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Network of Lenders, Including Suffern-Based Cloudfund, Are Accused Of Issuing Usurious Loans And Defrauding Borrowers And Courts
By Rick Tannenbaum
Attorney General Letitia James filed suit earlier this month in New York State Supreme Court in Albany County against a group of “predatory lenders” who allegedly issued usurious loans and committed fraud in the collection of debts, including a Suffern-based company Cloudfund, LLC.
Cloudfund, according to James, is part of a network of related companies, including Yellowstone Capital, Fundry, and Delta Bridge that purport to help struggling small businesses by providing them with rapid access to funding with flexible repayment options, with no lengthy application process and despite past credit problems.
According to the lawsuit, Cloudfund, and the other entities and individuals are accused of engaging in a fraudulent, illegal scheme to fleece money from small businesses by issuing them illegal, short-term loans at sky-high interest rates through so-called “merchant cash advances,” or “MCAs.”
James says that the merchant cash advance transactions were actually short-term loans with ultra-high interest rates of up to 820% per year.
Also, caught up in the lawsuit, which includes more than two dozen entities and individuals, is Pomona-based Aaron Davis who worked as a funder at Yellowstone from around 2009 until at least May 2021 and at Delta Bridge from May 2021 to the present.
Yellowstone was purportedly shut down in 2021 after investigations by the Attorney General’s Office, but rebranded itself as Delta Bridge and Cloudfund, and continued issuing and collecting “fraudulent, illegal loans” using the same personnel that operated at Yellowstone.
Attorney General James alleges that Yellowstone Capital and the other businesses operated this fraudulent network through a string of different company names, and therefore each is part of the same predatory lending scheme.
The OAG lawsuit seeks $1.4 billion for the impacted small businesses, including the return of all interest and fraudulent fees collected by the lenders and amounts illegally obtained through fraudulent court papers. The lawsuit further seeks a court order barring the companies and individuals from continuing their scheme in the future.
The merchant cash advances issued by Yellowstone, Delta Bridge, and their affiliates are a form of short-term, high-interest funding for small businesses. Merchant cash advances have grown in popularity in recent years, particularly for businesses that cannot get small business loans from traditional banks. According to James, the perpetrators of this scheme provided contracts that fraudulently described each transaction as a purchase of a portion of a merchant’s future revenues, with flexible payment amounts and open-ended terms. The suit alleges that the predatory lenders collected payments at fixed daily amounts, which they debited directly from merchants’ bank accounts over short repayment terms, such as 60 or 90 days. The lenders falsely promised to “reconcile” merchants’ daily payments to ensure they never rose above an agreed-upon percentage of the borrowers’ receipts, but the lenders used numerous fraudulent measures to ensure borrowers almost never qualified for payment refunds, the suit claims.
The lenders also exploited the New York courts, including courts here in Rockland County, by fraudulently obtaining judgments against the merchants and the merchants’ guarantors, enabling the lenders to exact greater harm. The suit charges the companies filed papers in court falsely describing each transaction as a purchase of a portion of a merchant’s future revenues.
Many of the borrowers were based out-of-state, but the MCA contracts included clauses designating New York courts as having jurisdiction over the contract, the borrowers and the guarantors, regardless of where they were based. Cloudfund filed 54 cases this year in Rockland County Supreme Court and 170 cases against borrowers statewide since 2022.
New York courts have been flooded with MCA litigation. 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. In some months, MCA lenders (named in the suit and otherwise) filed more than 100 suits here in Rockland County Supreme Court, almost always against out-of-state companies and their guarantors, many of whom don’t answer the suits and default.
Here’s how the schemes 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 New York, 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.
James’ lawsuit charges that the “percentage of receivables” aspect of the contract is a fraudulent scheme and that the payback is based on a fixed period, with payments generally extracted every day over a short period of time. James also alleges that “reconciliation” provisions in the contracts which allow a borrower to adjust its payments to accurately reflect a percentage of its revenue are set up to make it nearly impossible for borrowers to get relief.
These factors convert what are otherwise legitimate merchant cash advance contracts into usurious loans carrying illegal and often criminal interest rates.
Read also: Merchant Cash Advance Funders File A Flood Of Lawsuits In Rockland County Supreme Court, December 6, 2023
Read also: Rockland County Courts Becoming Hub For “Usury” Cases Originating Beyond The State, September 6, 2021
Read also: Is It Usury Or Legitimate Funding? A Rockland Court Will Decide, July 20, 2021
