The main theme in almost every MCA lawsuit comes down to the question of whether the MCA lender is in fact transacting by purchasing the receivables of the business or whether they are providing usurious and unconscionable loans. We have argued that it is the latter for years and we believe that the courts are finally starting to catch up. Recently, Justice Keith Cornell of Rockland County Supreme Court had some strong words for MCA companies in the MCA SERVICING COMPANY V. NIC’S PAINTING ET AL., decision. Judge Cornell states, “if the Receivables Purchasing Agreement 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.” This follows the same path as the decisions in CRYSTAL SPRINGS CAPITAL V. BIG THICKET COIN LLC; PEOPLE V. RICHMOND CAPITAL GROUP, LLC, as well as the allegations in the new case filed by the New York Attorney General against over 30 MCA companies. These allegations ultimately accuse the MCA companies of exploiting small business through fraudulent and deceptive loans with very high interest rates disguised as Merchant Cash Advances.
The factors a court must consider when deciding if a MCA transaction is a loan are: 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. In most matters that we defend, we allege that the merchant or business was not allowed to reconcile, and that the so-called reconciliation provision is illusory, or fake. One other common component of the agreement usually either states or implies that a bankruptcy filing by the business would be considered an event of default. In the event of a default, the MCA lender can accelerate the full uncollected purchase amount. Judge Cornell, once more in his decision writes, “were this a bona fide purchase of receivables, the plaintiff would have every interest in making sure that the Merchant continues to successfully operate its business so that it could continue to collect receivables.” Instead, MCA’s rarely ever do this if ever from our experience.
It is common for MCA creditors to open new companies under new names consistently. We always believed this to be deceptive at best, but judge Cornell goes further in saying, “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.” He goes on to explain that common MCA’s such as NewCo Capital Group, Capytal.com, MCA Servicing, Apollo Funding and others take advantage of unsophisticated businesses by promising an advance on their collections, and then makes them sign non-negotiable contracts that are deceptive and have extremely aggressive penalties for default. Finally, the judge ends his decision by saying that the MCA deception and trickery is not acceptable and that his court will not be used to “enforce potentially illegal and/or unconscionable loans.” This is one of the best decisions written by a judge yet particularly because of the language he uses as it explains the position of so many businesses that have been taken advantage of by MCA companies. This ruling joins the ever-growing decisions against Merchant Cash Creditors by other state court judges as well as appellate judges. If MCA lenders actually want businesses they work with to succeed, they will change their agreements, and conduct business transparently. Otherwise, we believe that more decisions like this will follow.