Usury can deduct his principal from obligation of compensation?

The Supreme Court on 10th June 2008 concluded on a dispute about the extent of profiteering in usury lending.

Case

According to the Japan Times on 11th June 2008, the defendan, formerly a senior member of the Goryo-kai, a group affiliated with Japan’s largest underworld syndicate, the Kobe-based Yamaguchi-gumi, was once called a loan shark tycoon in Japan.

The plaintiffs borrowed money from a lender linked with the Goryo-kai at an annual interest rate of more than 1,000 percent: the plaintiffs borrowed money from illegal loan outlets controlled by Kajiyama between November 2000 and May 2003; they were made to pay back the loans at exorbitant annual interest rates of between several hundred and several thousand percent–far higher than the maximum rate of 29.2 percent permitted under the Investment Deposit and Interest Rate Law, faced threats and coercive action during collection, the Yomiuri reported. 

The plaintiffs argued that the loan contracts themselves were invalid as unethical contract and demanded ¥35 million in principal, interest and compensation for mental anguish, as well as punitive damages for unethical practices.

Profiteering

Borrowers can ask reimbursement of excessive payment exceeding a cap of the Interest Rate Restriction Law. The law declares that even if borrowers agree with their payment of excessive interest, the contracts are void. Therefore, the  payment exceeding the cap of restricted rate become earnings no based on the legitimate contract. In other word, getting interest within the law shall be permitted.

Tort

If the interest rate is breach of the Investment Law that impose criminal sanction to the lending exceeding the cap interest on the law, borrowes can sue compensation claim based on tort to loan sharks. What extent of reimbursement can lenders deduct against borrower’s claim based on tort?

Views

One is that usuries can hold the profit to the extent to the cap of interest rate legitimated by the Interest Rate Restriction Law, in addition to the principal. Second view says that usury can only withhold his principal, therefore he can not ask to pay the interest even if it is legitimate. Third opinion indicates that lenders have to pay all of repayment by borrowers: the lending by loan shark is “an unethical act” which is considered to be based on unlawful causation or inducement, therefore asking repayment of principal is breach of civil law (art. 708); therefore lenders can not withhold both interest and principal.

Lower Cout decisions

In June 2006, the Matsuyama District Court ordered the defendant, a operator of a gangster-linked moneylender, to pay about ¥3.6 million in compensation to seven of the 11 plaintiffs. However, the courf of appeal, Takamatsu High Court, overruled that decision in December that year, ordering Kajiyama to pay about ¥14 million to all 11 borrowers; in oher word, the defendant had been ordered to compensate the 11 plaintiffs only for interest.

Top Cour Decision

The focus of the trial was on whether the plaintiffs would be able to have their initial principals returned, as well as the illegal high interest payments they made.

The Supreme Court approved above third view and ordered the defendant loan shark to restore all repayment by a borrower: the court ruling applied a provision in the Civil Code that “the return of payments made for things contrary to public order and decency cannot be demanded” to the business of loan-sharking; the ruling indicated that loan sharks should not be able to demand victims who borrowed money from them pay back their loans and that the victims should be compensated for the entire amount they have already paid back; in a word, the court ordered a loan shark to compensate his customers for both the principal and the illegally exorbitant interest rates he charged, overruling a high court decision. The cour sent the case back to the Takamatsu High Court, ordering it to recalculate the award to include the principal.

Other relief

Earlier this year, Japan and Switzerland reached an agreement to divide some 58 million Swiss francs (about $57 million or ¥6 billion at current exchange rates) seized by Swiss authorities from a bank account related to the Goryo-kai, with the portion due Japan to be returned to loan-shark victims.