Loan sharking remains a problem in some communities. Private lenders may target people with poor or insufficient credit to obtain the loans they want, and in some communities, there is no tradition of banks or similar regulated lenders. A recent case in Oregon shows that the courts are willing to protect borrowers from abusive lenders.
The lender was an elder in the Burmese community. Two younger Burmese living in Oregon signed a series of promissory notes, secured by their home, between 2001 and 2008, borrowing over $200,000 at rates as high as over 60 percent. By 2008, the borrowers had paid over $275,000, but the lender claimed they still owed over $180,000, never gave receipts, and refused multiple requests for accountings. Attempts to negotiate over the years were unsuccessful, with the lender claiming a fictitious business partner’s refusal to negotiate as the reason for her refusal to reduce rates or to subordinate her interest to a proposed refinancing. In 2005, the lender called the loans, asserting the business partner was making the decision, required them to sell the house, loaned an additional $40,000 for prelisting improvements that she claimed were necessary, and then, when an asking price she set was met, demanded a backdated note and trust deed for $70,000 more. Despite receiving over $74,000 from the sale, the lender also demanded, before closing, another $56,000 for asserted deficiencies and $10,000 for her daughter’s services related to the sale. She continued to demand additional loans after the sale. In 2007, the lender claimed the balance was $80,000 but gave a past due notice stating a balance of over $180,000 a year later.
The borrowers sued in 2009, asserting a series of claims including fraud, racketeering, violation of a fiduciary duty, and two different equitable claims based on the concept that it would be unfair for the lender to be allowed to keep the money. They asked for almost $210,000 in damages, the right to rescind the loans, and a declaration that they owed the lender no more money.
The lender’s defenses were primarily legal. First, she argued that the statute of limitations had run on several of the claims, including the racketeering claim. The trial court ruled in her favor with regard to racketeering, fraud, and fiduciary breaches, but the borrowers appealed this ruling as to the racketeering claim and the Court of Appeals reversed. As to the equitable claims, the trial court ruled for the borrowers and, when the lender appealed, the Court of Appeals affirmed the trial court’s ruling.
The Court of Appeals raised two significant points in reference to the statute of limitations. The simpler part of its ruling is that Oregon’s racketeering law, unlike the federal law, includes a specific statement that its five-year period should not begin to run until after the last act of racketeering, which in this case was the final past due notice only a year before the suit was filed. This opens the possibility that the trial court could award trebled damages, increasing the judgment (without considering costs and fees) to as much as $500,000 plus interest.
The more complicated issue is the Court of Appeals’ ruling that even though the statute of limitations for the equitable claims was the two year statute used for most tort claims, it did not begin to run until 2008 because a person in the borrower’s shoes, dealing with a person of great respect in their community, traditionally treated with deference, but who acted coercively (by repeatedly threatening action by the fictitious business partner), would not necessarily have discovered more than two years before they filed suit that the lender’s actions were improper. The Court of Appeals also noted that because Burma/Myanmar does not have an active banking industry, the rates charged were not inconsistent with a typical borrower’s experience and therefore would not raise a red flag. This ruling follows the reasoning of a 2013 case from the Oregon Supreme Court, which ruled that a student might not be expected to conclude that improper touching by a teacher was so offensive as to permit a suit for battery.
The lender also argued that the equitable claims were essentially based on the interest rate limit in Oregon’s usury law, which she claimed only applied as a defense when lenders try to collect, and that the usury law was the only remedy recognized by the law under those circumstances. The trial court ruled for the borrowers on the application of the usury law, awarding over $167,000 damages, over $105,000 interest, and costs and attorney fees of almost $215,000. (The judge also specifically found that the lender’s testimony was not only not credible, but flat-out perjury.) The lender appealed, and the Court of Appeals ruled for the borrowers on these points.
The usury law in Oregon limits the interest rate on most business loans of less than $50,000 to 12 percent. If a greater rate is charged, and an exception does not apply, the lender forfeits the right to collect interest. (The principal must still be repaid.) The court ruled that the law allowed a borrower who paid an illegal interest rate had the right to sue to recover the illegal payments. It also ruled that the basis for that suit did not have to be the usury law itself, but could include traditional equitable arguments for improperly paid or retained money. Several years ago, when payday lenders first appeared in Oregon and charged rates reported as high as 300 percent, I queried whether a similar argument, that the rate should be disallowed as grossly unfair, might be successful, but I never had the opportunity to raise that issue in court. I think that the Oregon courts have now signaled that extremely high payday loan rates might be subject to challenge. On the other hand, the coercive actions of the lender in this case are so far beyond the pale that another court might decide her abusive behavior was too different from most loans to expand on this ruling.
This case presented an unusual and extreme situation of abuse in the private lending market. If, however, you have concerns about the terms of a private loan or the actions of a private lender, please consider talking to a lawyer. If you are lending money privately, don’t take advantage of your borrowers. This case should be seen as a warning.