Recently, the Eastern and Southern Districts of New York have been ruling more favorably for small business borrowers and against Merchant Cash Advance lenders. The federal decisions are considerably more friendly for businesses than most New York State decisions which still lag behind federal courts, although they are starting to catch on. New York had generally held that MCA contracts were not covered under the criminal usury cap of 25% as long as long as a three-prong test under Principis Cap., LLC v. I Do, Inc., was met. Practically, this meant that MCA contracts were not considered loans. Fleetwood Services v. Ram Capital Funding was the first major decision to shift that policy. Fleetwood is extremely important as it found that when you have an over-broad description of the receivables being purchased, no provision giving the MCA creditor control over where receivables are deposited to and an all-assets security provision instead of a collateral package that includes only the right to receivables to secure performance, that the transaction is a loan and not a sale and purchase of receivables. This is primarily because there is no transfer of the risk of loss to the lender in case the merchant’s business fails. The SDNY has mainly followed Fleetwood and has issued pro-business borrower decisions since. Civil Rico filings have increased against MCA lenders significantly to void agreements and recover damages in the meantime.
In Lateral Recovery LLC v Capital Merchant Services LLC, the court scaled back Fleetwood a bit. However, it found three different conclusions when analyzing three MCA forms. One was usurious, one raised a question of fact about whether it was a loan and the final one seemed to be a true receivables contract because it had a reconciliation agreement in it. Haymount Urgent Care PC v. GoFund Advance LLC, was another important decision in which the court seemed to state that an MCA agreement could be voided under New York’s Usury laws. However, the court also seemed to state that a well-drafted MCA clause with an appropriate mandatory reconciliation provision will not absolutely be considered a usurious loan as long as the creditors provide proper underwriting, use the forms correctly and do not engage in misconduct. That is something that we have yet to see from the cases and MCA lenders that we have been involved with but maybe it means that larger more sophisticated companies and lenders will start to take over and clean up the industry if they want to continue forward in a legally proper way.
In the meantime, there is significant case law that can now be used in both federal and state courts to defend business borrowers and to pursue potential counterclaims against MCA lenders.