The United States Second Circuit Court of Appeals upheld a judgment in favor of a small business against a Merchant Cash Advance Funder this month. The decision upheld the lower court’s ruling that the MCA agreement was actually a usurious loan instead of a “purchase of future receivables,” an argument we have been making in State Courts for the last decade. This is extremely important because this is the first ruling of its kind from one of the highest-level courts in the country given that the Second Circuit Court of Appeals is just one step away from the Supreme Court of the United States itself. The claim filed against the MCA company was a RICO claim or a civil racketeering issue. The decision is also critical because it clears the way for case law in the future as it makes clear what standards should be used for MCA cases moving forward given that there were so many different decisions issue in the past by Federal judges in different jurisdictions.
The Second Circuit adopted the three-part test applied by New York State Courts in deciding whether an MCA agreement is in fact a purchase of receivables or whether it is a loan where Usury laws apply. The three factors are whether there is a reconciliation provision in the agreement; whether the agreement has a finite term; and whether there is any recourse if the merchant declares bankruptcy. In this case the Court found that any adjustment to the daily amount was subject to the funder’s sole discretion, and not to the merchant business whose receivables may have dwindled, and the agreement allowed recourse against personal guarantors of the business if they were to declare bankruptcy. In our experience, we almost always see these exact two factors when dealing with Merchant Cash Advance collection and lawsuits. We hope that a high-level decision like this will give straightforward guidance for Judges to protect Merchant businesses in these cases. More importantly, given that there is a wide array of decisions in New York State courts on this MCA issue, and that there is no Court of Appeals decision yet, we hope that more New York State Court Judges will follow this ruling along with the previous federal court rulings in protecting small businesses against MCA funders who aggressively pursue them in NY State Courts daily. It is crucial for small business merchants to consult with Counsel who are experienced when it comes to Merchant Cash Advance litigation to protect themselves by using these new decisions against aggressive MCA funders.