Can Utah courts find high interest rates in hard money loans unconscionable? Capital Stack v. Reddy Explained

In Capital Stack v. Reddy, the Utah Court of Appeals addressed whether a 146.44% annual interest rate in a hard money loan could be deemed unconscionable, providing important guidance on the limits of acceptable interest rates in commercial lending agreements.

Background and Facts

Gowtham Reddy, operating multiple real estate investment companies, borrowed $750,000 from Capital Stack UT LLC under a seven-month loan agreement with a 146.44% annual interest rate. The loan required repayment of $1,050,000 total, including interest and fees. Reddy also signed a confession of judgment as part of the agreement. When Reddy defaulted after acknowledging he “can’t” pay due to “market squeeze,” Capital Stack filed the confession and obtained a judgment for $694,999.90. Reddy then moved under rule 60(b) to set aside the judgment, arguing the interest rate was unconscionable and the loan agreement was never properly formed in Utah.

Key Legal Issues

The court examined two primary issues: (1) whether the 146.44% annual interest rate was substantively unconscionable, and (2) whether the loan agreement was properly “received and accepted” in Utah as required by its terms. The analysis required balancing Utah’s policy of contractual freedom with protection against oppressive agreements.

Court’s Analysis and Holding

The court identified “bookends” in Utah unconscionability law: 58% annual interest (permissible) and 1,200% annual interest (unconscionable). The 146.44% rate fell closer to the permissible end. Importantly, the court noted that Utah Code § 15-1-1(1) allows parties to “agree upon any rate of interest” in written contracts. The court emphasized that Reddy was a sophisticated party with multiple businesses who voluntarily entered the agreement understanding it was a hard money loan—a type of financing that “carry much higher interest rates than conventional loans.” Regarding contract formation, the court found the agreement’s language indicated acceptance occurred when Reddy signed, making Capital Stack’s signature unnecessary.

Practice Implications

This decision reinforces Utah’s strong preference for contractual freedom, particularly in commercial contexts involving sophisticated parties. Practitioners should note that unconscionability claims face a “heavy burden” and that high interest rates alone, even exceeding 140% annually, may not suffice without additional evidence of procedural unfairness or oppression. The decision also clarifies that confession of judgment provisions remain enforceable when parties understand their obligations, and challenges should be carefully evaluated for proper procedural posture under rule 60(b).