While equity has lost its appeal for the time being as a currency for acquisition transactions, subordinated debt and high yield bonds have gained ground as cost efficient financing tools.
However, the development of high yield lending in France has been substantially curtailed by a stringent criminal usury statute. To avoid the risk of running afoul of French usury restrictions, many loans to French corporations are arranged in foreign financial markets, on the theory that French usury law does not apply to international loans. This view has strong support from French courts and market regulators, yet has not been rigorously analyzed as an issue of private international law.
This memorandum examines the interplay of private international law and French usury rules in the case of international loans to French corporations.
Usury Laws in France, England and New York
The French usury statute is codified as Article 313-3 of the French Consumer Code: "[a] conventional loan constitutes a usurious loan when it is granted at a rate that exceeds, at the time it is granted, at least one-third of the average effective rate applied during the prior quarter of the year by credit institutions for loans of the same nature with similar risks, as defined by the relevant administrative authority after consulting with the National Credit Council."[1]
Violation of the French usury statute constitutes a criminal offense and subjects the lender to penalties of imprisonment and monetary fines. In addition, regardless of the terms of the loan agreement, the borrower may refuse to pay the lender interest in excess of the applicable usury rate.
In a decree issued pursuant to Article 313-3 of the French Consumer Code, the French Ministry of Economy and Finance designated the Bank of France to determine the usury interest rate for certain categories of loans specified by executive order (the "1990 Decree").[2] The rates determined by the Bank of France according to this provision over the past three years have ranged from 7.31% to 9.33%.[3]
However, the rates specified by the Bank of France for determination of usury ceilings do not include rates for corporate loans in an amount greater than €152,449 or loans denominated in foreign currency.[4] The usury rate on such loans would have to be established by the Bank of France on a case by case basis, upon referral by a French court, and by reference to the express guideline stated on the face of the usury statute, which refers to rates for "loans of the same nature with similar risks."
A Bank of France official has recently advised us that the Bank of France has never yet been called upon to determine the usury rate for a loan not covered by the 1990 Decree.[5] The official added that if the Bank of France were required by a court to do so in the context of an international loan, it would seek information concerning the market interest rates in the relevant foreign jurisdictions.
Remarkably, despite the criminal nature of French usury restrictions, there are no published usury baselines for large scale corporate loans. Parties remain subject to an ex post facto determination of legality by an administrative agency through a murky and uncharted procedure.
To avoid legal uncertainty and obtain loans at competitive international rates, French corporate borrowers often turn to the banking and financial centers in New York and London, where usury law has traditionally been less restrictive than in France.
English usury laws were repealed by Parliament in 1854,[6] but due to the proliferation of loan sharking activities certain credit restrictions were reintroduced by the Money-Lenders Act of 1900, which set the usury threshold at 48%.[7] The Money-Lenders Act of 1900 was superseded by sections 137 through 140 of the Consumer Credit Act of 1974 (the "Credit Act"), which permit a court to reopen terms of a credit agreement that it finds "extortionate" so as "to do justice between the parties."[8]
The Credit Act refrains from setting a bright-line usury threshold, defining instead an extortionate credit agreement as one that "requires the debtor ... to make payments ... which are grossly exorbitant, or ... otherwise grossly contravenes ordinary principles of fair dealing."[9] Most importantly, the extortionate credit provisions apply only to loans to individual borrowers, not to corporate borrowing.[10]
An implicit consideration of bargaining leverage led to the introduction into New York law of a limitation on usury prohibitions in corporate lending, following the 1850 case of Dry Dock Bank v. American Life[11]. In Dry Dock Bank, a New York bank had succeeded in having its corporate obligations in the amount of $250,000 declared void on the ground that they had been given in payment for usurious loans made to the bank. In response to this unanticipated use of the usury statute as a shield by a bank-borrower, the New York legislature enacted a statute providing that "no corporation shall hereafter interpose the defense of usury in any action."[12]
To exploit the exemption for corporations, loan sharks made it their policy to require individual borrowers to incorporate before being granted an exorbitantly priced loan.[13] The New York legislature responded to this practice in 1965 by enacting a section of the NYL which provides that if a corporation is given a loan at a rate of interest exceeding 25%, the loan is deemed usurious and the lender is subject to criminal sanctions.[14]
The provision of NYL § 5-521(3) combined with the criminal offense of usury under section 190.40 of the New York penal law served to deny businesses access to loans at interest rates exceeding 25%, even if funds were required for risky ventures financially justifying such high costs of capital.[15] This result went beyond the legislative intent which, as one court put it, was "to curb certain abuses by persons commonly known as 'loan sharks' who charged high interest rates but avoided defense of usury by insisting that an individual borrower organize a corporation which then became the nominal borrower."[16]
Subsequently, the New York legislature sought to clarify the distinction between consumer and business lending by exempting from the scope of usury laws loans in an amount greater than $2,500,000.[17] Such a bright-line rule facilitates large commercial loans and permits businesses, whether organized as corporations or other legal entities, to obtain loans with interest costs that are commensurate with the risk of their assets.[18]
Thus, in both New York and London, a French corporation may borrow at any rate of interest the market will bear, free of local usury restrictions.[19]
Conflict of Laws
A loan entered into by a French borrower or an international bond offering may involve various foreign "elements"; such as, the place of negotiation or signature of the contract, the place of performance, and the domicile, residence, nationality, place of incorporation, or place of business of the parties. In a contract dispute involving a foreign element, a court applies principles of private international law, also referred to as conflict of law rules, to determine which national substantive law governs the dispute.
French conflict of law rules were harmonized with those of the European Union in 1991[20] upon the adoption into French law of the Rome Convention on the Law Applicable to Contractual Obligations (the "Rome Convention").[21] Article 3 of the Rome Convention gives parties broad freedom to select a law to govern their contract, without requiring any factual connection between the chosen law and the parties or the transaction. The parties may even agree to subject different parts of a contract to different legal regimes, a practice known as "dépeçage."[22]
If the parties fail to specify a choice of law, the Rome Convention states that the contract will be governed by "the law of the country with which it is most closely connected."[23] Under the doctrine of dépeçage, separable parts of the contract that have closer connections to different countries may be ruled by the laws of those respective countries.
Article 4(2) of the Rome Convention establishes a rebuttable presumption according to which the country most closely connected to a transaction is the one in which the party who is to effect the "characteristic performance" of the contract resides.[24]
The most significant limit on the choice of foreign law to govern a contract is contained in Article 7(2) of the Rome Convention, which states that "[n]othing in this Convention shall restrict the application of the rules of the law of the forum in a situation where they are mandatory irrespective of the law otherwise applicable to the contract." As an additional limitation on choice of law, Article 16 of the Rome Convention permits a court to refuse application of a foreign governing law or of a foreign mandatory rule "where such application is manifestly incompatible with the public policy of the forum."
Thus, even in the case of an international loan to a French corporation, i.e., one involving a predominance of foreign elements and an explicit choice of foreign law, French usury restrictions may apply if a court determines that they are mandatory rules ("lois de police"),[25] or "rules of the law of that country which cannot be derogated from by contract" under the Article 3(3) definition. There is no authoritative case law concerning the scope of French lois de police, but usury rules operate precisely to restrict parties' contractual freedom and, thus, manifestly, "cannot be derogated from by contract." Hence, one must conclude that usury rules are mandatory, at least as applied to domestic transactions.
This line of reasoning has recently led a court in the southern city of Pau to suggest in obiter dictum that French usury rules could be considered "public order" and applied to a loan negotiated and obtained outside of France by an individual French borrower, even if the parties expressly stipulate foreign law as the law of the contract.[26]
To attenuate the extraterritorial reach of mandatory rules that might otherwise be deemed applicable in every case before a French court, a line of doctrine and jurisprudence has developed which distinguishes between "internal" as opposed to "international" mandatory rules. In a decision dated November 28, 2000, the French Cour de cassation held that statutory rules concerning the registration of commercial agents are mandatory internal rules but do not constitute lois de police in the international sphere.[27] The highest French court thus distinguished between an internal mandatory rule and an international mandatory rule, holding that only the latter must be given effect under Article 7 of the Rome Convention.
The Cour de cassation decision can be read as reaffirming a prior decision of the Paris Court of Appeals, according to which an interest rate above the French usury threshold does not constitute a violation of international public order if the rate does not substantially exceed the usury threshold of the foreign jurisdictions concerned.[28]
A leading commentator reflecting on the Paris Court of Appeals decision notes that "the decision is significant primarily due to its holding that with respect to an international loan agreement, French usury rules should not be considered to constitute international public order but only internal public order. It is now well established that international public order does not necessarily coincide with internal French public order."[29]
Another leading commentator remarks that "the scope of application of usury rules is thus clear. They constitute législation de police of territorial application, like other regulations applying to credit. These rules apply to French transactions, not to foreign operations. In the case of foreign operations, a French judge should apply foreign usury law ... It is agreed today that French usury laws are not a part of the 'public order'."[30]
In the case of a loan contract entered outside of France by a French corporate borrower, the contract would not be subject to French law but for the Article 7(2) exception. The Cour de cassation and the Paris Court of Appeals decisions provide a sound basis to argue that French usury law should not apply to such a loan as an "international mandatory rule" under Article 7(2) of the Rome Convention.[31]
The distinction between international and internal lois de police is similar to a distinction drawn by American commentators between "public law" and "mandatory private law."[32] While public law cannot be displaced by contractual election or choice of law principles, private law, even of a mandatory nature, remains subject to choice of law analysis.[33] Like French "internal lois de police," mandatory private laws in the U.S. are imperative in a domestic setting only; in an international context, they may be displaced by contractual election.[34]
In contrast, the applicability of a forum's "public law" turns on the intended scope or reach of the law and not on whether other countries might regulate the same transaction. As one commentator observed: "[j]udicial analysis concerning the applicability of public law . . . traditionally ends where conflicts analysis begins: if the court determines that the forum's public law applies to the particular transaction or issue, it does not proceed further to consider the parties' expectations or some other nation's possible superior interest in the transaction or issue."[35] Hence, in applying U.S. securities laws to international transactions, the traditional U.S. approach is indifferent to the regulatory interests of other countries.[36]
Were usury law deemed to be "public law," or, in the French terminology, "international loi de police," its extraterritorial reach would be delineated by the French Penal Code, not by principles of private international law. Under Article 113-7 of the French Penal Code, French criminal law applies to an offense punishable by imprisonment committed outside of France by a foreign national, if the victim of the offense is a French citizen. Although in many countries, this basis for extraterritorial jurisdiction, known as the "passive personality principle," has been restricted to instances of violent crime punishable by significant jail terms in both the victim's and the defendant's states,[37] France has extended Article 113-7 jurisdiction to non-violent, economic offenses.[38]
Not only the Paris Court of Appeals, but also U.S. courts and commentators treat usury rules as mandatory provisions of private law, as opposed to public law or "international lois de police." In fact, special choice of law rules have been developed in the U.S. specifically for usury cases.[39]
Section 203 of the Restatement (Second) of Conflict of Laws (the "Restatement") provides that "[t]he validity of a contract will be sustained against the charge of usury if it provides for a rate of interest that is permissible in a state to which the contract has a substantial relationship and is not greatly in excess of the rate permitted by the general usury law of the state of the otherwise applicable law..."[40]
The official commentary to the Restatement states that "[a] prime objective of both choice of law and of contract law is to protect the justified expectations of the parties. Subject only to rare exceptions, the parties will expect on entering a contract that the provisions of the contract will be binding upon them . . . Usury is a field where this policy of validation is particularly apparent."[41]
New York law has developed an approach more favorable still to the voluntary choice of law in usury cases. The New York choice of law rule with respect to usury is a "rule of validation," under which a New York court will assume that the parties intended to enter into a lawful agreement, and therefore apply the most favorable usury law of any jurisdiction having a significant relation to the transaction.[42] A New York court will examine the usury statutes of all jurisdictions that have a significant relation to the contract and apply the statute which either sustains the agreement or imposes the least severe penalty.[43]
The categorization by French courts of usury law as mandatory private law is thus entirely consistent with Anglo-American jurisprudence.[44]
Economic and Regulatory Considerations
In a previous article, we have demonstrated the difficulty of applying French usury law to corporate bonds issued within France, even in cases where there are no conflict of law issues.[45] The question arises since the usury statute applies to "contractual loans" (prêts conventionnels), whereas corporate bonds (obligations) issued in France, unlike ordinary loans, are governed by a specific set of statutory provisions and are not solely contractual in nature.
In a recently published opinion, the legal committee of the Association Nationale des Sociétés Anonymes ("ANSA") asserts that usury rules should not apply in any case to corporate debt instruments (titres de créance), since such instruments are of an "institutional," as opposed to contractual, nature.[46] The opinion points out that debt instruments are issued by institutional decision, that bondholders are protected by special institutional rights (masse des obligataires), and that like equity capital, bonds bear a nominal value. The Bank of France takes a similar position, stating that the criminal nature of usury rules mandates a narrow interpretation of the statute.[47]
In its opinion, ANSA states unequivocally that an issuance of debt by a French borrower on an international market is not subject to French usury law.[48] The French Commission des operations de bourse has recently acknowledged in a published statement by its general counsel that "French companies can issue bonds that are not under French law and according to an older decision by the court of appeals if these companies issue bonds to an international market then the usury law is not applicable."[49] French regulatory views have converged with the jurisprudential trend against extraterritorial application of usury law.
Economic logic itself argues against the application of French usury laws beyond national borders. Usury rules are a form of price control restricting the rate of interest, which is the price of credit and is linked inextricably to national money supply.[50] An interest rate considered high in France, such as 15% per annum, may well be a bargain price in Turkish or Argentinean debt markets.
Conclusion
In contrast to New York or English law, French law does not clearly provide an exemption from usury rules for corporate loans. French usury rules do not specify a usury reference rate for large scale corporate loans or for loans denominated in foreign currency. Such a reference rate is essential to put parties on fair notice of the limits of a statute that imposes criminal sanctions. The legal ambiguity surrounding the usury restrictions has driven French corporate borrowing to financial centers outside of France. We have shown that despite its mandatory nature, the French usury statute belongs in the sphere of private international law and may therefore be displaced by the parties' contractual choice of a foreign governing law. Nevertheless, legislative clarification of the scope of French usury statutes would remove burdensome uncertainty from financing transactions involving French corporate borrowers and help recover the ground Paris continues to lose to London and New York as a financial center.
[1] Usury was prohibited in France in the Law of January 12, 1886, which was amended and replaced by Law No. 66-1010 of December 28, 1966, and later codified by Law No. 93-349 of July 26, 1993, as Article L. 313 et seq. of the French Consumer Code.
[2] Article D. 313-6 of Decree No. 90-506 of June 25, 1990, J.O. n° 146, as amended by Decree No. 92-1165 of October 26, 1992, J.O. n° 250. The executive order covers "loans with an initial term of more than two years providing a fixed interest rate; loans with an initial term of more than two years providing a variable interest rate [and] other loans with an initial term smaller than or equal to two years."
[3] The rates are posted and updated on the Bank of France Internet site at http://www.banque-france.fr.
[4] The amount was previously one million French francs. Executive Order (Arrêté) of June 25, 1990, as modified by Executive Order 2001-09-03, applying Article 2 of Decree No. 90-506 of June 25, 1990, concerning the application of Article 1 of Law No. 66-1010 of December 28, 1966, J.O. n° 146.
[5] Complex procedural and evidentiary legal questions would be raised by such unprecedented referral, analysis of which is beyond the scope of this article.
[6] Usury Laws Repeal Act, 1854, 17 & 18 Vict., ch. 90 (U.K.).
[7] An Act to Amend the Law with Respect to Persons Carrying on Business as Money-Lenders, 1900, 63 & 64 Vict. 155, ch. 51 (Eng.).
[8] Consumer Credit Act, 1974, §§ 137-40, reprinted in 11 Halsbury's Statutes of England and Wales (4th ed. 1991). The Credit Act implements in the U.K. the requirements of the European Union Council Directive 87/102/EEC of December 22, 1986, for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit.
[9] Consumer Credit Act, 1974, § 138(1).
[10] Consumer Credit Act, 1974, § 137(2)(a). The term "individual" is defined in section 189(1) of the Credit Act to include "a partnership or other unincorporated body of persons not consisting entirely of bodies corporate." In a bankruptcy proceeding, however, the court may set aside or modify the provisions of an extortionate credit agreement entered into by a corporate debtor within the three years before it went into liquidation. Section 244 of the Insolvency Act, 1986.
[11] Dry Dock Bank v. American Life Ins. & T. Co. 3 N.Y. 344 (1850); also see E.A. Posner, Contract Law in the Welfare State: A Defense of the Unconscionability Doctrine, Usury Laws, and Related Limitations on the Freedom to Contract, 24 J. Legal Stud. 283 (1995).
[12] Codified in Section 5-521 of the New York General Obligations Law ("NYL"). Similar statutes were subsequently enacted in Delaware, Florida, Illinois, Maryland, Michigan, Missouri, New Jersey, Ohio, Pennsylvania, Virginia, and Wisconsin. See generally, Annotation, Statute Denying Defense of Usury to Corporation, 63 A.L.R.2d 924 (1959).
[13] 1965 N.Y. Legislative Annual, at p. 50.
[14] NYL § 5-521 read in conjunction with section 190.40 of the New York penal law.
[15] Transmedia Restaurant v. 33 E. 61st Street Restaurant Corp., 184 Misc.2d 706 (NY 2000).
[16] Reisman v. William Hartman & Son, 51 Misc.2d 393 (NY 1966); also see Schneider v. Phelps, 359 N.E.2d 1361, 391 N.Y.S.2d 568, 573 (1977).
[17] NYL § 5-501(6)(b). NYL § 5-501(6)(a) provides that loans in an amount greater than $250,000, other than loans secured by residential mortgages, are exempt from usury laws, except for criminal usury restrictions.
[18] See, e.g., Haralson v. E.F. Hutton Group, 919 F.2d 1014 (5th Cir. 1990); Machidera v. Toms, 685 N.Y.S.2d 719 (1999).
[19] Assuming a loan obtained in New York is for an amount greater than $2,500,000. See supra note 17 and accompanying text.
[20] Decree No. 91-242 of February 28, 1991, effective April 1, 1991 (Décret portant publication de la convention sur la loi applicable aux obligations contractuelles (ensemble un protocole et deux déclarations communes), signée à Rome le 19 juin 1980).
[21] Rome Convention on the Law Applicable to Contractual Obligations, 1980 O.J. (L 266) 1, reprinted in 19 I.L.M. 1492 (1980). Also see http://www.rome-convention.org; M. Giuliano & P. Lagarde, Report on the Convention on the Law Applicable to Contractual Obligations, 1980 O.J. (C 282) 1. The Rome Convention was opened for signature on June 19, 1980, at which time nine Member States signed on (Belgium, France, Denmark, Italy, Luxembourg, Germany, the United Kingdom, Ireland, and the Netherlands). The seven Member State ratification requirement was fulfilled by the United Kingdom and the Rome Convention officially came into force on April 1, 1991. The accession of additional Member States to the European Union added additional signatories: Austria, Finland, Greece, Portugal, Spain and Sweden.
[22] Article 3(1) of the Rome Convention reads: "A contract shall be governed by the law chosen by the parties. The choice must be expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or a part of the contract."
[23] Article 4(1) of the Rome Convention.
[24] "Characteristic performance" is not defined in the Rome Convention. In the case of a corporate party, the location of the "central administration" replaces the "habitual residence" of the individual party. Article 4(5) provides that the Article 4(2) presumption does not apply if the "characteristic performance" of the agreement cannot be determined. See generally, K. Lipstein, Characteristic Performance: A New Concept in the Conflict of Laws in Matters of Contract for the EEC, 3 N.W. J. Int'l L. & Bus. 402 (1981).
[25] The French version of Article 7(2) of the Rome Convention, under the heading "lois de police," reads: "[l]es dispositions de la présente convention ne pourront porter atteinte à l'application des règles de la loi du pays du juge qui régissent impérativement la situation quelle que soit la loi applicable au contrat."
[26] C.A. Pau, March 1, 2001, BRDA 8/01, n° 15, p. 10. This case, however, involved a consumer loan contracted by a French couple in Spain to finance the purchase of real estate in France. Also see M. Mariani, L'usure - les limites de la réglementation, La Semaine Juridique Entreprise et Affaires, n° 42, p. 1660 (October 17, 2002). Although Mr. Mariani states that the Pau court applied French usury law through Article 7(2) of the Rome Convention (ibid, at p. 1662), in fact, the court rejected the borrowers' request to apply French usury law, reasoning that since neither French nor foreign usury limits were crossed, no usury issue arose.
[27] Cass. Com., November 28, 2000, Allium, holding: "la loi du 25 juin 1991, codifiée dans les articles L. 134-1 et suivants du Code de commerce, loi protectrice d'ordre public interne, applicable à tous les contrats en cours à la date du 1er janvier 1994, n'est pas une loi de police applicable dans l'ordre international."
[28] C.A. Paris 1, June 9, 1983, Societé Iro-Holding v. Societé Sétilex, Revue d'Arbitage 1983, p. 497, note M. Vasseur, holding: "qu'il n'est ni démontré, ni même allégué, que le dépassement dont s'agit rendrait ce taux conventionnel supérieur à ceux pratiqués dans les pays étrangers concernés, et ce dans des conditions de nature à enfreindre l'ordre public international au sens du droit international privé français."
[29] Vasseur, ibid, at p. 503-04.
[30] J. Stoufflet, Les conflits de lois en matière de crédits bancaires, Comité français de droit international privé, Travaux de l'année 1967, 91, 102-03 (May 19, 1967).
[31] In fact, under the commentary of Vasseur, cited supra note 28, this would seem to be the case even in "international loans" entered into in France.
[32] P.J. McConnaughay, Reviving the "Public Law Taboo" in International Conflict of Laws, 35 Stan. J. Int'l L. 255 (1999); also see Symposium, The Public/Private Distinction, 130 U. Pa. L. Rev. 1289 (1982); R.H. Mnookin, The Public/Private Dichotomy: Political Disagreement and Academic Repudiation, 130 U. Pa. L. Rev. 1429 (1982); R.E. Barnett, Foreword: Four Senses of the Public Law-Private Law Distinction, 9 Harv. J.L. & Pub. Pol'y 267 (1994); L.H. Levinson, The Public Law/Private Law Distinction in the Courts, 57 Geo. Wash. L. Rev. 1579 (1989).
[33] Hence the name commonly used to describe the discipline of conflict of laws: private international law.
[34] McConnaughay, supra note 32, at p. 260, stating, in words reminiscent of those of French commentators discussing usury (supra notes 29-30 and accompanying text), that "[e]ven if private laws are mandatory in a domestic setting, the public interest in their enforcement in an international transaction is insufficient to insist on application of the law without regard for the expectations of the parties, the impact on cross-border commerce, and the comparative interests of other nations."
[35] McConnaughay, ibid, at p. 267.
[36] See, e.g., Sarbanes-Oxley Act Expands Corporate Governance and Accounting Requirements for SEC-Registered Non-U.S. Companies (Fried, Frank, Harris, Shriver & Jacobson memorandum of August 17, 2002), posted at http://www.ffhsj.com/cmemos/020802_sarb_acctg_reqs.pdf. Also see J. Turley, When in Rome: Multinational Misconduct and the Presumption Against Extraterritoriality, 84 Nw. U. L. Rev. 598 (1990).
[37] Restatement (Third) of Foreign Relations Law §§ 402-403 (1987); A.F. Lowenfeld, U.S. Law Enforcement Abroad: The Constitution and International Law, 83 Am. J. Int'l L. 880 (1989); Note, Constructing the State Extraterritorially: Jurisdictional Discourse, the National Interest, and Transnational Norms, 103 Harv. L. Rev. 1273 (1990); G.R. Watson, The Passive Personality Principle, 28 Tex. Int'l L.J. 1 (1993).
[38] C.A. Paris, Ch. Crim. 13, June 18, 2001, n° 158355 (concerning trademark violation); C.A. Paris, Ch. Crim. 11, February 24, 2000, n° 116499 (concerning defamation).
[39] See, e.g., L.M. Guenin, Choice of Law in Usury, 109 Banking L. J. 71 (1992).
[40] Rest. 2d Confl. § 203 (1971). See, e.g., Blackford v. Commercial Credit Corp., 263 F.2d 97 (5th Cir. 1959); Woods-Tucker Leasing Corp. v. Hutcheson-Ingram, 642 F.2d 744 (5th Cir. 1981); Hansen v. Duvall, 62 S.W.2d 732 (Mo. 1933); State v. Rivers, 287 N.W. 790 (Minn. 1939); Big Four Mills v. Commercial Credit Corp., 211 S.W.2d 831 (Ky. 1948); Deaton v. Vise, 210 S.W.2d 665 (Tenn. 1948); Gamer v. DuPont Glore Forgan, 135 Cal. Rptr. 230 (1976); Continental Mortgage Investors v. Sailboat Key, 395 So. 2d 507 (Fla. 1981); Jett Racing & Sales v. Transamerica, 892 F. Supp. 161 (Tex. 1995); Evans v. Harry Robinson Pontiac-Buick, 983 S.W.2d 946 (Ark. 1999); Sheer Asset Management v. Lauro Thin Films, 731 A.2d 708 (R.I. 1999).
[41] The Restatement, ibid, at n. B. The validation rationale is derived from the 1927 Supreme Court decision Seeman v. Philadelphia Warehouse Co., 274 U.S. 403 (1927), holding that a provision in a contract for the payment of interest will be validated if it is permitted by the law of the place of contracting, the place of performance, or any other place with which the contract has any "substantial connection."
[42] Walter E. Heller & Co. v. Chopp-Wincraft Printing Specialties, 587 F.Supp. 557, 560 (N.Y. 1982) ("In determining which state's usury law to apply to a transaction, New York's choice of law is to invoke the 'rule of validation'. The rule assumes that the parties intend to enter into a valid contract. Thus the forum state chooses the state whose usury statute would sustain the contract in full or else impose the lightest penalty for usury from the set of all states that have a substantial relationship to the contract"). Also see Speare v. Consolidated Assets Corp., 367 F.2d 208 (2d Cir. 1966); Wiltsek v. Anglo-American Properties, 277 F.Supp. 78 (S.D.N.Y. 1967); Franklin National Bank v. Feldman, 249 N.Y.S.2d 181 (1964); Crylon Steel v. Globus, 185 F.Supp. 757 (S.D.N.Y. 1960); Crisafulli v. Childs, 33 A.D.2d 293 (4th Cir. 1970); Hawkins v. Ringel, 231 N.Y.S.2d 476 (1962).
[43] For the rule of validation in other jurisdictions see Goodwin Bros. Leasing, v. H & B Inc., 597 S.W.2d 303, 308 (Tenn. 1980) ("Tennessee has long recognized a choice of law principle unique in usury cases whereby parties are presumed to have chosen the law which will uphold the legality of their bargain. The law which lends greatest validity to the transaction will be applied if it is otherwise logically relevant"). Also see, e.g., Continental Mortg. Investors v. Sailboat Key, 395 So.2d 507 (Fla. 1981); Gamer v. duPont Glore Forgan, 135 Cal.Rptr. 230 (1976); Peragallo v. Sklat, 466 A.2d 1200 (CT 1983).
[44] English courts will not impose on litigating parties the provisions of French usury law, unless the parties explicitly stipulate French law as the governing law. England has adopted the Rome Convention, pursuant to the Contracts (Applicable Law) Act, 1990, ch. 36 (Eng.). The relevant provision of the Rome Convention permitting a non-French court to apply the restrictive provisions of French usury law is Article 7(1), which provides that "[w]hen applying ... the law of a country, effect may be given to the mandatory rules of the law of another country with which the situation has a close connection, if and in so far as, under the law of the latter country, those rules must be applied whatever the law applicable to the contract." Yet, wary of the fact that Article 7(1) introduces a mechanism for judicial consideration of foreign countries' interests, Member States of the European Union reserved the right not to apply Article 7(1). (Article 22(1)(a) of the Rome Convention). In fact, the United Kingdom has chosen to refrain from adopting Article 7(1), as have Germany, Ireland, and Luxembourg. See Contracts (Applicable Law) Act, 1990, § 2(2); Giuliano & Lagarde, supra note 21, at p. 26; Note, Article 7(1) of the European Contracts Convention: Codifying the Practice of Applying Foreign Mandatory Rules, 114 Harv. L. Rev. 2462 (2001); H.M. Horlacher, The Rome Convention and the German Paradigm: Forecasting the Demise of the European Convention on the Law Applicable to Contractual Obligations, 27 Cornell Int'l L.J. 173 (1994).
[45] E. Cafritz & D. Caramalli, Comment: Are Bonds Subject to French Usury Law, IFLR (February 2002) 10-12; also see D. Caramalli, La question de l'application des règles relatives à l'usure aux emprunts obligataires, 17 Le Dalloz 1413 (2002); J. Stoufflet, Les emprunts obligataires et la limitation légale du taux de l'intérêt conventionnel, Mélanges AEDBF, 2001, p. 343.
[46] ANSA, Comité juridique, Taux de l'usure: application ou non aux emprunts obligataires, June 5, 2002.
[47] Letter from the Bank of France to Fried, Frank, Harris, Shriver & Jacobson, dated November 14, 2001. A similar opinion is cited in the ANSA report, ibid.
[48] ANSA, supra note 46, at n. 9 (citing Caramalli, supra note 45).
[49] T. Williams, The Woman Behind France's Securities Revolution - Interview with COB Legal Director Florence Roussel, IFLR (March 2002) 35, 37.
[50] See, e.g., C.C. DeMuth, The Case Against Credit Card Interest Rate Regulation, 3 Yale J. Reg. 201 (1986): "Usury laws, laws forbidding or limiting payment for money loans, are among the most ancient forms of price control"; Posner, supra note 11; J.R. Ostas, Effects of Usury Ceilings in the Mortgage Market, 31 J. Fin. 821 (1976).