Merchant Cash Advances and Summary Judgment: New York Courts Throw a Wrench in Quick Enforcement

As a small business owner, you may have considered or even taken out a merchant cash advance (MCA) to secure funding for your business. While MCAs can provide quick access to capital, they often come with high costs and potentially predatory terms. When businesses default on these advances, MCA providers often seek summary judgment to recover their funds swiftly. However, my review of recent cases in New York courts has shown that obtaining summary judgment is not always a straightforward process, and courts are putting up roadblocks to quick enforcement when necessary to uphold the law.

Summary judgment is a legal motion that allows a party to win a case without going to trial. It can be granted if the court determines there are no genuine disputes of material fact and the moving party is entitled to judgment as a matter of law. In New York, a motion for summary judgment can be filed at any time after the defendant has answered the complaint, but it is typically made after discovery is complete and before trial.  However, lawyers for merchant cash advance lenders very often file motions without any discovery having taken place, shortly after the beginning of the case.

But summary judgment motions are not always successful. To be successful, the party moving for summary judgment must present a prima facie case of entitlement to judgment as a matter of law, tendering sufficient evidence in admissible form demonstrating the absence of material issues of fact.

Here are some examples of recent New York cases where courts have denied summary judgment to MCA lenders or, in the last example, have denied blanket default fees:

In Global Merchant Cash Inc v LPZ Carriers LLC (2024 NY Slip Op 50085(U)), the court denied summary judgment, among other reasons, because the plaintiff failed to properly authenticate the MCA agreement as a business record:

Plaintiff herein fails to properly authenticate the alleged merchant cash advance agreement pursuant to the business record exception to the hearsay rule (see CPLR 4518 [a]). Plaintiff’s affidavit does not fully comply with the requirements set forth by CPLR 4518 (a), and such foundation is necessary to admit a “writing or record” to prove the truth asserted by the record’s content (Bank of NY Mellon v Gordon, 171 AD3d 197 [2d Dept 2019]).

In order for a business record to be admissible, the tendering party’s affidavit must note: (1) that the recording was made in the regular course of business, (2) that it was the regular course of such business to make the recording, (3) that the recording was made at or near the time of the subject transaction or occurrence, and (4) that any informant in the evidentiary chain was under a business duty to accurately report the information (see People v Patterson, 28 NY3d 544 [2016]).

The affidavit of Jay Keller, chief executive officer of Plaintiff, does not lend itself toward authentication of the alleged agreement and the payment history, as paragraph 3 does not establish specificity as to the recorder’s personal knowledge and fails to state whether it was the regular course of Plaintiff’s business to make the records (see NYSCEF Doc No.12 ¶ 3). Paragraph 3 states that the agreement was “made by persons who had a business duty to GMC to make such records” (id.). Keller’s statement is insufficient as the person who made the record must have had actual knowledge of the event recorded or must have received their information from someone who had actual knowledge (see Johnson v Lutz, 253 NY 124 [1930)]; Capybara Cap. LLC v Zilco NW LLC, 78 Misc 3d 1238[A], 2023 NY Slip Op 50476[U] [Sup Ct, Kings County 2023]). The affidavit does not provide this information.

In Silverline Servs., Inc. v PDC Constr., LLC (2024 NY Slip Op 50304(U)), inconsistencies in the plaintiff’s papers led to the denial of summary judgment despite there not even being any opposition by the defendant to the motion. This did not stop the court from denying the motion:

However, “[a] summary judgment motion should not be granted merely because the party against whom judgment is sought failed to submit papers in opposition to the motion, (i.e., ‘defaulted’)” (Liberty Taxi Mgt., Inc. v Gincherman, 32 AD3d 276, 278 n [1st Dept 2006], citing Vermont Teddy Bear Co., v 1-800 Beargram Co., 373 F3d 241, 244 [2d Cir 2004] [“the failure to oppose a motion for summary judgment alone does not justify the granting of summary judgment. Instead, the … court must still assess whether the moving party has fulfilled its burden of demonstrating that there is no genuine issue of material fact and its entitlement to judgment as a matter of law”]; see Cugini v System Lumber Co., Inc., 111 AD2d 114, 115 [1st Dept 1985]).

Zachter’s affirmation demonstrates no personal knowledge of any of the transactional facts alleged in the complaint. “An attorney’s affirmation that is not based upon personal knowledge is of no probative or evidentiary significance” (Nerayoff v Khorshad, 168 AD3d 866, 867 [2d Dept 2019], citing Warrington v Ryder Truck Rental, Inc., 35 AD3d 455, 456 [2d Dept 2006]).

Here, the merchant balance statements are submitted without explaining their source, or their meaning. It is neither self-explanatory nor self-admitting and there was an insufficient foundation for its admission as a business record. “[I]t is the business record itself, not the [*4]foundational affidavit, that serves as proof of the matter asserted” (Citibank, N.A. v Potente, 210 AD3d 861, 862 [2d Dept 2022], quoting Bank of NY Mellon, 171 AD3d at 205). Accordingly, evidence of the contents of business records is admissible only where the records themselves are introduced. Without their introduction, a witness’s testimony as to the contents of the records is inadmissible hearsay (see Bank of NY Mellon,171 AD3d at 198). In sum, Silverline has failed to make a prima facie showing of entitlement to summary judgment on any of the claims it has asserted against the defendants.

In Robin Funding Group LLC v Southern Elite Roofing, Inc. (2024 NY Slip Op 50413(U)), the court found that the plaintiff failed to establish the necessary facts to establish a breach by the defendants.

The Court finds that plaintiff has failed to establish its prima facie entitlement to judgment as a matter of law. At the outset, the affidavit in support of the motion contains an allegation that defendants initiated a “payment stopped” request that blocked plaintiff’s access to the funds. See NYCEF Doc. 25, ,i 16. However, the record relied upon, the history of defendants’ account, has no indication of a stop payment request, the record merely indicated funds not received. See NYCEF Doc. 29. Moreover, the Court notes that the default occurred on July 13, 2023, a Thursday, and this action was commenced on July 18, 2023, only 5 calendar days from the date of the default and less than 5 workdays from which the contract allowed defendants to seek reconciliation. The agreement also contains plaintiff’s risk acknowledgments that include “adverse business conditions” and on the instant motion plaintiff has not established did not exist. Thus, the Court finds that plaintiff has failed to establish a breach by defendants because it fails to establish defendant, Southern Elite Roofing, was generating sufficient receivables and the breach was not caused by an adverse business condition.

Fundfi Merchant Funding, LLC v JDM Elec. LLC (2024 NY Slip Op 50362(U)) saw summary judgment denied due to the plaintiff’s failure to establish the business records exception for the records it relied upon. Again, there was no opposition to the motion, which often happens because the borrowers simply lack the funds to hire lawyers.

“A proper foundation for the admission of a business record must be provided by someone with personal knowledge of the maker’s business practices and procedures” (Citibank, N.A. v Cabrera, 130 AD3d 861, 861 [2d Dept 2015]). Generally, “the mere filing of papers received from other entities, even if they are retained in the regular course of business, is insufficient to qualify the documents as business records” (Bank of NY Mellon v Gordon, 171 AD3d 197, 209 [2d Dept 2019] quoting Standard Textile Co. v National Equip. Rental, 80 Ad2d 911, 911 [1981]). “However, such records may be admitted into evidence if the recipient can establish personal knowledge of the maker’s business practices and procedures or establish that the records provided by the maker were incorporated into the recipient’s own records and routinely relied upon by the recipient in its own business” (Bank of NY Mellon, 171 AD3d at 209).

Here, the report of defendant’s account under exhibit 6 is one page and in a tiny font. The Court was able to enlarge the exhibit. After doing so, the court found that the document was not self-explanatory and that there was an insufficient foundation for its admission as a business record.[FN1] Furthermore, the bank record of FMF reflecting the R01 code was not annexed. “[I]t is the business record itself, not the foundational affidavit, that serves as proof of the matter asserted” (Citibank, N.A. v Potente, 210 AD3d 861, 862 [2d Dept 2022], quoting Bank of NY Mellon, 171 AD3d at 205). Accordingly, evidence of the contents of business records is admissible only where the records themselves are introduced. Without their introduction, a witness’s testimony as to the contents of the records is inadmissible hearsay (see Bank of NY Mellon,171 AD3d at 198). In sum, FMF has failed to make a prima facie showing of entitlement to summary judgment on its claim that the business defendants breached the agreement. Consequently, FMF has failed to show that the obligation of the guarantor was ever triggered. As a result, the plaintiff also failed to show that the guarantor breached the agreement.

In Newco Capital Group VI LLC v K Transco Inc. 2024 NY Slip Op 50413(U) [82 Misc 3d 1226(A)], the court granted summary judgment but did not give them the requested attorneys’ fees and other expenses.

“The Default Fee, however, is an unenforceable penalty. Here, the amount of damages upon a breach is readily ascertainable: it is the sum remaining due on the factoring agreement . Plaintiffs in this industry are unquestionably capable and able to calculate the amount due on a default, as continuously illustrated by the plethora of cases of this type filed in the [Ninth] Judicial District.” See, Byzfunder NY LLC v. Holy City Collision LLC, 80 Misc 3d 1208(A), 194 N.Y.S.3d 924 (Sup Ct Ontario Cty, 2023)

Plaintiff is also requesting a fixed attorney’s fee award of 30% of the balance of the amount due. However, the Supreme Court is not bound by the fixed percentage set forth in the contract but has the inherent authority to determine reasonable attorneys’ fees. Orix Credit Alliance Inc. v. Grace Industries, Inc., 261 AD2d 521, 521-522, 690 N.Y.S.2d 651 (2d Dept. 1999); Prince v. Schacher, 125 AD3d 626, 628, 2 N.Y.S.3d 585 (2d Dept. 2015). Thus, an award of attorneys’ fees pursuant to a contractual provision may only be enforced to the extent that the amount is reasonable and warranted for the services actually rendered. Kamco Supply Corp. v. Annex Contracting Inc. 261 AD2d 363, 689 N.Y.S.2d 189 (2d Dept. 1999); Lupo v. Anna’s Lullaby Café, LLC, 189 AD3d 1205, 138 N.Y.S.3d 103 (2d Dept. 2020); Coffey v. Tretola, 179 AD3d 889, 890, 119 N.Y.S.3d 179 (2d Dept. 2020).

Accordingly, “a fixed percentage fee, as requested here, is viewed only as a maximum fee, limiting the amount of reasonable attorney’s fees which the plaintiff may charge upon proving the extent of the necessary services.” Mead v. First Trust & Deposit Co., 60 AD2d 71, 78, 400 N.Y.S.2d 936 (4th Dept. 1977). An award of reasonable attorneys’ fees is within the sound discretion of the court, based upon such factors as the time and labor required, the difficulty of the issues involved, and the skill and effectiveness of counsel. SO/Bluestar LLC v. Canarsie Hotel Corp., 33 AD3d 986, 825 N.Y.S.2d 80, 82 (2d Dept. 2006).

Plaintiff may be entitled to recover an attorney’s fee of a fixed percentage if it can [*6]demonstrate that the quality and quantity of the legal services rendered were such as to warrant, on a quantum meruit basis, that full percentage. Industrial Equipment Credit Corp. v. Green, 92 AD2d 838, 460 N.Y.S.2d 337 (1st Dept. 1983). If the plaintiff does not make that demonstration, then a reasonable attorney’s fee should be set by the court upon a quantum meruit basis. Id. Where the value of the legal services rendered by Plaintiff’s counsel is not evident from the record, the matter may be remanded for an assessment of those damages. Id. Here, Plaintiff has offered absolutely no evidence, by way of billing statements or otherwise, the amount of time expended by counsel related to its pursuit of this debt.

Since a quantum meruit award cannot be issued on this record, Plaintiff is accorded thirty (30) days from today’s date to provide an affirmation and billing statements to this Court as proof of the time spent to litigate this action if it intends to seek attorney’s fees. Otherwise, Plaintiff may enter judgment against Defendants in the amount of $27,740.00, plus pre-judgment interest at 9% from the September 27, 2023, to the date of entry of judgment, post-judgment interest, costs and disbursements as taxed by the Rockland County Clerk.

These decisions highlight the importance of adhering to legal standards and providing proper documentation when seeking summary judgment. The courts’ reasoning in these cases demonstrates that MCA providers must be meticulous in their legal filings to succeed on summary judgment. On the other hand, when you are a small business owner, these cases also show that you may have a shot at prolonging your case and defeating a summary judgment motion, which in turn, gives you more room to negotiate a settlement.

If you are a small business owner facing legal action from an MCA provider, it is essential to know that you have options and that summary judgment against you is not a foregone conclusion.

If you find yourself in default and facing legal action from an MCA provider, don’t hesitate to reach out to us to understand your rights and options. You may be able to successfully challenge summary judgment and protect your business from predatory MCA practices.