NEW YORK APPELLATE COURT SAYS MERCHANT CASH ADVANCE IS CRIMINALLY USURIOUS LOAN

After a number of recent rulings against Merchant Cash Advance companies in both the New York Federal and State courts, the 2nd Appellate Division in New York recently joined that club and ruled against another MCA company. The Court in Crystal Sorings Capital, Inc v. Big Thicket Coin, LLC et al, ruled that the defendants were able to establish that the agreement was a criminally usurious loan. The follows a similar pattern laid down by both the Eastern and Southern District of New York as well as more and more state court decisions, most notably the decision in the case pursued by the NY Attorney General against another MCA company. In this case, the court explained that the MCA company was under no obligation to reconcile the payments and that the full uncontrolled purchased amount plus fees were due in default even if the business declared bankruptcy. This language equated to what the court believed to establish a loan as opposed to the purchase of future receivables because payment was “absolute.” In other words, the amount of receivables incoming and the actual sales of the defendant really made no difference. The interest rate charge was far above the allowed 25% in a loan matter in New York. The initial trial court had denied the defendant’s argument that this was a criminally usurious loan which is what makes this decision by the 2nd Appellate Division so important.

Almost all of the recent positive decisions against MCA lenders stem from issues with the reconciliation provision or lack thereof in MCA agreements. The Federal and State courts have both explained that these so-called reconciliation provisions have not been abided by which makes the Merchant Cash Advance a loan. In our experience, and as said by Justice Borrok in his decision in the People v. Richmond Capital Group, LLC case, ruling for the NY Attorney General, the reconciliation provisions are a sham to make the agreement purportedly look like the purchase of future receivables in order to step away from the criminal usury law that apply to loans and charge astronomical interest rates that can reach 200%-300% or more. We have had many clients from all over the country tell us that they showed their financial situation to the MCA’s when business went south but were simply met with aggressive threats of default and collection tactics. Not a single attempt at actual reconciliation was ever made based on the dozens of clients that we have represented and heard from. The collection and litigation tactics are another issue altogether that many courts including the decision by Justice Borrok have interpreted as illegal and extremely predatory in nature.

The good news is that the current trend of decisions against Merchant Cash Advance cases seems to be picking up positive momentum across the differing courts. However, MCA companies sue businesses daily, obtain default judgment more frequently than not, and use UCC liens to halt business revenue in order to collect their debts. Businesses need to know that they can and should defend themselves against MCA companies and UCC liens. They must also move quickly to vacate default judgments against them that are often served improperly, or not at all. These recent decisions should help better protect businesses and give them more tools in defending themselves against these MCA lenders.