U.S. District Court (New York) Rules Interest Rates on Loans Are Not Usurious 
Golock Capital, LLC v. VNUE, Inc., 2023

“Golock Capital, LLC (Golock) and DBW Investments, LLC (DBW; together, Plaintiffs)  issued seven loans in the form of convertible promissory notes to VNUE, Inc. (VNUE).  Golock and DBW have sued VNUE for breach of its obligations under the notes.” VNUE  admitted it had not repaid the loans but argued that the loans were “criminally usurious” and were void. A bench trial determined that the rates on the loans were not usurious, and  judgment was made in favor of the plaintiffs, including an award for attorneys’ fees. 

Findings of fact.

In total, from 2017 to 2019, the plaintiffs loaned VNUE $341,081. VNUE  is a music technology company, that records concerts and sells the recordings online. In  2017, Zach Bair, VNUE’s CEO, reached out to David Whitlock (of Golock) for short-term and  long-term funding. VNUE was a small-cap public company whose 10K included a going 

concern clause from its auditors. It did not yet have revenues and needed capital. To minimize the risk of repayment, Whitlock included a conversion feature for principal and interest in the notes. 

VNUE’s stock was a price volatile penny stock. The 2022 10K, filed in 2023, included a risk  description, part of which follows: 

The lack of an active market impairs your ability to sell your shares at the time you  wish to sell them or at a price that you consider reasonable. The lack of an active  market may also reduce the fair market value of your shares. An inactive market may  also impair our ability to raise capital to continue to fund operations by selling shares. 

Whitlock, in conjunction with Kenneth Lustig, formed Crossover Capital Fund II. Crossover  made two loans to VNUE through promissory notes but declined to make additional loans to VNUE. Interested in making additional loans, “Whitlock formed Golock with Christopher  Gorog, and formed DBW alone. Golock and DBW were created solely to provide funding to  VNUE.” From September 2017 to February 2018, Golock and DBW made six convertible  loans to VNUE with an interest rate of 10% and a default interest rate of “highest (non usurious) rate for when the Borrower may legally contract under applicable law.” The parties  agreed this rate was 24%. The notes also included a common stock conversion provision at  a price set in the notes. The notes also included an original issue discount (OID) of $5,000 per note to compensate the lender for costs and additional consideration. 

VNUE was unable to repay any of the original notes. “To account for the continued risk of  default on these loans, the Original Notes were amended to include a floating-price  conversion option” at a discount from the trading price. The maturity date for the First  Amendment to the notes and price passed, and VNUE still was unable to pay the notes.  There was a Second Amendment on April 29, 2019, extended to July 31, 2019. “The Second  Amendment also changed the discount in the floating-price conversion option from 58% to  50% of the Lowest Trading Price.” The Second Amendment also required VNUE to issue  stock warrants at $0.00475 per share. “Pursuant to the Warrants, Golock was to receive  12,833,333 shares, and DBW was to receive 2,966,986 shares.” Golock exercised its  conversion rights under one of the notes five times, for a total conversion of $24,387.50.  Golock provided one more note on Nov. 15, 2019, due Aug. 14, 2020. In addition to  conversion provisions including price, this note carried an interest rate of 12%, with a default  rate of 22%. Had Golock converted the shares on the maturity date of the loan, it would have  received shares that would then represent about 37% of the resulting outstanding shares.  In December 2019, VNUE refused to convert any of the notes then and subsequently and  refused to allow warrants to be exercised. “[T]he Plaintiffs calculate the damages as  $787,717.56 for unpaid principal and interest on the Notes; $516,541.65 for the value of the  shares under the Warrant issued to Golock; and $115,396.19 for the value of the shares  under the Warrant issued to DBW.” 

Procedural history.

The plaintiffs filed this action on Sept. 30, 2021. “The Plaintiffs bring  claims of breach of contract for the unpaid principal, interest, and default interest on the  Notes; breach of contract for failure to deliver the Warrants; and unjust enrichment.” On  Sept. 1, 2022, the defendant filed counterclaims. Discovery closed on Feb. 3, 2023. A bench  trial was scheduled for May 22, 2023. On April 27, 2023, VNUE moved for summary  judgment on the primary charge of usury. The motion for summary judgment as well as a  motion to exclude the plaintiffs’ expert witness were denied. 

Conclusions of law.

Usury. Corporations were not allowed, in New York, to offer a defense of usury with one  exception, which was a case of criminal usury. It was a felony when a lender “without other  legal authorization … knowingly charges, takes or receives any money or other property as  interest on the loan or forbearance of any money or other property, at a rate exceeding 25%  per annum or the equivalent rate for a longer or shorter period.” (Adar Bays). When a loan was criminally usurious, neither the principal nor the interest were collectible but were rendered void. The party seeking to void (i.e., the defendant in this case) had the burden of  proving the usury. Usurious intent was an essential element of usury. It was a question of  fact when the usury did not appear on the face of a note (e.g., a stated interest rate on the  face of the note exceeding 25%). 

“The Second Circuit Court of Appeals, however, certified that question to the New York Court of Appeals, and on October 14, 2021, the New York Court of Appeals held that ‘the value of  the floating-price convertible options should be included in the determination of interest’ in usury calculations.’” (Adar Bays) The value of the conversion options should be determined  at the time of the agreement. The fact that the conversion option might result in a return  higher than 25% did not render a loan usurious on its face. 

The valuation should exclude contingencies that were a part of any loan transaction, e.g., bankruptcy. Additionally risks that the lender had contractually protected itself from should  also not be included in the valuation. And the risk of the borrower refusing conversion should  also not be considered in the valuation. The New York court anticipated that expert  testimony will assist the valuation. 

VNUE asserted that the two 2018 notes as originally constituted were usurious due to their  OID. It also asserted that all of the notes having a floating conversion price were usurious. VNUE had failed to prove that any of the floating conversion notes were usurious. The rate  at which the notes would ultimately be converted was not known at the execution dates. No  evidence supported a finding that the plaintiffs would have converted all of the debt of even  one note into equity. 

VNUE provided expert testimony by Dr. Scott Hakala. He concluded that all floating-rate  conversion notes had a rate in excess of 25%. He concluded that the 2018 notes were  usurious when the OIDs were factored into the notes. Hakala relied on an intrinsic value of  each note. He did not include incremental “optionality” value for conversion rights nor  warrants. He explained his intrinsic value in his report as follows: 

The “intrinsic” value is deemed to be realized on the date of issuance and is typically  calculated as a form of OID for financial accounting purposes. In this instance, in  order to be conservative and reflect the net cash proceeds of each loan I have not treated the “intrinsic” value as a form of OID but, instead, as additional consideration. 

He measured the option conversion value as the exercise of full principal at the maturity  date of the note and then selling the shares on the market at that date. “As Dr. Hakala  explained, he relied on the intrinsic value method since the current stock price is an ‘estimate  of the probability weighted of all future outcomes.’” This allowed him not to have to consider  a number of issues such as the number of shares, financial condition of VNUE, number of  shares able to be sold on the maturity date, etc. His report gave a detailed example of his  calculation of the interest rate on the 2019 note, which he calculated to be 58.38%  annualized. 

In testimony, Hakala admitted it was likely that the stock gained in conversions would have  to be dribbled out to be sold because of VNUE’s thin and volatile market. He also admitted  the price volatility caused by conversions in his report. However, the court noted that the  plaintiffs were responsible for only a minuscule fraction of the conversions. Hakala also  admitted that a lender would not likely sell all stock received in a note conversion because  the impact of the sale lowering the price would go against the lender. It would have taken eight years to sell the stock received in 2019 conversions. VNUE failed to carry its burden  to prove usury. Hakala’s intrinsic value method was not appropriate and was not in keeping with Adar Bays, which itself cautioned that future returns may result in a rate greater than  25%, which did not render the note usurious on its face. 

Usurious intent. VNUE failed to prove that the plaintiffs had an intent to charge a usurious  rate. “VNUE didn’t offer any evidence that VNUE itself ever calculated the interest rate for a  Note by valuing the conversion options for the Note.” The OID was not included in the  calculation of the rate of interest, and VNUE agreed that the notes were not usurious without  the inclusion of OID. 

Conclusion.

“Because VNUE has failed to establish the affirmative defense of usury, the  Plaintiffs are entitled to judgment on their breach of contract claims. The Plaintiffs’ unjust  enrichment claim is denied as duplicative.”