Harvard Sued In Usury Claim

Harvard is disputing a lawsuit brought by a real estate developer that accuses the University of backing a loan with an interest rate that exceeds legal limits, according to court documents.

The lawsuit, filed by Fred Fahey, claims that Realty Financial Partners—a company which Harvard and other institutions have invested in—charged an interest rate on a $6.7 million loan of 42 percent, exceeding the state limit of 20 percent set under the Criminal Usury Act.

Fahey, a real estate developer in Dracut, Mass., took the loan to finance a 186-home community and golf course.

The lawsuit accuses Harvard, which is listed as a third-party defendant, of funding the loans.

In court papers filed jointly with Yale and Princeton earlier this month, Harvard moved to dismiss the case because it claimed it was a limited partner. The court papers argued that the three universities had no interaction or management in the real estate development project, and had provided capital for investment in a limited partnership agreement.

Accordingly, the papers argue that as a limited partner, Harvard should be protected by the Massachusetts Limited Partnership Act, which “shields limited partners from liability for partnership obligations unless they participate in control of the business.”

But Harvard has argued in the court papers that the Criminal Usury Act does not apply to the University because the statute is “directed at lenders and there is no suggestion that it was intended to encompass passive investors in lenders such as limited partners or shareholders.”

Harvard’s Office of General Counsel declined to comment because of the pending legal action.

According to Richard Briansky, Fahey’s attorney, a drawdown notice describing the loan and interest rates charged was sent to Harvard at least a week before the loan was approved.

Fahey is seeking approximately $20 million, the amount that he said he would have earned on the project. Though the lawsuit did not list specific amounts, damages are being sought from all third-parties involved, including Harvard.

“The damages are all encompassing,” Fahey said in a phone interview yesterday. “They got an investment summary that told them what the deal was and where it was and how much they were receiving.”

While Harvard is listed as a third-party, the lawsuit claims that it violated the Criminal Usury Act, which implicates “whoever in exchange for either a loan of money or other property knowingly contracts for, charges, takes or receives, directly or indirectly, interest and expenses” that total more then 20 percent. According to the lawsuit, Harvard is liable because it did not properly notify the state attorney general.

The lawsuit claims that the statute does not distinguish between different entities, and that it applies to anyone who benefits from a loan that exceeded the 20 percent threshold.

The other institutions listed in the lawsuit as “third-party defendants” include Yale University, Princeton University, Oberlin College in Ohio, the MacArthur Foundation, and Carnegie Corporation.

Briansky said that he believes the court will hear the case in January.

—Staff writer Kevin Zhou can be reached at kzhou@fas.harvard.edu.