On March 25, 2022, Justice Ruchelsman of the Kings County Commercial Division issued a decision in Hi Bar Capital LLC v. Parkway Dental Servs., LLC, 2022 NY Slip Op. 30989(U), holding that a cash advance agreement was not a usurious loan, explaining:
The defendants argue the agreement consisted of improper usury and such usury c6nstitutes a defense.
The plaintiff asserts the money afforded to the defendants was not a loan, rather it was a cash advance. Moreover, plaintiff argues the agreement contained a reconciliation provision which conclusively establish the agreement was not usurious. The defendants argue the reconciliation provision in the contract was merely illusory and thus not a true reconciliation provision, hence the contract was a loan and was usurious.
The courts have developed three criteria evaluating whether a particular arrangement is a loan or a merchant case advance. First, whether there is a reconciliation provision, whether the agreement has an indefinite term and lastly, whether the funder has recourse if the merchant declares bankruptcy.
The reconciliation provision that governs this case states that “Merchant may request a retroactive reconciliation of the total Remittance Amount . . . . Such reconciliation, if applicable, shall be performed by KDK within two (2) Business Days following its receipt of Merchant’s request for reconciliation by either crediting or debiting the difference back to, or from, Merchants Bank Account so that the total amount debited by KDK shall equal the Specific Percentage of the Future Receipts that Merchant collected during the requested month.
The defendants argue the discretionary nature of the reconciliation provision renders it illusory. However, there is nothing speculative or discretionary about the provision at all. On the contrary, the provision automatically becomes operative upon the presentation of the necessary bank statements required for the reconciliation. Thus, the reconciliation provision also provides that the request must include copies of all of Merchant’s bank account statements, credit card processing statements, and accounts receivable report outstanding if applicable, from the date of this Agreement through and including the date the request is made. KDK retains the right the request additional reasonable documentation including without limitation bank login or access to view Merchant’s accounts using third party software, and Merchant’s refusal to provide access shall be a breach of this Agreement and KDK shall have no obligation to reconcile. That disclaimer clearly indicates that such reconciliation would be honored if the necessary paperwork is furnished.
There is, thus, no discretion that may be employed by the funder. Consequently, there is no basis to assert the agreement in this case was really a usurious loan.
(Internal quotations and citations omitted) (emphasis added).