Merchant Cash Advance Legal Update

Merchant Cash Advances or MCA’s are commonly known to struggling small businesses all across the country due to their high-interest rates and aggressive collection and judgment enforcement action by funders and their retained law firms. MCA’s are supposed to be akin to factoring agreements where a funder purchases receivables for a set price and repayment is based on the business’s success. However, businesses have often sued MCA funders because they believe these MCA’s are really loans with incredibly high-interest rates usually over the State usury amount.

The NY Attorney General lawsuit in People of the State of New York v. Richmond Capital Group, 2021 alleges that certain funders violated the criminal usury law because these are actually contracts. This allegation is based on emails, sales calls, and advertisements that call them “loans” as well as being underwritten as loans by reviewing credit and bank balances as opposed to receivables which do not do so.

The more recent Davis v. Richmond Capital Group, 2021 decision will likely mean that trial courts will focus on the agreements between MCA lenders and businesses to decide the nature of the transaction. Mainly, the Davis decision seems to show that a failure to provide reconciliation by the funder could be considered a breach and more so could be considered evidence that the funder treated the agreement as a loan and not a merchant cash advance.

Most recently Judge Andrew Borrok denied MCA’s motion to dismiss the NYAG case stating that the NYAG had shown alleged fraudulent conduct by the funders.