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Is This Predatory Lending Or Legitimate Small Business Funding?
By Rick Tannenbaum
Arcarius LLC, a Long Island-based lender that does business under several entities including 24 Capital and Express Business Capital, has filed more than a dozen breach-of-contract cases in Rockland County Supreme Court. Oddly, Arcarius seems to have no connection to Rockland County. Even odder is that none of the businesses or individuals sued by Arcarius appear to be connected to Rockland County either.
Defendants in the cases are located in San Marino, CA, Cleveland, OH, Glen Burnie, MD, and Hot Springs, AZ, to name a few. What they all have in common is that each defendant signed a contract containing a “venue clause” that allows Arcarius to file suit in any county in New York, even though that venue is likely a thousand miles from the defendants’ businesses.
Both Rockland and Orange Counties have become popular venues for these finance companies because the finance companies have enjoyed favorable rulings, according to an attorney familiar with these proceedings.
In all the cases, defendants sold future receivables to Arcarius for a fraction of their face value — let’s say 55- to 65 cents on the dollar. The businesses agree to repay the full amount of the sold receivables (100 cents on the dollar) within a few months of receiving the money, in daily amounts that are automatically withdrawn from companies’ checking accounts. If these arrangements were considered traditional loans, the effective interest rate paid by the borrowers on these short-term loans would often be between 80 and 200%.
New York’s Usury laws criminalize loans made with interest rates in excess of 25 percent.
An attorney for one of the borrowers referred to these lenders as “predatory lenders who target minorities and disadvantaged people” and called the finance companies “lenders of last resort.”
The lender field is large: companies like Mantis Funding, Small Business Financial Solutions, Funding Metrics, Forward Funding, Liberty Funding Solutions, and Everest Business Funding all engage in this type of investing in a company’s future by paying them a fraction of a dollar for the face value of the future receipts in exchange for immediate cash, provided the company also agrees that the funds sent are “not a loan.”
However, borrowers and the lenders are at odds over whether these finance arrangements are loans or investments.
In July, Rockland County Business Journal reported on a company fighting back against the financiers by filing suit in Rockland County Supreme Court, claiming that the moneys advanced were usurious loans and that they were unenforceable. It may take the Rockland Court some time to sort out the legal issues, but up in Orange County last week, a loan recipient’s arguments of usury failed to hold water. In a case against Funding Metrics, Judge Bartlett rejected the usury argument and looked to the language of the financing contract which said these investments in future receivables are not loans. Counsel for the borrower vowed to appeal the decision.
In a case here in Rockland County against a company called Crawford Collectibles, defendant Crawford raised the usury argument to defend against enforcement of an arbitration award in favor or Small Business Financial Solutions, claiming the receivables financing arrangement was really just an illegal loan with a 39 percent annual interest rate. The Rockland Court enforced the arbitration award, implicitly rejecting the usury defense, and Crawford satisfied the judgment against it last month.
With a string of favorable outcomes for lenders, it’s likely to assume cases will continue to be filed here, even though the only connection to local courts appears to be the court’s willingness to allow this type of lending to continue unabated. Perhaps an appellate court decision or the New York State legislature will disrupt this sort of financing arrangement and level the playing field against this sort of work-around the state’s usury laws.
Rick Tannenbaum sells commercial investment property with Houlihan Lawrence Commercial. Phone: 917-689-1799 email@example.com