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 9% of the business’ daily proceeds until the funder received the total amount of purchased receivables.

Within ten days of receiving the purchase price, the business refused to allow any of its receivable proceeds to be forwarded to the funder. As a result, the funder filed a complaint against the business and obtained a default judgment. The business later filed a motion to vacate the judgment. The business argued that the transaction was not a true purchase and sale but rather a usurious loan.

After reviewing the business’ arguments the trial court denied the motion. First, the court held that the business, which was a corporation, was barred from asserting civil usury because that defense is unavailable to corporate entities in New York. Second, the court found that business’ had failed to sufficiently allege a criminal usury defense because it failed to allege that the funder had knowingly charged, took or received annual interest in excess of 25% on a loan or forbearance.

The court 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. The court specifically found that the agreement between the parties was a purchase of future receivables for an upfront payment and 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, the court found that the business’ defense of usury was entirely without merit and denied the motion to vacate.

Merchant Cash & Capital, LLC v G&E Asian Am. Enter., Inc., 2016 N.Y. Misc. LEXIS 3067, 2016 NY Slip Op 31592(U)

About Patrick Siegfried

Patrick Siegfried is the author of the Usury Law Blog. Patrick is a practicing attorney in Bethesda, Maryland. Patrick’s work focuses on issues regarding alternative small business financing. He can be reached at psiegfried@usurylawblog.com
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