Opinion ID: 1799833
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Heading: the corporate exception and the two major lines of cases

Text: The corporate exception to the usury laws was born in England in 1716 when a statute was passed, denying the defense of usury to a corporate body. See Comment, Usury Laws and the Corporate Exception, 23 Md.L.Rev. 51, 54 (1963) (citing to 10 Bacon's Abridgement 264, 266 (1952)). States that have adopted similar corporate exception statutes have generally followed one of two rules: the New York Rule or the New Jersey Rule. The New York Rule is founded primarily on the case of Jenkins v. Moyse, 254 N.Y. 319, 172 N.E. 521 (1930). In that case the defendant lender refused to make the loan to an individual but suggested that the plaintiff incorporate. The plaintiff followed the suggestion in order to get the loan but later brought an action claiming that the loan was usurious. On appeal the New York Court of Appeals wrote this often quoted language, The law has not been evaded but has been followed meticulously in order to accomplish a result which all parties desired and which the law does not forbid. Jenkins, 172 N.E. at 522. New York makes it clear in its recent cases that its courts will make a determination whether the loan was for a purely personal and necessitous purpose or for a personal business or commercial enterprise. Schneider v. Phelps, 41 N.Y.2d 238, 391 N.Y.S.2d 568, 359 N.E.2d 1361, 1364 (1977). In New York, as Schneider points out, the claim of usury is allowed only when a corporation has been formed to hide a personal and necessitous loan. Most states follow the New York Rule. See Matter of LeBlanc, 622 F.2d 872 (5th Cir.1980); Snyder v. Woxo, Inc., 185 Neb. 545, 177 N.W.2d 281 (1970); Loiseaux, Some Usury Problems in Commercial Lending, 49 Tex.L.Rev. 419, 439-41 (1971). A minority of states have adopted the New Jersey Rule, also known as the question of fact rule, by which the corporate form is disregarded if the substance of the loan transaction involves a loan to an individual instead of a corporation. In re Greenberg, 21 N.J. 213, 121 A.2d 520 (1956). This rule involves a fact determination of whether or not the corporation was used as a device to conceal a usurious transaction to an individual. Note, Incorporation for the Purpose of Borrowing at an Otherwise Usurious Rate of Interest; Skeen v. Glen Justice Mortgage Co., 29 Sw.L.J. 959, 960-61 (1975). The question of fact jurisdictions proceed on a case-by-case basis considering such factors as the voluntariness of incorporation, the corporation's financial basis, the purpose of the loan, and the experience of the borrower. Id. at 962. Those jurisdictions do not hesitate to examine the reasons for a loan in attempting to determine whether the corporation was the true borrower. See Monmouth Capital Corp. v. Holmdel Village Shops, Inc., 92 N.J.Super. 480, 224 A.2d 35 (Ch.1966).