On July 25, 2023, Justice Driscoll of the Nassau County Commercial Division issued a decision in Singh v. LCF Group, Inc., 2023 NY Slip Op. 33014(U), rejecting a claim that a merchant cash advance agreement was an usurious loan, explaining:
The central question in this action is whether the parties’ MCA Agreements are usurious loans concealed in the sheep’s clothing of a purchase of future receivables. . . .
Plaintiffs cannot establish usury, however, because the MCA Agreements are not loans. The rudimentary element of usury is the existence of a loan or forbearance of money, and where there is no loan, there can be no usury, however unconscionable the contract may be. In determining whether a transaction constitutes a usurious loan, the court must consider the transaction in its totality, judged by its true character, rather than by the name, color, or form that the parties have seen fit to give it. The transaction is not a loan unless the principal sum advanced is absolutely repayable. Generally, courts balance three factors in determining whether repayment is absolute or contingent: 1) whether there is a reconciliation provision in the agreement; 2) whether the agreement has a finite term; and 3) whether there is any recourse should the merchant declare bankruptcy.
The Court will utilize the framework set forth in LG Funding in analyzing whether the MCA Agreements are loans. As to the first factor, each of the MCA Agreements contain an identical reconciliation provision (“Reconciliation Provision”) that states:
1.4 Reconciliation of Specific Daily amount. The specific daily amount represents the Specified Percentage of Merchant’s future receipts. Merchant may request that Company reconcile Merchant’s actual receipts by either crediting or debiting the difference back to or from the Account so that the amount Company debited in the most recent calendar month equaled the Specified Percentage of future receipts that Company collected in that calendar month. Any reconciliation request must be 1. In writing 2. Include a complete copy of Merchant’s bank statement for the calendar month at issue and 3. Be sent to Company … within 30 days after the last day of the calendar month at issue. It is solely the Merchant’s responsibility to send a complete bank statement. Failure to send a written reconciliation request within 45 days of the last day of the calendar month at issue forfeits that month’s reconciliation.
Plaintiffs argue that the Reconciliation Provision is a sham in which Plaintiffs were restricted to making one reconciliation request within 30 days after the last day of the calendar month, asserting that courts have recognized that such limitations render the reconciliation provision useless if the merchant experiences a mid-month decline in revenues. The Court acknowledges that the time limitations in the Reconciliation Provision impose a hardship, but balances that portion of the provision against the fact that the Reconciliation Provision is not discretionary.
As to the second LG Funding factor, the MCA Agreements do not contain a finite term or absolute payment schedule. Rather, the MCA Agreements provide, at Section 1.10, that there is no interest rate or payment schedule and no time period during which the Purchase Amount must be collected by Company. Plaintiffs’ allegation that discovery will confirm that when the Enterprise is negotiating the terms of an MCA agreement with a merchant, it does so by describing the agreement as having a finite number of days, weeks, or payments, as was the case when negotiating with the respective borrowers here is conclusory.
With respect to the third LG Funding factor, Section 1.10 of the MCA Agreements states that Merchant going bankrupt or going out of business, in and of itself, does not constitute a breach of this Agreement. This further weighs against a finding that the agreements are loans.
The Court is not persuaded that the Events of Default were defined so broadly that a default with full recourse could occur under any conceivable circumstance. The MCA Agreements provide, in relevant part:
1.12 Protections Against Default. The following Protections 1 through 8 may be invoked by Company, immediately and without notice to Merchant in the event: (a) Merchant takes any action to discourage the use of electronic check processing that are settled through Processor, or permits any event to occur that could have an adverse effect on the use, acceptance, or authorization of checks for the purchase of Merchant’s services and products including but not limited to direct deposit of any checks into a bank account without scanning into the Company electronic check processor; (b) Merchant changes its arrangements with Processor in any way that is adverse to Company; ( c) Merchant changes the electronic check processor through which the Receipts are settled from Processor to another electronic check processor, or permits any event to occur that could cause diversion of any of Merchant’s check transactions to another processor; ( d) Merchant interrupts the operation of this business (other than adverse weather, natural disasters or acts of God) transfers, moves, sells, disposes, transfers or otherwise conveys its business or assets without (i) the express prior written consent of Company, and (ii) the written agreement of any purchaser or transferee to the assumption of all of Merchant’s obligations under this Agreement pursuant to documentation satisfactory to Company; or ( e) Merchant takes any action, fails to take any action, or offers any incentive–economic or otherwise-the result of which will be to induce any customer or customer to pay for Merchant’s services with any means other than payments, checks, or deposits that are settled through Processor. Any of these events places merchant in default under this Agreement.
Plaintiffs contend that bankruptcy is effectively an event of default because a bankruptcy debtor must cease using its pre-petition accounts, which would block LCF from collecting payments. Such a reading of Section 1.12, however, conflicts with the express provision in Section I.10 that bankruptcy or going out of business is not a breach of the agreement. The Court reconciles these provisions by interpreting the agreements to exclude bankruptcy as an event of default.
The Court notes that Appendix A of the MCA Agreements states that a $2,500 default fee is charged each time the merchant defaults, but that is not dispositive on the central question whether these transactions are loans. Additionally, Plaintiffs’ argument that Defendants treated Jar 259’s bankruptcy filing as an event of default speaks to a breach of contract, not to the character of the transactions at issue.
In sum, the Court concludes that the MCA Agreements are not loans. To be sure, there are aspects of the transactions that are troubling, particularly the high interest rates alleged by Plaintiffs and the limitations on reconciliation in the MCA Agreements. Indeed, it is not lost on the Court that the Amended Complaint, at its core, presents the subject transactions as a Dickensian web of debt that ultimately resulted in bankruptcy. The Court also notes that several recent federal cases-many of them cited by Plaintiff-have applied what appears to be a heightened level of scrutiny to merchant cash advance agreements. But that is not the law of this state.
(Internal quotations and citations omitted).