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)

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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