MCA Funder Fails to Defend Usury Counterclaim, Court Voids Agreement and Awards Damages to Defendants

An Florida MCA funder filed a breach of contract action against a business. The funder alleged that the business had failed to remit payments required by the merchant agreement. The funder sought to recover the amounts owed from the business and the individual guarantor. The business and guarantor filed a counterclaim against the funder alleging that the transaction was a disguised loan that charged a usurious interest rate. The funder failed to respond to the counterclaim and a default judgment was entered against it.

At a hearing to determine the damages to be awarded to the business and guarantor, evidence was presented showing that the contract was for a purchase and sale of future receivables for a purchase price of $250,000.00 and a receipts purchased amount of $347,500.00. Of the $347,500.00, the business paid the funder $108,963.00. Based on the dates of payment and amount paid, the Court found that the transaction carried an interest rate of 72%, which exceeded Florida’s criminal usury cap.

As a result, the Court voided the merchant agreement, awarded damages to the business of $108,963.00 and granted the recovery of its attorney fees from the funder.

1st Global Capital, LLC v. Volt Elec. Sys., LLC, 2017 U.S. Dist. LEXIS 175119

Posted in Criminal Usury, Florida, Merchant Cash Advance, Sale vs. Loan, State Court, Usury Cap | Comments Off on MCA Funder Fails to Defend Usury Counterclaim, Court Voids Agreement and Awards Damages to Defendants

US District Court Holds Individual Guarantors Liable for Business Loan; Rejects Usury Challenge

An alternative small business lender provided a loan to a business located in Texas. The loan was guaranteed by two individuals.  The agreement contained a choice of law provision which provided that the transaction would be interpreted and governed by federal law and, where not preempted by federal law, Wisconsin state law.

The business and individuals later filed suit against the lender in an attempt to void the loan agreement. The lender filed a motion to dismiss the complaint. In opposing the motion, the plaintiffs first argued that the loan violated Texas’ civil usury statute. However, as the plaintiffs failed to provide any argument as to why the loan agreements’ choice of law clause should be ignored, the court held that federal and/or Wisconsin law would control.

The plaintiffs also claimed that the individuals were co-borrowers rather than guarantors and therefore the loan violated Wisconsin’s usury law. In support, the individuals cited to several instances where they signed the loan agreement as “borrowers.” The court, however, rejected the plaintiffs’ argument based on the totality of the agreement. The court noted that, “(1) elsewhere in the Agreement [the business] alone is identified as the borrower; (2) the loan proceeds were paid to [the business], not to the individual plaintiffs; and (3) the individual plaintiffs also signed the Agreement as guarantors, a step that would be redundant if they were already responsible for repayment as borrowers.”

As a result, the court granted the lender’s motion and dismissed the case with prejudice.

Grp. One Dev., Inc. v. Bank of Lake Mills, 2017 U.S. Dist. LEXIS 104960 (S.D. Tex. July 7, 2017)

Posted in Choice-of-Law, Civil Usury, Federal Court, Texas | Comments Off on US District Court Holds Individual Guarantors Liable for Business Loan; Rejects Usury Challenge

New York Court Recharacterizes Merchant Agreement as Loan, Vacates Confessed Judgment and Voids Transaction

A business received financing from an alternative small business funder. The parties’ agreement stated that in exchange for the financing provided, the funder would receive 11.02% of the business’ daily receipts which the funder would take by debiting $331.82 from the business’ bank account each business day. The business later defaulted on the agreement and the funder obtained a confessed judgment against it in New York.

In response, the business filed a motion to vacate the confessed judgment. The business argued that the judgment was invalid because it obtained based on the default of a usurious loan that violated New York usury law.

After reviewing the parties agreement, the court granted the business’ motion and vacated the confessed judgment and voided the parties’ agreement. In its decision, the court held that though denominated as a purchase and sale of account receivables, the true nature of the transaction was that of a usurious loan.

“[The funder] asserts in its affidavit of nonpayment that it agreed to buy all rights to [the business’] future accounts receivable, having a face value of $21,900.00, for a purchase price of $15,000.00, and that repayment of the $21,900.00, was to be accomplished bu debiting [the business’] bank account by the Specified Percentage of 11.02%, until that amount was paid in full. The documents submitted before this court belie this claim. By doing basic mathematical calculations, the Court finds that controlling payment schedule set forth in the Merchant Agreement, with its Addendum, contemplates an interest rate of approximately 177%, as claimed by [the business].

In addition, there is absolutely no evidence that the parties’ financial arrangement contemplated plaintiff to be an investor or partner in defendants’ business. [The funder]  fails to point to a non-recourse provision in the Merchant Agreement by which it assumed the risk that it might not be able to collect payments from [the business’] account receivables. Merely telling the Court that risk is contemplated under the terms of the parties’ agreement is inadequate. The requirement of a guarantor, along with the other facts and circumstances set forth, demonstrate that the principal sum advanced was absolutely repayable with calculated interest that exceeds the legal rate, and supports a finding that the evidence outweighs the presumption against a finding of usury.”

As a result, the court vacated the confessed judgment and voided the agreement, stating, “[d]enominating a loan document by another name, as in this case, by calling it a Merchant Agreement, and including in it verbiage of [the funder’s] purported purchase of accounts receivable that is unsupported by actual [business] receivables dedicated to repayment, does not shield it from the judicial determination that it contemplates a criminally usurious transaction, which is void ab initio as a matter of law.”

QFC, LLC v Iron Centurian, LLC, 2017 N.Y. Misc. LEXIS 2632 (N.Y. Sup. Ct. July 5, 2017)

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Increased Value of Pledged Stock Not Interest

A lender provided a $600,000 loan to a borrower on the condition that the proceeds be used to purchase shares of a publicly traded company. The note provided for an interest rate of 10% and granted the lender warrants to purchase the shares at a fixed price. Upon the maturity of the note, the borrower had the option of repaying the principal plus interest or delivering the shares to the lender plus a cash payment of interest.

When the note came due, the borrower elected to deliver the shares to the lender. At the time the lender took ownership of the shares, their value had increased to more than $2 million. The borrower later filed a breach of contract action against the lender arguing that the value of the stock received by the lender in excess of the principal plus New York’s criminal usury rate of 25% should have been refunded to the borrower. The US District Court dismissed the borrower’s claim as barred by the one-year statute of limitation period on claims of overcharged interest. The borrower appealed to the Second Circuit.

Reviewing the District Court’s decision de novo, the Court of Appeals affirmed the District Court’s decision, though not on the same grounds (in a footnote, the Court appeared to reject the conclusion that the borrower’s claims was barred by the statute of limitations). Rather, the Court of Appeals found that the language of the note clearly removed the possibility that the transfer of the shares constituted a payment of interest.

“The contract provides that [the borrower] could elect to deliver the preferred shares to [the lender] to ‘repay the principal’ of the loan instead of paying back the $600,000 principal in cash. The contract specifically requires, however, that if [the borrower] chooses this alternative principal payment, she must make an additional “cash payment equal to the interest accrued . . . through the date of such delivery” at the regular, 10% per annum interest rate. There is no hint anywhere in the contract that to the extent the value of the preferred shares exceeded $600,000, that value would constitute payment of interest—in fact, the contract specifically contemplates that any interest must be paid in cash.”

Given the unambiguous language of the contract, the Court of Appeals rejected the borrower’s attempt to re-characterize the increase in the value of the shares as interest. As such, the court affirmed the District’s judgment.

Chassman v. Shipley, 2017 U.S. App. LEXIS 11252 (2d Cir. N.Y. June 21, 2017)

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U.S. District Court Holds that Purchase of Future Settlement Proceeds Violates Kansas Usury Law

A litigation finance firm advanced funds to an individual that was pursuing a personal injury case against a gas can manufacturer. After receiving a series of cash advances, the individual filed suit against the financing firm in U.S. District Court alleging that the financing agreements were unenforceable under Kansas law. The individual argued that even though the transactions were couched as purchase and sales of future proceeds of the personal injury case, they were in fact loans that carried usurious interest rates. The individual filed a motion for summary judgment.

In its opposition to the motion, the finance firm argued that the agreements were not subject to Kansas’ usury statute because repayment was contingent on the success of the individual’s case. If the individual failed to receive proceeds from his personal injury claim he would owe nothing. In support of its position, the firm cited a Kentucky Court of Appeals case which held,

Where, under a contract for the payment or repayment of money, the payment of interest on the principal sum is subject to a contingency, so that the creditor’s entire profit or return is put in hazard, the interest so contingently payable need not be limited to the maximum fixed by the usury statutes, provided the contract is made in good faith and without intention to evade or avoid the usury laws.

Dublin v. Veal, 341 S.W.2d 776, 777-78 (Ky. 1960).

After reviewing the individual’s motion and the firm’s opposition, the court granted summary judgment for the individual. The court held that even if the agreements were not loans (which it believed they were) the transactions were still subject to Kansas’ usury statutes. It stated, “[t]he statute never uses the term ‘loan’ in that subsection; rather it applies to ‘any contract or other obligation in writing where the original principal amount is fifteen thousand dollars ($15,000) or less . . . .’ KRS 360.010(1)(a). The scope of KRS 360.010(1) certainly encompasses the subject Agreements, each of which evidence indebtedness under $15,000.”

The court refused to follow the holding in Dublin because that case involved the sale of future business profits between co-partners in a commercial enterprise. In contrast, the court found that the transactions between the individual and the financing firm were simply loans of money “to tide him over while he litigated his personal injury claim.” As such, the court held that the agreements did not fit the exception discussed in the Dublin case and were, therefore, subject to Kansas’ usury statute.

Boling v. Prospect Funding Holdings, LLC, 2017 U.S. Dist. LEXIS 48098 (W.D. Ky. Mar. 30, 2017)

Posted in Civil Usury, Federal Court, Kansas, Sale vs. Loan, Usury Cap, Usury Exceptions | Comments Off on U.S. District Court Holds that Purchase of Future Settlement Proceeds Violates Kansas Usury Law

Citing Madden v. Midland Funding, Colorado Regulator Challenges Bank Partnership Model

The Colorado Administrator of the Uniform Consumer Credit Code (UCCC”) has filed complaints against two UCCC licensees alleging violations of Colorado’s usury cap. Both licensees utilize bank partnerships to originate their loans.

Citing Madden v. Midland Funding, the Administrator, represented by the office of the Colorado Attorney General, alleges that the licensees may not charge interest rates that the banks were permitted to charge under federal law. As the Administrator argues,

Specifically, certain banks may, pursuant to federal law, lawfully lend in Colorado and other states at rates that exceed the interest and other finance charge limits imposed by state law. This right is sometimes referred to as federal interest rate exportation.

[The licensees], and other non-banks cannot, however, enforce a bank’s federal interest rate exportation rights when they purchase loans from banks (or purchase loan receivables) because banks cannot validly assign such rights to non-banks. E.g., Madden v. Midland Funding, LLC, 786 F.3d 246, 250 (2d Cir. 2015) (distinguishing contrary precedent, and holding that non-bank purchaser of national bank’s loan could not enforce bank’s right to federal interest rate exportation).

The Administrator also alleges that the licensees, rather than the originating banks, were the true lenders of the loans.

Further, with respect to the [licensee loans] that [the bank] sells to [licensee or licensee’s] affiliates (including loans in which [the bank] sells only the receivables), [the bank] is not the true lender of the loans and, because the loans therefore are not made by a bank, federal interest rate exportation does not apply for this additional reason. E.g. CashCall, Inc. v. Morrisey, 2014 W. Va. LEXIS 587 (W. Va. May 30, 2014) (memorandum decision) (national bank that sold loans to non-bank was not the true lender of the loans because the non-bank purchaser bore the predominant economic interest in the loans and non-bank purchaser therefore could not enforce bank’s right to federal interest rate exportation).

[The bank] is not the true lender of the [licensee loans] that it sells to [licensee or licensee’s] non-bank affiliates because [the bank] does not bear the predominant economic interest in the loans.

The Administrator requests relief in the form of: injunctive relief, refund and penalty payments to Colorado consumers, a civil penalty paid to the Administrator, and attorney’s fees.

The licensees have not yet filed their initial responses.

Meade v. Avant of Colorado LLC d/b/a Avant, & Avant, Inc., 1:17-cv-0620-WJM

Meade v. Marlette Funding LLC d/b/a Best Egg, 1:17-cv-00575-PAB

Posted in Assignor-Assignee, Attorney General, Colorado, Federal Court, National Bank Act, Preemption, Usury Cap, Usury Exceptions | Comments Off on Citing Madden v. Midland Funding, Colorado Regulator Challenges Bank Partnership Model

Massachusetts State Court Rejects Choice of Law Clause, Vacates Confessed Judgment

A business located in Massachusetts received financing from a small business funder. The parties’ agreement stated that in exchange for the financing provided, the funder would receive 15% of the business’ daily receipts which the funder would take by debiting $1,549 from the business’ bank account each business day. The business later defaulted on the agreement and the funder obtained a confessed judgment against it in New York.

The funder then domesticated the New York judgment in Massachusetts. A few days after the New York judgment was domesticated, the business filed a motion to vacate the judgment in Massachusetts. The business argued that the underlying judgment was void because it was obtained pursuant to a confessed judgment provision in a promissory note which is not permitted under Massachusetts law. The business alleged that the loan itself was void because it violated the criminal usury laws of New York and Massachusetts. The business also argued that because the loan charged a rate greater than both states’ criminal usury caps the transaction violated Massachusetts’ UDAP statute.

After reviewing the parties agreement, the court granted the business’ motion and vacated the Massachusetts judgment. In a somewhat disjointed discussion, the court appeared to disregard the agreement’s New York choice of law provision as it related to the enforceability of the confessed judgment provision. The court stated, “while Massachusetts is required to give full faith and credit to lawfully executed judgments from other states, these all appear to be Massachusetts agreements…Here, the agreements were executed in Massachusetts, by Massachusetts residents and Massachusetts businesses, through a Massachusetts notary.”

To support its rejection of the agreement’s New York choice of law, the court held that the funder had failed to offer any explanation as to how the agreement was not a “Massachusetts Agreement.” However, the court did note that the parties agreement specifically provided that the “Agreement [would] be governed by and construed in accordance with the laws of the state of New York, without regards to any applicable principals of conflicts of law [and that] [a]ny suit, action or proceeding arising hereunder, or the interpretation, performance or breach hereof, shall, if [the funder] so elects, be instituted in any court sitting in New York.” Yet despite its clear language, the court appeared to limit the scope of the agreement’s choice of law provision to only cover the venue in which the funder could bring a complaint, “[The funder] chose the venue in its Merchant Agreement and appropriately filed its Complaint in New York.” As a result, the court seemed inclined to believe the confessed judgment provision was void under Massachusetts law and, therefore, refused to recognize the New York judgment.

The court further held that even if a judgment by confession were permitted under Massachusetts law, the funder had failed to refute the business’ allegation that the agreement appeared to charge an interest rate that exceeded the criminal usury laws of Massachusetts and New York. The court stated that the funder had failed to show how the $1,549 daily payment, which the court interpreted as a “DAILY interest rate”, was not criminally usurious under New York and Massachusetts law. In so finding, the court appeared, without any analysis, to hold that the transaction was a loan and to reject the plain meaning of the agreement which stated that a confessed judgment would bear an interest rate of 16%.

As a result, the court vacated the Massachusetts judgment.

Saturn Funding, LLC v. NRO Boston, LLC, 2017 Mass. Super. LEXIS 3 (Mass. Super. Ct. Feb. 21, 2017)

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Citing Growing Body of Case Law, New York Court Finds Sale of Future Receivables is Not Subject to Usury Laws

A small business funder entered into an agreement with a business to purchase a portion of the business’ future receivables for an upfront lump sum. In exchange for the lump sum payment, the funder was to receive a portion of the business’ daily proceeds until the funder received the total amount of purchased receivables.

The business later sued the funder and the bank that had initiated the ACH debits from the business’ bank account on the funder’s behalf. In its complaint, the business alleged that the transaction was not a purchase and sale but rather a usurious loan. In response, the bank filed a motion to dismiss the suit.

After reviewing the business’ complaint the trial court granted the motion. In its decision, the court cited a number of recent cases that had found that the sale of future receivables is not subject to New York’s usury laws. The court stated,

“…the agreement between the parties is unquestionably a purchase of receivables, and hence, not a loan, to which the laws of usury apply. This was established in Merchant Cash & Capital v Edgewood Group, LLC, 2015 U.S. Dist. LEXIS 94018, 2015 WL 4451057 (U.S.D.C., S.D.N.Y, Koeltl, J.), [**4]  Merchant Cash & Capital, LLC v Yehowa Med. Servs., Inc., 2016 NY Misc. LEXIS 3065 *, 2016 NY Slip Op 31590(U) [Sup Ct. Nassau Co. 2016; Murphy, J.]); Merchant Cash & Capital, LLC v Liberation Land Co., LLC, 2016 NY Misc. LEXIS 4854, 2016 NY Slip Op 32589(U) [Sup Ct. Nassau Co. 2016; Mahon, J.]; Retail Capital, LLC. d/b/a Credibly v Spice Intentions Inc. d/b/a Curry Heights, and AK M Karim, Index No. 713376/15, 2016 N.Y. Misc. LEXIS 4883, 2016 NY Slip Op 32614(U), Sup. Ct. Queens Co. [2016; this Court]) and other courts facing this issue.”

The court further held that the business, which was a corporation, was barred by General Obligations Law §5-521(1) from interposing the defense of civil usury, and could not assert criminal usury as a cause of action, rather than as an affirmative defense.

As a result, the court found that the business’ suit was without merit and dismissed the case.

Chartock v National Bank of California, 2017 N.Y. Misc. LEXIS 673 (N.Y. Sup. Ct. Jan. 17, 2017)

Posted in Civil Usury, Criminal Usury, Merchant Cash Advance, New York, Sale vs. Loan, State Court | Comments Off on Citing Growing Body of Case Law, New York Court Finds Sale of Future Receivables is Not Subject to Usury Laws

In Three Separate Decisions, New York Courts Find Sale of Future Receivables Not Subject to Usury Laws

In three nearly identical cases, a small business funder entered into an agreement with three separate businesses to purchase a portion of the businesses’ future receivables for an upfront lump sum. In exchange for the lump sum payment, the funder was to receive a portion of the businesses’ daily proceeds until the funder received the total amount of purchased receivables.

Each of the businesses breached their agreements by refusing to forward the purchased receivables to the funder. As a result, the funder filed complaints for breach of contract against the three businesses. In each of their answers, the businesses argued that the transactions were not true purchase and sales but rather usurious loans. In response, the funder filed motions to dismiss the businesses’ usury defenses.

After reviewing the businesses’ arguments the trial courts granted the funder’s motion and dismissed the usury defenses. First, the courts held that the businesses and their individual guarantors were barred from asserting civil usury because that defense is unavailable to corporate entities in New York. Second, the courts found that businesses’ had failed to sufficiently allege criminal usury defenses because they failed to allege that the funder had knowingly charged, took or received annual interest in excess of 25% on a loan or forbearance.

The courts explained that usury laws are only applicable to loans and forbearances and that where a financial arrangement is a purchase and sale there can be no usury. In each case the courts specifically found that the agreement between the parties was a purchase of future receivables for an upfront payment. In one of the cases, the court highlighted aspects of the transaction that it found conclusively proved that there was no loan:

The repayment was based upon a percentage of daily receipts, and the period over which such payment would take place was indeterminate. Plaintiff took the risk that there could be no daily receipts, and defendants took the risk that, if receipts were substantially greater than anticipated, repayment of the obligation could occur over an abbreviated period, with the sum over and above the amount advanced being more than 25%. The request for the Court to convert the Agreement  to a loan, with interest in excess of 25%, would require unwarranted speculation, and would contradict the explicit terms of the sale of future receivables in accordance with the Merchant Agreement.

As a result, each of the three courts found that the businesses’ arguments were entirely without merit and granted the funder’s motion to dismiss the usury defenses.

Merchant Cash & Capital, LLC v Liberation Land Co., LLC, 2016 N.Y. Misc. LEXIS 4854, 2016 NY Slip Op 32589(U) (N.Y. Sup. Ct. Dec. 12, 2016)

Merchant Cash & Capital, LLC v South Jersey Speed LLC, 2016 N.Y. Misc. LEXIS 4852, 2016 NY Slip Op 32591(U) (N.Y. Sup. Ct. Dec. 13, 2016)

Merchant Cash & Capital, LLC v Fire Suppression Servs., Inc., 2016 N.Y. Misc. LEXIS 4855, 2016 NY Slip Op 32590(U) (N.Y. Sup. Ct. Dec. 16, 2016)

Posted in Civil Usury, Criminal Usury, Merchant Cash Advance, New York, Recharacterization, State Court | Comments Off on In Three Separate Decisions, New York Courts Find Sale of Future Receivables Not Subject to Usury Laws

Convertible Note with 150% Default Penalty Not Usurious

A creditor purchased four convertible promissory notes from a company. The notes provided that they could be converted to unrestricted common stock of the company at a 45% discount. Upon an event of default, the notes carried a penalty that required a payment from the company of 150% of the outstanding balance of the notes.

Following an event of default, the creditor elected to convert the notes to stock and filed a suit for breach of contract for the 150% penalty. In response, the company argued that the notes charged rates that exceeded New York’s criminal usury code and that the discounted price at which the creditor obtained the company stock rendered the transaction usurious. The company then moved for summary judgment based on its usury defense. The trial court, however, rejected the company’s arguments.

The trial court explained that even though the notes provided for a discounted conversion rate of 45%, that alone did not render the transaction usurious. “…[G]iven that the shares could fluctuate in value, and the value realized would be paid by a buyer and not the [company], it is difficult to imagine that the share price discounts contained in the agreement could reasonably be construed as interest, and how one would calculate the rate of such interest.”

Further, the court held that the 150% penalty charged on the outstanding balance was not a violation of the New York usury code because its assessment was within the control of the company, specifically whether or not it defaulted on the notes.  In support, the court cited to a 2015 2nd division appellate decision, “a payment may not be considered usurious where, as here, said payment is ‘based upon a contingency within the control of the debtor—in this case, default in the payment of an agreed-upon obligation—and the debtor could have avoided the imposition of such charges simply by paying promptly.'”

Therefore, the court denied the company’s motion in its entirety.

KBM World Wide, Inc. v. Hangover Joe’s Holding Corp., 2017 U.S. Dist. LEXIS 15003 (E.D.N.Y. Feb. 1, 2017)

Posted in Criminal Usury, Federal Court, Interest Calculation, New York | Comments Off on Convertible Note with 150% Default Penalty Not Usurious