In a very important recent decision, the New York Appellate Division for the 3rd department held that a Merchant Cash Advance is a usurious loan instead of the purchase of receivables that it is purported to be. The decision came down in Crystal Springs Capital, Inc. v Big Thicket Coin, LLC, et al. This is an extremely important decision for multiple reasons. The Appellate Division is one level below the Court of Appeals, New York’s highest court, so this decision is significant case law that lower courts should now follow. This is particularly significant because there are still many lower court judges that rule against small businesses in MCA matters arguing that there is little to no appellate law to follow. Although there has been a previous appellate decision, this holding clearly lays out the test for why an MCA may be a usurious loan. The federal courts in both the Eastern and Southern Districts of New York as well as the 2nd Circuit have also followed this logic.
This outcome is also critical from a geographic perspective. It is well known that MCA companies often file their lawsuits in Upstate New York hoping that judges in smaller forums will rule in their favor. The 3rd department Appellate Division is in Albany, which covers a large portion of Upstate New York exactly where many of these cases are litigated on a lower court level. Hopefully, this will lead many of the judges in those districts to rule properly on this subject matter.
In terms of substance, the court explained that there are three factors when determining whether repayment is absolute or contingent. First, whether there is a reconciliation provision in the agreement which is the most common issue we encounter; whether the agreement has a finite term; and whether there is any recourse should the merchant declare bankruptcy. In our experience, it is a rare occurrence for the MCA company to offer reconciliation, and they almost always require the collection of the full purchase amount plus fees under the agreement in case of a default or bankruptcy by the small business.
The court also ruled on a separate issue about the vacature of a default judgment which is very commonly misinterpreted and ruled on incorrectly by lower court judges. The Court of Appeals has consistently ruled that they want matters to be litigated on the merits of the case instead of on default. Defaults, however, are all too common when it comes to MCA matters because service of process is done via mail or e-mail in most scenarios due to the contracts that they force businesses to sign. Some judges have made it difficult for small businesses to vacate default judgments citing to either a reasonable excuse under CPLR 5015 that they do not believe or a meritorious defense that they do not think can be proven. Both arguments are misguided and the Appellate Division once more explained that a court may vacate a default for sufficient reason and in the interests of substantial justice, and that CPLR 5015a does not provide an exhaustive list as to when a default judgment may be vacated. The Appellate Division clearly lays out that a potentially criminally usurious loan itself is enough to warrant the vacature of a default judgment.
This decision is another important case in several mounting decisions against MCA creditors and their tactics. Hopefully, it will solidify lower court decisions and help judges make the correct decisions when it comes to both vacating default judgment obtained by Merchant Cash Advance creditors as well as dismissing these matters based on criminal usury.