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)

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
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