Usury New York

Usurious Loans or Legitimate Merchant Cash Advances – Courts To Decide

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Merchant Cash Advance Funders File A Flood Of Lawsuits In Rockland County Supreme Court

By Rick Tannenbaum

Rockland County Supreme Court Justices are on any given day overwhelmed by their caseloads. But a notably strange phenomenon in the courts has been the onslaught of cases filed every day by companies who are chasing clients who’ve defaulted on “merchant cash advances,” which are purported to be the purchase of future receivables and not loans.

However, many defendants disagree, and argue that the merchant cash advances are in fact usurious and illegal loans.

Both Rockland and Orange counties have been flooded with these lawsuits. In November, 122 new suits were filed (about 17 percent of the 724 lawsuits filed in Rockland County Supreme Court) by Rockland County-based companies against out-of-state entities.

In the first few days of December, 26 new suits have been filed in Rockland County by these litigants.

The lawsuits are filed by a small group of law firms for a handful of clients with names like Capytal, NewCo Capital, Samson Capital, MCA Capital, all operating out of the same suites of offices behind a veterinary clinic in Pomona. Other plaintiffs/funders include Paladin Funding, Apollo Funding, Kalamata and Black Olive, operating out of shared spaces and virtual offices at Blue Hill Plaza. And others with names like CloudFund, operate out of similar shared spaces in Suffern.

So why is Rockland – and other parts of New York rife with cases like these?

“New York courts have been reluctant to re-write the Merchant Cash Advance agreements as loans,” said an attorney close to these transactions. “And, many out-of-state companies opt to default because of the cost of litigation, and the fact that they’re already in financial straits, which is why they took these loans in the first place.”

The suits are all largely the same, based on the same or similar Merchant Cash Advance (MCAs) agreements that are signed by distressed companies unable to secure traditional financing to operate their businesses. Here’s how they work: the plaintiffs/funders purchase a company’s future receivables for a fraction of its value and advance the company cash, less administrative and other closing fees. The companies agree to pay back the money they received via daily ACH withdrawals from their bank accounts until the full amount purchased is paid back. The company owners have to personally guarantee the repayment and to receive the funding, must agree that any dispute stemming from the contract is litigated here in Rockland County, regardless of where the business is based.

For example, a business may sell $100,000 in future receivables for $60,000 and receive some amount less than $60,000 (paying in advance closing and administrative fees). Each day, the business pays a fixed amount, perhaps $1,000 per day for 100 days until the full $100,000 is paid back to the buyer of the receivables.

New York law has been friendly to the Merchant Cash Advance business, with courts and appellate courts holding over and over that the agreements are not loans, they are the legitimate purchase of future receivables. The courts, finding generally that the “reconciliation” provisions in the contract – the mechanism to adjust the daily payments to reflect a percentage of revenue instead of a fixed daily payment amount – protected the agreements from being considered loans, and therefore not subject to New York’s usury law.

In September, New York State Attorney General Letitia James won a significant court victory against a consortium of merchant cash advance companies in the New York Supreme Court, New York County. The lawsuit alleged the defendants’ merchant cash advances were in fact illegal, high-interest loans with astronomical and illegal rates. In People v. Richmond Capital Group, LLC, the court ordered the defendants to cancel the outstanding debt owed by thousands of small businesses nationwide and to repay all interest and overcharges collected, totaling tens of millions of dollars.

Supreme Court Justice Andrew Borrok found in that case that the risk of loss never actually passed through to the lenders and that the reconciliation provisions in the contracts were shams — put in to give the appearance of legitimacy, but were not operative.

Then, in October, the Appellate Division of the Supreme Court of New York, Second Department (which also oversees Rockland County) reviewed the Merchant Cash Advance Agreement used by Crystal Springs Capital (a Nassau County-based lender) and found that the “agreement constituted a criminally usurious loan.” In support, the court cited that the amounts withdrawn each day were not based on sales but on a fixed amount, which the lender had no obligation to reconcile or adjust to daily sales, and that the repayment obligation was absolute, making the scheme a usurious loan and not a legitimate “purchase of future receivables.”

This decision, along with Attorney General’s recent victory over predatory lenders, is sure to be relied on by defendants here in Rockland County and elsewhere in the Second Department. The decision opens the door once and for all for a usury defense.

Interest rates become usurious in New York when they exceed 16 percent. They become criminal when the interest rate exceeds 25 percent. Loans made in excess of 16 percent are typically modified or voided by the courts when such cases are litigated. Loans made with interest in excess of 25 percent can be referred for criminal prosecution.

Lawyers who defend these cases are closely watching these rulings.

Garden City-based defense attorney Robert Jacovetti is currently defending clients in a number of cases in Rockland County Supreme Court brought by Newco, Apollo, Capytal, Paladin, and is challenging the agreements as being usurious loans, not legitimate purchases of future receivables.

If the merchant cash advances are found to be loans, then the interest rates would be considered usurious and the contracts unenforceable. The interest rates on these “loans” would sometimes be near 100%, and based on the short-term nature of the loans, could approach 1000%.