Introduction

The First Department’s decision in Salamone v. Deily & Glastetter, LLP squarely holds that a lawyer who drafts a forbearance agreement containing a “forbearance fee” that renders the transaction facially usurious may be liable for legal malpractice. The Court reverses a CPLR 3211 dismissal and clarifies that:

• Labeling a payment as a “forbearance fee” does not prevent it from being treated as interest under New York usury law when it is consideration for the loan or the forbearance.
• Even where the borrower may be estopped from asserting usury because of a special relationship (Seidel estoppel), that doctrine does not insulate attorneys from malpractice for drafting a usurious instrument and does not resurrect an unenforceable usurious charge.
• Attorney’s fees a client incurs to mitigate or unwind the consequences of an attorney’s usury-related drafting error are a cognizable category of malpractice damages and are not “speculative” at the pleading stage.
• “Lost opportunity” amounts that would function as additional interest are not recoverable, even if the parties separately documented them; repackaging usury does not avoid usury.

The case arises from a short-term $2 million loan for which the plaintiff, Kenneth Salamone, retained Deily & Glastetter, LLP (D&G) to draft a demand note and later a forbearance agreement. The forbearance agreement provided for a 20% default rate and a $300,000 “forbearance fee,” which the courts ultimately deemed usurious when counted as interest. After a partial win on the underlying note, Salamone sued his former lawyers for malpractice. The motion court dismissed; the First Department reversed.

Summary of the Judgment

The First Department unanimously reversed the Supreme Court’s dismissal and allowed Salamone’s legal malpractice action against D&G and its partner to proceed. It held that the complaint adequately alleges:

• Negligence: Drafting and advising execution of a forbearance agreement that was facially usurious because the “forbearance fee” constituted interest under General Obligations Law (GOL) § 5-501(2).
• Proximate cause: The usurious term precipitated additional litigation and fees that would not have been incurred absent the drafting error.
• Damages: At minimum, unreimbursed attorney’s fees to address the usurious provision are recoverable mitigation damages and are not speculative at the pleadings stage.

The Court rejected two defense theories:

• That the availability of a Seidel estoppel in the underlying case (based on a “special relationship” between lender and borrowers) negated negligence or causation. The Court emphasized that estoppel was raised belatedly and, even when available, cannot be used to collect usurious consideration.
• That damages were speculative. The Court held the complaint permits a reasonable inference of mitigation fees directly attributable to the facially usurious drafting.

Critically, the Court also held Salamone may not pursue “lost opportunity” damages tied to the inability to re-purchase Apple stock because awarding such sums beyond principal plus legal interest would itself amount to enforcing a usurious bargain, regardless of estoppel or separate documentation.

Background and Procedural History

• In October 2019, Salamone loaned $2,000,000 to EIP Global Fund, LLC and Sridhar Chityala at 10% annual interest under a demand note drafted by D&G, due November 10, 2019.
• When unpaid, the parties executed a D&G-drafted forbearance agreement setting a 20% default rate and a $300,000 “forbearance fee,” along with attorneys’ fees and a security interest in Chityala’s membership interests.
• In the ensuing litigation, the borrowers asserted usury. The Supreme Court held the “forbearance fee” was interest for usury purposes under GOL § 5-501(2), rendering the forbearance agreement usurious. The court limited Salamone’s recovery to the original note and entered judgment for principal plus legal interest, and a portion of D&G’s billed fees.
• On appeal in the underlying action, the First Department reinstated certain claims under the forbearance agreement (financial disclosures, transfer of membership interests, and contractual attorneys’ fees) based on Seidel estoppel, but it confirmed that the “forbearance fee” was interest and that, absent estoppel, the forbearance agreement was void as usurious. Even with estoppel, recovery could not include usurious charges; thus, the forbearance fee remained unrecoverable.
• Salamone then sued his attorneys for malpractice, alleging that drafting and advising execution of a facially usurious forbearance agreement caused damages. The motion court dismissed; the First Department reversed.

Analysis

Precedents Cited and Their Influence

• Leon v Martinez, 84 NY2d 83 (1994); Guggenheimer v Ginzberg, 43 NY2d 268 (1977); Himmelstein v Matthew Bender & Co., 37 NY3d 169 (2021).
  These cases frame CPLR 3211 standards:
  • (a)(7): Liberally construe pleadings; give plaintiff every favorable inference to see if facts fit any cognizable theory.
  • (a)(1): Dismissal on documentary evidence is appropriate only if it utterly refutes the allegations and conclusively establishes a defense as a matter of law.
  The First Department applied these standards to reject dismissal where the complaint plausibly alleges malpractice and damages and is not conclusively refuted.
• Mamoon v Dot Net Inc., 135 AD3d 656 (1st Dept 2016); Leder v Spiegel, 31 AD3d 266 (1st Dept 2006).
  Elements of legal malpractice: negligence, proximate causation, and actual damages. The Court found all three sufficiently pleaded.
• DeStaso v Condon Resnick, LLP, 90 AD3d 809 (2d Dept 2011).
  Recognizes malpractice claims where lawyers draft usurious loan documents not within any statutory exception. The First Department embraced this principle, treating the inclusion of a forbearance fee functioning as interest as a departure from ordinary care.
• Seidel v 18 E. 17th St. Owners, 79 NY2d 735 (1992).
  Key usury estoppel doctrine: A borrower may be estopped from asserting usury if, through a special relationship, the borrower induced reliance on the transaction’s legality. Yet even then, the lender’s recovery is limited to principal plus legal interest; the usurious consideration remains unenforceable. The First Department’s prior decision in Salamone applied Seidel to allow certain non-monetary and fee-related relief, but not the forbearance fee. In the malpractice case, Seidel undercuts the defense argument that estoppel salvaged the usurious drafting.
• Dweck Law Firm v Mann, 283 AD2d 292 (1st Dept 2001).
  Attorneys may select among reasonable strategies; mere second-guessing of strategy is not malpractice. The Court distinguished this principle because ignorance of black-letter usury law is not a “reasonable strategy,” especially where the estoppel argument surfaced only on appeal.
• Rudolf v Shayne, Dachs, Stanisci, Corker & Sauer, 8 NY3d 438 (2007).
  Standard of care (“ordinary reasonable skill and knowledge”) and damages: a plaintiff may recover reasonable fees and expenses incurred to ameliorate the consequences of the attorney’s negligence. This decision is pivotal for recognizing mitigation fees as non-speculative damages here.
• Fielding v Kupferman, 65 AD3d 437 (1st Dept 2009).
  Lawyers must know the law pertinent to the matter they undertake; damages may be reasonably inferred at the pleading stage. The Court quoted Fielding to underscore the duty to understand usury law when drafting forbearance terms.

Statutory Framework Applied

• GOL § 5-501(2). “Interest” includes any and all amounts paid or payable, directly or indirectly, to the lender in consideration for making a loan or a forbearance. The Court treated the $300,000 forbearance fee as “interest,” rendering the forbearance agreement usurious when the aggregate exceeded lawful limits.
• GOL § 5-501(6)(a). Civil usury caps (other than Penal Law provisions) generally do not apply to loans or forbearances of $250,000 or more. But criminal usury constraints remain.
• Penal Law § 190.40 (Criminal Usury in the Second Degree). Interest at or above 25% per annum is criminally usurious. By counting the forbearance fee as interest, the effective rate vastly exceeded 25%.
• GOL § 5-521. Corporate borrowers ordinarily cannot assert civil usury as a defense, but criminal usury remains available. In this matter, both an entity and an individual were obligors; regardless, the criminal usury cap controlled once the fee was treated as interest.
• CPLR 3211(a)(1) and (a)(7). Pleading and documentary evidence dismissal standards guided the reversal.

Legal Reasoning

1. Facial usury from the four corners of the forbearance agreement. Because GOL § 5-501(2) defines interest broadly, the $300,000 “forbearance fee” counted as interest when it was consideration for plaintiff’s forbearance. Adding this fee to the stated 20% default rate pushed the effective interest well above the 25% criminal threshold. The agreement was therefore facially usurious and unenforceable except to the limited extent Seidel allows (principal plus legal interest).
2. Malpractice in transactional drafting. A competent attorney must know and apply usury law when structuring forbearance consideration. Drafting a document that is facially illegal constitutes a departure from the ordinary skill and knowledge expected of practitioners (Fielding; Rudolf; DeStaso). The Court rejected the idea that this was a reasonable “strategy” choice (Dweck); notably, the estoppel theory surfaced only on appeal, which the Court viewed as a “belated attempt to cover up errors,” not a strategic decision.
3. Proximate cause and damages. The drafting error proximately caused Salamone to incur significant legal fees in the underlying litigation to “avoid, minimize or reduce” the harm wrought by the usurious term. Under Rudolf and Fielding, such mitigation fees are cognizable, non-speculative damages. At the pleading stage, it is enough that damages attributable to defendants’ conduct may reasonably be inferred.
4. Estoppel does not sanitize usury or immunize malpractice. The First Department’s earlier decision in the underlying dispute permitted certain claims to proceed on a Seidel estoppel theory but confirmed that usurious consideration (like the forbearance fee) remains unrecoverable even if estoppel applies. Thus, the availability of estoppel cannot defeat the malpractice claim or cure the consequences of drafting usurious terms.
5. No recovery for “lost opportunity” amounts that function as interest. The Court expressly foreclosed Salamone’s effort to claim that, but for the malpractice, he would have separately documented a payment for lost opportunity to repurchase stock. As the Court explained, recovering such amounts would again enforce usury in substance, regardless of form or estoppel. Substance controls over labels and structuring choices.

Impact and Implications

• Transactional diligence on usury is a malpractice checkpoint. Lawyers who draft forbearance, extension, or workout agreements must rigorously analyze the usury implications of every monetary component, including “forbearance,” “extension,” “make-whole,” “workout,” or “success” fees. If the consideration is for the loan or forbearance, it will likely be treated as interest under GOL § 5-501(2), counted toward the criminal usury cap.
• “Strategy” is no shield for basic legal errors. The decision narrows the defensive use of Dweck: where the alleged misstep is a failure to know and apply settled statutory law, it is not a protected strategic choice.
• Recoverable malpractice damages include mitigation fees. Plaintiffs need not quantify lost merits recoveries to survive dismissal; fees incurred to unwind or minimize the consequences of usurious drafting suffice at the pleading stage. Expect increased malpractice exposure where defective transactional drafting triggers avoidable litigation.
• Repackaging usury will not work. Attempting to relocate or relabel lender premiums as “forbearance fees,” “lost opportunity” payments, or side letters will not prevent recharacterization as interest. This decision underscores that courts look to substance, not labels, to police usury.
• Preservation matters, but timing does not cure drafting errors. Raising Seidel estoppel for the first time on appeal may aid the underlying case to some extent, but it cannot retroactively validate a usurious term or extinguish malpractice exposure for including it.
• Corporate and large-loan contexts remain constrained by criminal usury. Although civil usury does not apply to loans or forbearances of $250,000 or more (GOL § 5-501(6)(a)) and corporations cannot assert civil usury (GOL § 5-521), criminal usury (≥25% per annum) remains a hard cap. The effective rate—counting fees as interest—controls.

Complex Concepts Simplified

• Usury (civil vs. criminal): Civil usury generally caps interest for certain smaller loans; criminal usury makes it unlawful to charge 25% or more per annum. For loans or forbearances of $250,000 or more, civil usury caps (other than criminal usury) do not apply. Corporations cannot assert civil usury but can raise criminal usury. Criminal usury is measured by the effective annual rate, not merely the nominal interest stated.
• Interest includes more than stated rate: Under GOL § 5-501(2), any amount paid “in consideration for making the loan or forbearance” is treated as interest. That includes forbearance fees, extension fees, and similar lender premiums tied to time or tolerance, even if styled otherwise.
• Forbearance agreement: A contract in which a lender agrees to delay exercising rights (like suing or foreclosing) in exchange for consideration. Consideration paid for the delay is ordinarily treated as interest.
• Facially usurious: A document is facially usurious when, on its face and without extrinsic evidence, the charges classified as interest exceed lawful limits.
• Seidel estoppel: In limited circumstances, a borrower who induced the lender’s reliance through a special relationship may be barred (estopped) from asserting usury. Even then, the lender’s recovery is limited to principal plus legal (non-usurious) interest; usurious terms remain unenforceable.
• Legal malpractice basics: A plaintiff must allege (1) attorney negligence (departure from ordinary skill/knowledge), (2) proximate cause, and (3) actual damages. In transactional cases, recoverable damages can include reasonable attorney’s fees incurred to mitigate the harm caused by the negligent drafting.
• CPLR 3211 dismissal standards: At the pleadings stage, courts accept facts as true and give plaintiffs favorable inferences. Dismissal based on documents is proper only when they conclusively refute the claim.

Key Takeaways

• Drafting a forbearance agreement that is facially usurious—because a “forbearance fee” operates as interest exceeding the criminal usury cap—constitutes a departure from the ordinary skill and knowledge required of attorneys and can support a malpractice claim.
• Seidel estoppel may salvage limited aspects of an underlying enforcement action but does not cure usury, does not authorize recovery of usurious consideration, and does not immunize attorneys from malpractice exposure.
• Attorney’s fees incurred to mitigate, avoid, or reduce the fallout from a usurious term are recoverable malpractice damages and are not speculative at the pleading stage.
• Courts will not enforce “lost opportunity” or similar payments that, in substance, function as interest on a loan or forbearance; relabeling or side agreements do not defeat usury principles.
• Practitioners must aggregate all loan- and forbearance-related monetary components when testing for usury, especially in large loans where the criminal usury cap remains dispositive.

Conclusion

Salamone v. Deily & Glastetter advances New York’s legal malpractice jurisprudence by expressly linking usury compliance to the standard of care in transactional drafting. The First Department confirms that attorneys who include usurious forbearance consideration—such as a “forbearance fee” that functions as interest—may be liable for malpractice, and that clients may recover the additional legal fees they incur to undo or mitigate the consequences. The decision simultaneously reinforces substantive usury doctrine: courts will treat substance over form, count all consideration for the loan or forbearance as interest, and refuse to enforce lender premiums that lift the effective rate above the criminal usury cap. Seidel estoppel remains a narrow, borrower-focused doctrine that cannot validate usurious consideration or erase attorney negligence.

In practical terms, Salamone warns transactional lawyers and lenders alike: structure forbearance and workout consideration within usury limits, test the effective rate after counting all direct and indirect charges tied to the time value of money, and avoid post hoc reliance on estoppel. Failure to do so risks not only contract unenforceability but also malpractice liability.