Overcoming Merchant Cash Advance Debt
As a lawyer who is deeply devoted to assisting and supporting business owners, I have witnessed firsthand, through numerous cases, how the predatory tactics and unethical practices of merchant cash advance (MCA) lenders—whom I believe are akin to the devil due to their exploitative nature—can devastate hardworking enterprises. Together, by utilizing all available legal strategies, statutes, and precedents, we’ll navigate the complex legal avenues to overcome these formidable challenges.
Merchant Cash Advances, although often presented as swift and accessible financial solutions, frequently ensnare unsuspecting business owners in a vicious cycle of debt due to exorbitant fees, usurious interest rates, and oppressive terms that cross into the realm of unconscionability under the law, thereby violating the principles of fairness and justice that are supposed to protect borrowers from such predatory practices.
Usury Laws and Precedents in New York
In New York, usury laws codified under New York General Obligations Law § 5-501 for civil usury and New York Penal Law § 190.40 for criminal usury prohibit charging interest rates exceeding 16% and 25% per annum, respectively. MCA agreements frequently violate these thresholds by imposing rates that far exceed legal limits, subjecting lenders to potential civil and criminal penalties.
The landmark case of Funding Group, Inc. v. Water Chef, Inc., 19 A.D.3d 249 (N.Y. App. Div. 2005), set a precedent where the court recharacterized an MCA agreement as a loan due to the absolute repayment obligation imposed on the borrower, indicating that the lender bore no risk—a key factor in distinguishing between a true sale and a loan under New York law.
Similarly, in Pearl Capital Rivis Ventures, LLC v. RDN Construction, Inc., No. 18 Civ. 3727 (S.D.N.Y. Sept. 24, 2018), the court scrutinized whether repayment was genuinely contingent upon receivables—a crucial factor in differentiating a true sale from a loan. These precedents demonstrate that if the MCA lender retains no risk of non-payment and repayment is mandatory regardless of actual receivables, the agreement may be deemed a loan subject to usury defenses, providing powerful legal grounds to challenge the enforceability of the agreement.
California’s Legal Framework
In California, under the California Financing Law (California Financial Code § 22000 et seq.), entities engaging in lending activities must obtain a finance lender’s license. Unlicensed MCA providers may be operating illegally, rendering their agreements void and unenforceable.
The case of Creative Ventures, LLC v. Jim Ward & Associates, 195 Cal.App.4th 1430 (2011), established that contracts made by unlicensed lenders are unenforceable under California law, which can be an effective defense against MCA enforcement actions. Moreover, California’s usury laws under California Constitution Article XV, Section 1 limit interest rates to 10% per annum for non-exempt lenders. Exceeding this cap exposes the lender to usury penalties, including forfeiture of all interest. By arguing that the MCA functions as a loan exceeding these limits, attorneys can assert usury defenses, potentially voiding the obligation to pay excessive interest.
Unconscionability and Economic Duress
Under the Uniform Commercial Code, specifically UCC § 2-302, contracts or clauses that are unconscionable can be struck down or modified by the court. Unconscionability has both procedural and substantive elements:
- Procedural unconscionability refers to unfair surprise or lack of meaningful choice.
- Substantive unconscionability pertains to overly harsh, one-sided terms.
In the context of MCA’s, oppressive terms, lack of negotiation, complex language, and hidden fees can contribute to a finding of unconscionability, providing grounds for legal relief.
The doctrine of economic duress occurs when one party is induced to enter into a contract under wrongful pressure that deprives them of their free will. We’ll demonstrate that the MCA lender knew of the business’s financial distress and exploited it by imposing unfair terms, thereby invalidating the consent given by the borrower.
Texas Laws and Defenses
In Texas, the Texas Finance Code § 302.001 limits interest rates to a maximum of 18% per annum for business loans. Charging rates above these limits constitutes usury, subjecting lenders to penalties including forfeiture of principal and interest. The case of First Bank v. Tony’s Tortilla Factory, Inc., 877 S.W.2d 285 (Tex. 1994), reinforces that usurious contracts are void and borrowers are entitled to recover usurious interest paid.
Furthermore, the Deceptive Trade Practices Act (DTPA) provides remedies against businesses that engage in false, misleading, or deceptive acts, which can include predatory MCA practices. By alleging violations of the DTPA, businesses may recover economic damages, attorney’s fees, and additional damages for knowing or intentional misconduct.
Florida’s Usury Laws and Legal Leverage
In Florida, the civil usury statute under Fla. Stat. § 687.03 sets the maximum interest rate at 18% per annum on loans up to $500,000. Exceeding this rate can result in the transaction being deemed usurious, rendering the lender liable for penalties including forfeiture of the interest. Criminal usury under Fla. Stat. § 687.071 prohibits interest rates exceeding 25% per annum, and violations are considered third-degree felonies.
The case of Ramirez v. Atlantic Coast Lending Corp., No. 8:13-cv-1911-T-30TGW (M.D. Fla. Jan. 15, 2014), demonstrated that courts will not enforce contracts that violate usury laws, providing a defense against excessive MCA obligations.
Federal Laws and Multifaceted Defense
We’ll scrutinize the MCA agreement for violations of the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692 et seq., if the lender’s collection practices are abusive or deceptive. Although the FDCPA primarily applies to consumer debts, certain courts have extended its protections to small business debts when the lender’s conduct is egregiously improper.
By highlighting violations of federal and state statutes, we build a multifaceted defense that challenges the MCA on multiple legal fronts, increasing the likelihood of a favorable outcome by undermining the lender’s legal standing.
Real-World Case and RICO Violations
In my practice, I recall a case where we successfully argued that the MCA’s daily ACH withdrawals, which depleted the client’s account regardless of actual sales, constituted an unlawful practice under state law. This required detailed financial analysis and expert testimony to demonstrate the disparity between the MCA terms and the client’s revenue.
We also examine potential violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et seq., particularly if the MCA lender engages in a pattern of illegal activity. RICO claims offer the possibility of treble damages and attorney’s fees, which can be a powerful deterrent against predatory lenders.
Analyzing Reconciliation Provisions
In assessing MCA agreements, we analyze the reconciliation provisions; if they are illusory or impractical, it strengthens the argument that the agreement is a loan. The reconciliation clause is supposed to adjust payments based on actual receivables; however, many MCA agreements include burdensome requirements that make adjustments improbable.
Courts have frowned upon such deceptive practices, as seen in the case of K9 Bytes, Inc. v. Arch Capital Funding, LLC, where the court scrutinized the practicality of the reconciliation process. By exposing these flaws, we’ll demonstrate that the lender retains control over repayment terms, negating the contingent nature required for a true sale of receivables.
Security Interests and Good Faith
We investigate whether the MCA lender filed a UCC financing statement, which may indicate that they view the transaction as creating a security interest, akin to a loan. The presence of a security interest suggests that the lender intended to secure repayment obligations, supporting the recharacterization of the MCA as a loan.
In addition, we analyze the implications of the covenant of good faith and fair dealing, which is implied in every contract. Evidence of bad faith, such as aggressive collection tactics or refusal to adjust payments, can bolster claims that the lender breached this duty.
State-Specific Regulations and Licensing
We’ll assess whether the MCA lender violated any state-specific lending regulations, such as licensing requirements or disclosure obligations. For example, in New Jersey, the New Jersey Consumer Finance Licensing Act requires lenders to be licensed, and unlicensed activity can render contracts unenforceable.
By leveraging these regulatory frameworks, we challenge the legality of the MCA agreement itself, aiming to have it declared void or voidable.
Judgments by Confession and Legal Scrutiny
In instances where the MCA lender obtained a judgment by confession, we’ll examine whether procedural requirements were followed, as courts strictly construe such judgments due to their drastic nature. Many states have abolished or heavily regulated cognovit notes; failure to comply with statutory requirements can invalidate the judgment.
Comprehensive Legal Strategy
Our approach includes scrutinizing every aspect of the MCA transaction, ensuring that no legal stone is left unturned in our effort to protect the rights of the borrower. By bringing all these legal arguments together, we create a formidable defense strategy aimed at alleviating the burdens imposed by predatory MCA agreements.
Practical Steps and Future Developments
It’s crucial for businesses to document all interactions with MCA lenders, as detailed records will support claims of misconduct or contractual breaches. We’ll continue to monitor legislative developments, as states increasingly recognize the need to regulate MCA practices more stringently.
For instance, New York’s Small Business Truth in Lending Act, enacted after my knowledge cutoff, may impose additional disclosure requirements on MCA providers. While we can’t rely on laws enacted after our agreements, they signal a shift in regulatory attitudes that may influence judicial interpretations.
Advocating for Fair Lending Practices
Our goal is not only to resolve individual cases but to contribute to a broader movement advocating for fair lending practices. Through persistent legal challenges, we’ll deter MCA lenders from exploiting businesses, promoting a more equitable financial landscape.
I encourage any business owner struggling with MCA debt to consult with an attorney experienced in this field, as timely legal intervention is paramount.
Commitment and Call to Action
My commitment to this cause is unwavering, and I’ll continue to fight tirelessly for the rights of business owners against predatory lending practices. Stay informed, stay vigilant, and remember that the law provides mechanisms to protect you from unfair financial burdens.
Let’s work collectively to ensure that businesses have access to fair financing options without falling prey to exploitative agreements. By sharing knowledge and experiences, we empower each other to stand up against unjust practices in the financial industry.
Conclusion: Towards Financial Liberation
Thank you for joining me in this important conversation, and please reach out if you need guidance or support in overcoming MCA debt. Together, we’ll pave the way for a fairer, more transparent lending environment for all business owners.