Contract breach; Application of usury laws; MCL 438.41; Whether a settlement agreement constituted a novation; Effect of the underlying agreement being invalid; Proper remedy; MCL 438.32; Whether appellate review was waived; Annual percentage rate (APR)

The court held that because the underlying agreement was invalid for violating the criminal usury statute, the alleged novation was invalid. But it concluded the trial court erred in ruling that defendants did not owe plaintiff anything. The proper remedy “was to extinguish the outstanding interest and apply any prior interest payments toward the principal.” This breach of contract action arose from a $30,000 loan plaintiff made to defendants. There was no dispute that the effective APR of the loan far exceeded “what is allowed by criminal usury statutes.” The parties later entered into a settlement agreement “intended ‘to settle on the amount owed and the terms of repayment.’” Plaintiff filed this action to enforce that agreement. The trial court granted defendants summary disposition, agreeing “that the loan underlying the settlement agreement charged illegal interest and was invalid, and thus that the settlement neither novated the debt nor waived defendants’ rights, claims, or defenses regarding the usury. Refusing to enforce the usurious settlement agreement as contrary to public policy, [it] awarded ‘no sums from Defendants.’” Plaintiff argued the trial court erred in applying usury laws because “the settlement agreement was a novation and therefore discharged the underlying loan and any accompanying defenses to its repayment.” The court disagreed, noting the elements required “to establish novation are: (1) parties capable of contracting; (2) a valid prior obligation to be displaced; (3) the consent of all parties to the substitution, based upon sufficient consideration; and (4) the extinction of the old obligation and the creation of a valid new one.” It found plaintiff could not “establish element two because the prior obligation, being in violation of criminal usury laws, was invalid.” While plaintiff suggested “the underlying agreement was valid because usury is a ‘defense’ that” defendants failed to raise, it cited no supporting authority for “this bizarre assertion, and it is well established that courts cannot enforce agreements that violate law or public policy.” However, while the trial “court properly extinguished the interest, it erred by wholly releasing defendants from the debt.” Affirmed in part, reversed in part, and remanded.