Another win against a Merchant Cash Advance company and hope that the tide may turn in favor of Merchant Borrowers

Another day, another Merchant Cash Advance Lender goes to court and asks for a summary judgment based on the alleged breach of its Merchant Cash Advance agreement  (aka Revenue Purchase agreement) (MCA Servicing Co. v. Nic’s Painting, LLC* (2024 NY Slip Op 50598(U))).  In what seems to be following a turning of the tide in the courts,  the judge denied summary judgment and lectured on what he seems to think about these agreements…namely, that there is a good chance they are unenforceable due to usury.

This comes after some other recent wins for small businesses tortured by MCA companies’ predatory lending practices. In February, a New York Appellate Court ruled that the agreement at issue in the case was a criminally usurious loan (see Crystal Springs Capital, Inc. v Big Thicket Coin, LLC). In March, the New York Attorney General filed a lawsuit against many of these companies for predatory lending practices. Both developments are mentioned in this recent case out of Rockland County.

Here is a longer quote from the above-mentioned case because it speaks for itself and gives hope to other small businesses currently being sued by their MCA lenders:

“More important, however, is a most fundamental question: whether the RPA is void and unenforceable, either because it is an illegal usurious loan or a fundamentally unconscionable contract. If the RPA is a loan masquerading as an asset purchase — a wolf in sheep’s clothing— and if a calculation of the transaction’s cost reveals a usurious rate of interest, then the RPA is unenforceable. See Crystal Springs Capital v. Big Thicket Coin, LLC, 220 AD3d 745 (2d Dept. 2023). The Court is concerned that this RPA is in fact a usurious loan or an unconscionable contract, despite Plaintiff’s vociferous claims to the contrary. The RPA Agreement bears a striking resemblance to the loan agreements that were found to be usurious and unconscionable in Crystal Springs Capital, supra, and People v. Richmond Capital Group, LLC, NYLJ, Sep. 20, 2023 at p.17, col.2, 2023 NYLJ LEXIS 2487 (Sup. Ct. NY Co. 2023). This contract also resembles the contracts recently alleged to be usurious loans by the New York State Attorney General in a new petition filed against over 30 companies on March 5, 2024. In the newest matter, the AG accuses these companies of exploiting small businesses through fraudulent loans with extremely high interest rates that are disguised as “Merchant Cash Advances.” See “Attorney General James Sues Large-Scale Predatory Lending Operation Targeting Small Businesses,” Press Release of the NYSOAG, March 5, 2024 ( lending-operation-targeting); Rick Tannenbaum, “New York Attorney General Sues Suffern- Based Merchant Cash Advance Lender For Fraud,” Rockland County Business Journal, March 20, 2024.

Courts, in determining whether a transaction constitutes a usurious loan, must consider the transaction in its entirety and judge the same “‘by its real character, rather than by the name, color, or form which the parties have seen fit to give it.'” LG Funding, LLC v. United Senior Props of Olathe, LLC, 181 AD3d 664, 665 (2d Dept. 2020) (internal citation omitted). A loan is characterized by an absolute entitlement to repayment under all circumstances. SeeK9 Bytes, Inc. v Arch Capital Funding, LLC, 56 Misc 3d 807, 816 (Sup Ct. Westchester Co. 2017). In assessing whether the transaction is a loan, Courts generally weigh three factors: “1) whether there is a reconciliation provision in the agreement; (2) whether the agreement has a finite term; and (3) whether there is any recourse should the merchant declare bankruptcy.” LG Funding, 181 AD3d at 666.

This agreement includes a reconciliation provision, which purports to adjust the repayment amount based on 10% of the Merchant’s receivables. However, Defendants allege that the reconciliation provision is illusory, as Merchant was not allowed to reconcile. In this case, the alleged default was failure to request a reconciliation within one business day of a bounced remittance. However, Defendants allege that their attempts to reconcile were denied. Further, there is no evidence that the initial repayment amount was actually based on legitimately projected receivables. Defendant Rahming alleges that the amount of receivables purchased was falsely identified as 10%, when they were actually 100% of Merchant’s receivables. See Rahming Aff. ¶ 20 (NYSCEF Doc. 45).

The security agreement also suggests that this is actually a loan, rather than a bona fide purchase of future receivables. The Merchant must grant Plaintiff a security interest in all of Merchant’s assets if, at any time, there are insufficient funds in Merchant’s account for Plaintiff [*6]to remit payment to Plaintiff. While the guarantee signed by the Merchant’s owner purports to guarantee performance only, upon the occurrence of a default, the Merchant’s owner becomes jointly and severely liable for the amounts owed. And although bankruptcy is not identified as an event of default, the agreement creates a security interest in every tangible aspect of the business and allows for recovery personally against the Merchant’s owner, negating any protections that would accompany a bankruptcy filing by the Merchant.

Finally, upon an Event of Default, Plaintiff may “accelerat[e] the full uncollected Purchase Amount.” Were this a bona fide purchase of receivables, the Plaintiff would have every interest in making sure that Merchant continues to successfully operate its business so that it could continue to collect receivables. Plaintiff would actively work to adjust the payment so that the Merchant’s operating accounts were not totally depleted.

An unconscionable contract has been defined as one which is so grossly unreasonable as to be unenforceable because of “an absence of meaningful choice on the part of one of the parties” (procedural unconscionability) together with “contract terms which are unreasonably favorable to the other party” (substantive unconscionability). King v. Fox, 7 NY3d 181, 191 (2006). Examples of procedural unconscionability include “high pressure commercial tactics, inequality of bargaining power, deceptive practices and language in the contract, and an imbalance in the understanding and acumen of the parties.” Emigrant Mortg. Co., Inc. v.Fitzpatrick, 95 AD3d 1169, 1170 (2d Dept. 2012). Substantively unconscionable terms include “inflated prices, unfair termination clauses, unfair limitations on consequential damages, and improper disclaimers of warranty.” Id.

Defendants argue that they were subject to inequality of bargaining power and a significance imbalance of understanding. Defendants argue that they were desperate for funding when they agreed to the contract. See Rahming Aff. ¶ 17-19 (NYSCEF Doc. 45). Defendants argue that the percentage of receivables that were sold was chosen by Plaintiff. Defendants allege that the method for setting this percentage was not disclosed and was not based on the Merchant’s actual receivables. See id. ¶ 20, 22. Defendants allege that they did not even understand that they had sold 100% of their receivables until this lawsuit was commenced. See id. Finally, Defendants allege that Plaintiff did not allow Merchant to reconcile despite repeated requests. See id. ¶ 7-11.

This Court currently has dozens of matters on its docket filed by the various entities under which Plaintiff operates, including but not limited to NewCo Capital Group,, MCA Servicing, and Apollo Funding, all seeking judgments against small businesses located throughout the country who allegedly defaulted on RPAs after a few weeks or months. It appears that Plaintiff has a business of making loans under a variety of aliases to desperate small businesses, bleeding them dry, and then getting personal judgments against the owners. Plaintiff allegedly aggressively pursues these out-of-state, unsophisticated businesses, promising an advance on their collections. Plaintiff allegedly then presents them with a non-negotiable form contract that contains onerous repayment terms, hair-trigger events of default, and liquidated damages clauses that result in amounts owed that far exceed the value of the funds extended. While aggressive contract terms are not necessarily illegal, if the transaction is a subterfuge, it cannot be countenanced. This Court will not be used as a cudgel to enforce potentially illegal and/or unconscionable loans.

Recently, in Crystal Springs Capital, the Appellate Division, Second Department, held that a similar transaction constituted criminal usury. See id., 220 AD3d at 747. The Court held [*7]that the Supreme Court erred in not dismissing the plaintiff’s complaint on the basis of documentary evidence pursuant to CPLR § 3211(a)(1). The Appellate Division found that the merchant cash advance agreement was void as a matter of law. While the RPA in the instant case is not identical to the agreement before the court in Crystal Springs, the RPA’s structure and administration by Plaintiff smacks of chicanery.

Feel free to contact us if you need attorneys to defend you against MCA companies.