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)

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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