The New York Supreme Court of Westchester County issued a decision in
Pearl Capital Rivis Ventures, LLC. v. RDN Construction Inc. that clarifies the circumstances under which the provision of a merchant
cash advance in exchange for the assignment of future receivables may
be deemed a loan subject to usury restrictions, versus a non-loan purchase
and sale agreement.
In this case, the plaintiff, Pearl Capital Rivis Ventures, sought to recover
on its causes of action for unjust enrichment and breach of contract.
The court here considered whether the merchant cash advance arrangement
between plaintiff and defendant, RDN Construction, was either a loan subject
to New York’s criminal usury restrictions or a non-loan contract
for the purchase and sale of future accounts receivables. Commercial loans
are subject to the state criminal usury statute, NY CLS Penal Law §190.40.
A finding of criminal usury requires proof that the lender knowingly charged,
took, or received annual interest exceeding 25% on a loan or forbearance.
Here, the New York State Supreme Court deemed the arrangement between Pearl
Capital and RDN Construction to constitute a loan. The Court concluded
that the “real purpose of the Agreement was for plaintiff to lend
money to defendants at the usurious interest rate set forth therein, and
that defendant agreed to borrow the money based on the same usurious terms
dictated by plaintiff.” It was held that simply calling a loan document
a “Merchant Agreement,” does not shield it from the judicial
determination that it contemplates a criminally usurious transaction.
The defendant’s witness testified that by purchasing future receivables
RDN Construction accepted business risks besides the normal risks of repayment
common to a loan, the court discounted this testimony on the basis that
“merely telling the Court that risk is contemplated under the terms
of the Agreement is inadequate, especially where, as here, the Agreement
is illegible, with excessively small print.” The agreement here
did not specify that sales of receivables to the defendant were without
recourse to the plaintiff. The court determined that in the absence of
this language, the plaintiff was obligated to repay and the agreement
amounted to a loan. Therefore, the applicable interest rate was approximately
180 percent per year, which exceeded the 25 percent maximum rate allowed
in New York.
This case highlights the importance of paying close attention to the terms
and conditions of any merchant capital advance agreement. In reviewing
a merchant capital advance agreement, a court is likely to look beyond
the general nature of the relationship and will analyze the precise terms
of the governing contract. A sale of receivables will be treated as a
purchase and sale agreement instead of a loan, the sale must be without
recourse to the seller. In a sale without recourse, the purchaser accepts
the risk that the seller may not perform as expected and that the future
receivable may not materialize. Furthermore, a violation of certain representations
and warranties in the merchant cash advance agreement may allow the purchaser
of the receivables to proceed directly against the seller for breach of contract.