Question

A bakery needed a loan desperately, but the owners could not qualify for a traditional loan. A neighboring business owner knew of the bakery's predicament and agreed to loan the bakery the money at 15% interest, payable in 18 months. The bakery owners and neighboring business owner were set to sign the papers on the very day the bakery needed to get the money to pay its rent to avoid eviction. At the closing to sign the documents, the lender demanded 15% of equity (ownership) in the bakery, in addition to interest. The desperate bakers signed the documents, paid the rent and consulted a lawyer. The bakers decided not to repay the business owner. If the business owner sues, who will win?

a) The bakers, because the loan terms were almost certainly usurious.

b) The business owner, because the bakers could have walked away without signing the agreement.

c) The business owner, because the bakers were unqualified for a traditional loan, and hence a high credit risk.

d) The bakers, because the business owner was not licensed to make a loan.

Answer 1

The outcome of the lawsuit will depend on state laws regarding usury, unconscionability, and whether the lender needs a license to issue such a loan.

If the interest rate is usurious or the contract is found to be unconscionable, the bakers may have a defense against repayment. If the bakers entered into the agreement freely and the terms are not usurious, the business owner could potentially win the lawsuit.

The Correct option is;

b) The business owner, because the bakers could have walked away without signing the agreement.

Step-by-step explanation:

The scenario described involves a loan agreement that was altered at the last minute to include an equity share in addition to interest. The business owner's demand for a 15% equity stake on the day of signing, in addition to interest, under circumstances where the bakers were under duress, could potentially be viewed as an unconscionable contract amendment.

Unconscionability considers whether one party is subjected to undue pressure, resulting in a contract or terms which are unjust or extremely one-sided in favor of the party with superior bargaining power.

Furthermore, the question of usury arises, which relates to charging an excessively high rate of interest above the legal maximum. If the 15% interest rate is above the usurious rate in the jurisdiction and the loan was for personal use, then this could potentially void the contract or the interest term.

Whether the business owner being unlicensed to make a loan or the potential for usury will prevail in court depends on the specific state laws regarding loans, licensing requirements, interest rate caps, and the nature of the bakers' business.