Why so many lenders are incorporated in Delaware

Delaware law allows freedom of contract; therefore parties are free to engage in negotiations regarding the amount of interest that will be charged pursuant to a specific contract.

According to Delaware common law, “Delaware places no cap on interest rates, but instead allows interest to be charged in an amount pursuant to the agreement governing the debt”. Change Capital Partners Fund I, LLC v. Volt Electrical Systems, LLC, C.A. No. N17C-05-290 RRC (Del. Super. Ct. April 3, 2018).

In Change Capital Partners, Azadian Group, LLC (A Delaware LLC) entered into a Merchants Receivables Purchase and Security Agreement with Volt Electrical Systems, LLC (“Volt”). Azadian agreed to purchase $472,500 of future receivables to be generated by Volt for a fixed purchase price of $338,000. Azadian paid the fixed purchase price of $338,000, but Volt only transferred $248,590 in receivables to Azadian, leaving Azadian short by $223,910 of untransferred receivables. Azadian then transferred its rights under the receivables purchase agreement to Change Capital Partners, a private equity firm.  Change Capital Partners then sued Volt for breaching the receivables purchase agreement by failing to transfer the additional $223,910 of Volt receivables.

Volt (the defendant) filed an amended counterclaim alleging that transaction was a loan with an interest rate of 102% which is usurious under New York and Texas law. Defendant argued that the agreement was executed/funded in New York, and both parties were headquartered in Texas therefore New York and Texas usury law should apply. Defendant argued that the Delaware choice-of-law provision in the purchase agreement should not apply and Plaintiff should not be allowed to use Delaware choice-of-law provisions to circumvent another state law that would apply but for the choice-of-law provision.

The court decided that Delaware choice of-law provision in the purchase agreement applied because the court chose not to “disrupt the long-recognized, fundamental principle in favor of a freedom of contract”. Azadian Group, LLC (A Delaware LLC) entered into the agreement and “Delaware [c]ourts will honor a contractually-designed choice-of-law provision so long as the jurisdiction selected bears some material relationship to the transaction.” Vichi v. Koninklijke Philips Elecs., N.V., 85 A.3d 725, 766 (Del. Ch. 2014)

Conclusion:

The court dismissed defendant’s counterclaims because:

1)      Azadian Group, LLC (A Delaware LLC) entered into the purchase agreement with Volt and the purchase agreement included a valid Delaware choice-of-law provision

2)      Since the Delaware choice-of-law provision applies, and Delaware places no cap on interest rates, Defendant’s claim that the agreement was usurious fails.