On March 1, 2023, the U.S. District Court for the Southern District of New York refused to dismiss a RICO claim, finding that a usurious contract could qualify as an “unlawful debt” for RICO purposes. Before commencing litigation, the borrower-plaintiff and defendant EMA Financial executed securities contracts providing that, in exchange for $94,000, EMA would receive a promissory note in the principal amount of $100,000 with an annual interest rate of 8% and a nine-month maturity date. The note also contained a conversion option allowing EMA to exchange the accrued debt for shares of the plaintiff’s stock at a 30% discount. EMA submitted multiple conversions under the note, ultimately converting approximately $83,000 in debt into over 567 million shares of plaintiff’s stock, with a market value of over $265,000. The plaintiff sued EMA on: (i) a claim based on a violation of the Racketeer Influenced and Corrupt Organization Act and (ii) an unjust enrichment claim.

In a motion to dismiss, EMA argued that the RICO claim failed because, among other things, the plaintiff did not plead a substantive RICO violation since the securities contracts did not qualify as an “unlawful debt” (a necessary element for a RICO claim). RICO defines an unlawful debt as one “which is unenforceable under State or Federal law . . . because of the laws relating to usury,” and “which was incurred in connection with . . . the business of lending money . . . at a rate usurious under State or Federal law, where the usurious rate is at least twice the enforceable rate.” Under the applicable New York law, a loan is usurious if the interest rate exceeds 6%, and is criminally usurious if it has an interest rate over 25%. The plaintiff alleged that the annual interest rate under the note was not 8%, but was really 73% because of the conversion option. The district court agreed with the plaintiff, finding that an “unlawful debt” was adequately alleged. Since the conversion option had to be considered to determine the effective interest rate, it was plausible that the securities contracts were usurious. While EMA argued that a “savings clause” (i.e., that payments of interest could not exceed the maximum lawful rate authorized under applicable law) prevented the securities contracts from being usurious, the district court disagreed, finding that such a savings clause could not save an otherwise usurious promissory note.

The district court also refused to dismiss the unjust enrichment claim. An unjust enrichment claim is ordinarily precluded when there is a valid and enforceable written contract. However, because the enforceability of the securities contract was disputed (as being usurious), the unjust enrichment claim was allowed to proceed.

The case is DarkPulse, Inc. v. EMA Financial, LLC, No. 22-cv-45 (S.D.N.Y. Mar. 1, 2023). The plaintiff is represented by The Basile Law Firm P.C. The defendants are represented by Olshan Frome Wolosky LLP. The order is available here.