Usury Laws Do Not Apply to Merchant Cash Advance

On February 20, 2024, Justice Whelan of the Suffolk County Commercial Division issued a decision in GEM Funding, LLC v. Z-Rite Plumbing & Heating Corp., 2024 NY Slip Op. 50171(U), holding that the usury laws do not apply to merchant cash advance agreements, explaining:

Usury laws apply only to loans or forbearances, and not investments. If the transaction is not a loan, there can be no usury, however unconscionable the contract may be. New York law includes a strong presumption against a finding of usury and requires it to be supported by clear and convincing evidence.

New York courts have developed a three-factor test to determine whether a merchant cash advance transaction should be considered a loan as opposed to a purchase of future receivables. Under this test, courts evaluate: (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. Here, the plaintiff established that the transaction set forth in the agreement was not a loan. The terms of the agreement provided for adjustments to the monthly payments made by defendants to plaintiff based on changes in defendants’ monthly sales. Accordingly, as the amount of the monthly payments could change, the term of the agreement was not finite. Moreover, no contractual provision existed establishing that a declaration of bankruptcy would constitute an event of default. Plaintiff has established its prima facie entitlement to summary judgment as a matter of law by demonstrating the existence of an agreement and breach, and defendants, in opposition, have failed to raise a triable issue of fact. Accordingly, plaintiff’s motion for summary judgment is granted in its entirety.

(Internal quotations and citations omitted).

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