On February 28, 2023, Justice Borrok of the New York County Commercial Division issued a decision in Spin Capital, LLC v. Golden Foothill Ins. Servs., LLC, 2023 NY Slip Op. 30594(U), declining to recharacterize purchase agreements as loans for purposes of usury, explaining:
To state a RICO claim for collection of an unlawful debt, the Counterclaim Plaintiffs must allege that (i) the debt was unenforceable in whole or in part because of state or federal laws relating to usury, (ii) the debt was incurred in connection with the business of lending money at a usurious rate, and (iii) the usurious rate was at least twice the enforceable rate. As discussed above, any loan for $2.5 million or more is not subject to New York’s usury laws. . . .
As discussed above, the Counterclaim Plaintiffs allege that the Loan was really only for $1,307,403 (i.e., less than 50% of the face amount of the loan). Relying principally on Haymount Urgent Care PC v GoFund Advance LLC, 2022 WL 2297768, at* 6 (SD NY 2022) and looking at the transaction as a whole and whether there was a transfer of risk, the Counterclaim Plaintiffs argue that the Court should recharacterize the Purchase Agreements as loans and hold that the attorneys’ fees and closing costs are improper such that the Loan falls below the $2.5 million threshold and is subject to usury laws. More specifically, the Counterclaim Plaintiffs argue that the daily payments required by the Purchase Agreements do not represent a good-faith estimate of the percentage of future receipts purchased, liability was absolute upon an event of default (and declaring bankruptcy would inevitably cause an event of default), the reconciliation provisions was a sham because they would not be credited if they overpaid, and the Purchase Agreements did have a finite term because the reconciliation process did not affect the daily payment. In addition, the Counterclaim Plaintiffs argue that the attorneys’ fees and closing costs should also not be considered part of the Loan. They argue that these payments constituted interest on the Loan because among other things there was no obligation to pay attorneys’ fees unless there was a default. The arguments fail. Finally, the Counterclaim Plaintiffs argue that the Loan Documents contained false statements because when the Purchase Agreements were executed the counter-parties knew that the assets allegedly sold and not represented by the defendants to be wholly owned by the defendants had already been sold. The arguments fail.
As an initial matter, the Court must look to the amount agreed upon not merely the new money advanced. As
such, the Loan is not merely for $1,307,403, it is for $2.7 million because the Loan amount also includes amounts used to satisfy pre-existing obligations and reasonable expenses.Next, the court must consider whether any of the pre-existing obligations or other costs should be recharacterized as the Counterclaim Plaintiffs urge. Courts have held that revenue purchase transactions like the Purchase Agreements are not loans where the obligation to repay the principal sum is not absolute.
In determining whether repayment is absolute or contingent, courts weigh three factors: (i) whether there is a reconciliation provision in the agreement, (ii) whether the agreement has a finite term, and (iii) whether there is any recourse if the merchant declares bankruptcy. The BMF and HI Bar revenue purchase agreements meet all three criteria: (i) they all contained mandatory reconciliation provisions to ensure that payments were made based on the specific percentage of the accounts receivable that were sold in the Purchase Agreements, (ii) the Purchase Agreements did not have a finite term because the reconciliation provisions ensured that the amounts due were contingent on the sales and as such the term of the agreement would fluctuate based on the amount earned and (iii) the Purchase Agreements all contained provisions expressly stating that a declaration of bankruptcy did not constitute an event of default. The Court further notes that the purchase agreements do not contain false statements because the purchase agreements did not each sell 100% of the accounts receivables. Thus, it was true that the assets were not subject to other obligation or were not otherwise owned by others. In any event, even if there were misstatements, which there were not, the misstatements were made by the seller-defendants of the accounts receivable not the purchasers-Counterclaim Defendants. Moreover, it does not appear that there is any basis for the allegation that the reconciliation process was a sham and that the defendants would not have received an appropriate credit, because on the record before the Court, it does not appear that the Counterclaim Plaintiffs even allege that they requested a reconciliation or adjustment of the payments and that it was done improperly. Lastly, the Court notes that the payment of reasonable expenses including attorneys’ fees does not make a loan usurious
Goldberger v Magid, 2023 NY Slip OP 00725 (1st Dept 2023) does not mandate a different result. In Goldberger, the defendant received only $150,000 of value of the alleged principal amount of $300,000. Significantly, the plaintiff in that case failed to establish that the preexisting debt was satisfied. Thus, having received only half of the value of the face amount, the borrower was essentially paying twice the stated interest making the loan criminally usurious.
That is simply not this case. It is beyond dispute that the money advanced in respect of the HI Bar and BMF purchase agreements relieved the defendants’ obligations set forth in those agreements. Thus, the satisfaction money counts and the counterclaim must be dismissed.
(Internal citations omitted).