.40; General Obligations Law § 5-521[3]). Here, however, the defendants failed to raise a triable issue of fact as to whether the loan was criminally usurious—the submissions did not establish that the agreed interest rate crossed the criminal usury threshold. Accordingly, the criminal usury counterclaim was properly dismissed.
On the guaranty, the court held that the assignment of the note and mortgage to LF Collateral carried with it Imranova’s guaranty. The plaintiff could therefore enforce the guaranty against her despite not being the original lender.
Key Takeaways
- Corporations and LLCs (and their guarantors) may not assert civil usury as a defense to mortgage enforcement—New York law forecloses that defense for business entities. The only available usury defense is criminal usury, which requires interest rates exceeding Penal Law § 190.40 thresholds.
- To defeat a foreclosure on criminal usury grounds, the defendant must submit evidence sufficient to raise a triable issue of fact that the effective interest rate is criminally usurious. A bare assertion or counterclaim allegation is insufficient; evidentiary support is required.
- A standing defense to foreclosure is waived if not raised in the answer; defendants cannot introduce a standing challenge for the first time in opposition to a summary judgment motion.
- A guaranty travels with the note and mortgage on assignment: an assignee of a mortgage note may enforce the original guaranty against the guarantor without any further agreement from the guarantor.
Why It Matters
Criminal usury has become an increasingly common defense in New York mortgage foreclosure proceedings, particularly in the commercial real estate and hard-money lending markets. Lenders who operate in markets with higher interest rates—private credit funds, bridge lenders, and mezzanine lenders—routinely face usury counterclaims as a foreclosure defense tactic. LF Collateral confirms that such counterclaims, while available in theory to corporate and LLC borrowers, require a genuine factual showing: the defendants must raise a triable issue that the effective rate crosses the criminal threshold, not simply plead it.
For New York real estate lenders and their counsel, the decision reinforces that the business entity-civil usury bar (GOL § 5-521) remains a robust shield in commercial mortgage litigation, and that criminal usury defenses—the only remaining avenue—require evidentiary support to survive summary judgment. Borrowers and guarantors asserting criminal usury as a defense should obtain expert analysis of the effective interest rate (accounting for fees, points, and related charges) before filing the defense; otherwise, the claim will be dismissed at the summary judgment stage.