Key Points

  • The Appellate Division, First Department, unanimously affirmed the denial of the defendants' motion under CPLR 5015(a)(3) and (4) to vacate a default judgment obtained by Kapitus Servicing, Inc.
  • Whether or not the notary on the affidavits of service was commissioned in November 2020, the defendants had actual notice of the action, because defendant Herbert Loebl admitted service on October 24, 2020, and the parties held settlement discussions that month.
  • The defendants failed to establish that the agreement was a loan, a necessary element of a usury defense.
  • Because Southern Source was required to pay 15% of its future receivables rather than a fixed weekly amount, its obligations could be satisfied at different times, and the defendants failed to show the agreement had a finite term.
  • The defendants did not prove the usury defense by clear evidence as to all its elements.

A New York appeals court on Oct. 8 refused to set aside a default judgment against a business and its co-defendants, holding that the business never showed its funding agreement was a loan. That showing is a necessary element of a usury defense.

The Appellate Division, First Department, unanimously affirmed a July 1, 2025, order by Justice Arlene P. Bluth of State Supreme Court in New York County. Justice Bluth had denied the defendants' motion to vacate the default judgment entered for Kapitus Servicing Inc., formerly known as Colonial Funding Network Inc. The five-justice panel of Presiding Justice Manzanet-Daniels and Justices Kennedy, Friedman, Kapnick and Higgitt issued the ruling as a decision and order.

The panel's analysis of the usury defense turned on how the payments were calculated. Southern Source Inc. owed Kapitus a percentage of its future receivables rather than a fixed weekly sum. Because of that structure, the panel reasoned, the obligation could end at different times, and the defendants could not show that the agreement had a finite term. The panel also held that a possible flaw in the notarization of the proof of service did not help the defendants, because they plainly knew about the lawsuit.

The decision describes the agreement's terms in a single sentence. It does not state how much money Kapitus provided, how much Kapitus claimed it was owed, or the amount of the default judgment.

According to the decision, defendant Herbert Loebl admitted that he was served with the lawsuit on Oct. 24, 2020, and the parties held settlement discussions that month. The affidavits of service were notarized in November 2020. The caption identifies the defendants as Southern Source Inc., doing business as Southern Source, and others.

The defendants later moved to vacate the default under CPLR 5015(a)(3) and (4). The defendants' appeal, as limited by their briefs, challenged the denial of that motion.

On jurisdiction, the defendants argued that the person who notarized the affidavits of service was not a commissioned notary at the time. The panel declined to accept that premise. "Contrary to defendants' contention, it is unclear from the record whether or not the person who notarized the affidavits of service was a commissioned notary when she notarized the affidavits in November 2020," the panel wrote.

The panel then held that the question made no difference. "In any event, even if this was a defect in the affidavit of service, defendants clearly had actual notice of the action," the court wrote, citing Ruffin v. Lion Corp., a 2010 Court of Appeals decision. The panel based that conclusion on Loebl's admission that he was served and on the October 2020 settlement talks, and it held that the trial court had "correctly denied" the jurisdictional branch of the motion.

The second branch of the motion rested on the usury defense, and there the panel asked whether the trial court had acted within its discretion. It held that the trial court "providently exercised its discretion" in rejecting that branch. The court framed the defect as a missing element. "Defendants failed to establish that the underlying agreement was a loan, which is a necessary element of a defense sounding in usury," the panel wrote. For that rule it cited Seidel v. 18 E. 17th St. Owners, a 1992 Court of Appeals decision, and Blue Wolf Capital Fund II, L.P. v. American Stevedoring Inc., a 2013 First Department decision.

The panel said the defendants had failed to demonstrate, "among other things," that the agreement had a finite term, citing LG Funding, LLC v. United Senior Properties of Olathe, LLC, a 2020 decision of the Appellate Division's Second Department. The panel did not identify the other deficiencies. Its explanation of the term problem focused on the payment formula. "As defendant Southern Source, Inc. was required to pay plaintiff 15% of its future receivables, rather than a fixed weekly amount, Southern Source's obligations could become fully satisfied at different times depending on the size of its future receivables," the court wrote.

That variable endpoint left the defendants unable to meet their burden of proof. Quoting the Court of Appeals' 1984 decision in Freitas v. Geddes Savings & Loan Association, the panel held that the defendants had failed to prove their usury defense "by clear evidence as to all its elements." The First Department held that these defendants had not proved one of those elements, the existence of a loan.

Matin Emouna of Emouna & Mikhail, PC, in Garden City, represented the defendants. Kristyn N. Harrison represented Kapitus.

The affirmance leaves the default judgment against Southern Source and the other defendants in place, and the panel awarded neither side costs on the appeal. The decision, reported as 2026 NY Slip Op 05855, is uncorrected and subject to revision before publication in the Official Reports.