On January 7, 2022, Justice Odorisi of the Seventh Judicial District Commercial Division issued a decision in American Water Restoration, Inc. v. AKF Inc., 2022 NY Slip Op. 50030(U), holding that a receivables sale contract was not an usurious loan, explaining:
Plaintiffs’ other relief ground – an alleged usurious loan – does not support an injunction. Purchases and sales of future receivables and sales proceeds are common commercial transactions expressly contemplated by the Uniform Commercial Code. Plaintiffs’ case hinges on the true nature of the transaction as:
The question in each case is, and necessarily must be, whether the agreement be fair and reasonable, or a mere device to evade the usury statutes “what we have to find in the transaction is the intention of the parties. It was early recognized by the courts than if the form of the contract were to be controlling, the statute against usury would be substantially unenforceable, and thus it was made the duty of the court in each case presented to examine into the substance of the transaction between the parties and determine whether the intent which pervaded it was one which violated the statute.
Where merchant funding agreements are deemed to actually be usurious loans disguised a purchases of accounts receivable, the court:
typically found no provisions for forgiveness or modification of the loans, such as viable and enforceable reconciliation provisions, in the event that the funding companies would not collect the daily amounts required . . .
Focusing on the reconciliation provision in a given merchant agreement is appropriate because it often determines the risk to the funding company. If the funding company truly is collecting a specified percentage of accounts receivable, then the funding company bears the risk of a downturn in the merchant’s business. If, however, the merchant is unable to adjust fixed payments in the event of a reduction of its accounts receivable, and the funding company can collect the amount due and owing by way of a personal guarantee and confession of judgment, there is far less risk to the funding company. Therefore, whether the merchant may reconcile its fixed payment amount when there is a reduction of accounts receivable is often determinative of whether repayment is absolute or contingent. If repayment is absolute, then the arrangement must be considered a loan as opposed to a purchase of accounts receivable.In this case, the Revenue Purchase Agreement is not shown to be a usurious loan by clear and convincing evidence. The Agreement has the following reconciliation provision:
Merchant has elected to have FUNDER debit the Alternative Daily Amount each business day. The Alternative Daily Amount is intended to represent the Specified Percentage of Merchant’s Receipts. For as long as no Event of Default has occurred, once each calendar month Merchant or FUNDER may request a reconciliation. Merchant agrees to provide FUNDER with Merchant’s monthly bank statements and any other information requested by FUNDER to assist in this reconciliation. Upon receipt and reasonable verification of the Merchant’s monthly bank statements and any additional requested information, FUNDER shall reconcile the Merchant’s account by either crediting or debiting the difference from or back to the Merchant’s bank account so that the amount debited in the immediately preceding calendar month equals the Specified Percentage of Merchant’s actual Receipts for that calendar month. FUNDER also shall adjust the Alternative Daily Amount on a going-forward basis to more closely reflect the Merchant’s actual Receipts times the Specified Percentage. FUNDER will give Merchant notice five business days prior to any such adjustment. After each adjustment made pursuant to this paragraph, the new dollar amount shall be deemed the Alternative Daily Amount until any subsequent adjustment.
Contrary to the discretionary reconciliation provision in AH Wines, Inc., the present one is worded as mandatory with “shall” dictates. This negates Plaintiffs’ usurious loan contention. Without a usurious loan, Adar Bays, LLC v. GeneSYS ID, Inc., _ NY3d _, 2021 NY Slip Op 05616 (10/12/21) is wholly inapplicable. Therefore, this other avenue of likelihood of success is missing.
(Internal quotations and citations omitted).