How Do Merchant Cash Advances Differ From the Sale of Future Receivables?

CFPB Expands Definition of 'Credit' to Include Merchant Cash Advances Under ECOA

On March 30, 2023, the Consumer Financial Protection Bureau (CFPB) published its rule regarding small business data collection and reporting. This rule amends Regulation B under the Equal Credit Opportunity Act (ECOA), as directed by Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This new rule mandates that financial institutions originating at least 100 small business credit transactions each year must gather and report various data, including information on loan applications, origination, pricing, and certain demographics of applicants and borrowers.

In a significant development, the CFPB’s commentary within this rule's release has broadly categorized merchant cash advances as "credit" for purposes of ECOA. This interpretation will affect not only the applicability of this specific rule but also the general compliance obligations regarding fair lending and adverse actions for providers of merchant cash advances.

CFPB’s Rationale for Classifying Merchant Cash Advances as 'Credit'

According to the CFPB’s interpretations and the rule, merchant cash advances fall within the scope of "covered credit transactions." The CFPB extends the traditional definition of "credit" under ECOA, which involves the right to defer payment of a debt. Despite the non-recourse nature of these advances, where repayment depends on future sales, the CFPB views that advancing funds with deferred repayment terms constitutes credit.

In distinguishing merchant cash advances from factoring arrangements, which are not considered "credit," the CFPB noted that unlike factoring, merchant cash advances do not involve existing receivables at the time of the transaction. This perspective was solidified despite opposition from industry trade associations, which argued that the nature of merchant cash advances is more akin to factoring due to their immediate exchange of value.

Implications for Merchant Cash Advance Providers 

The classification of merchant cash advances as "credit" means that providers will be subject to the broader compliance requirements of ECOA and Regulation B. These include obligations related to anti-discrimination and the need to take adverse actions. The CFPB's stance may also influence how these financial products are treated under other credit-related regulations, although traditional lender licensing and usury laws might not apply, as they typically pertain only to defined "loans."

New York Case Law Governing Future Receivables Contracts and Merchant Cash Advances

Debtor's Usury Defense Justifies Vacating Default Judgment

In Rockefeller v. Jeckel, the debtor, Marion E. Jeckel, appealed an order from the Supreme Court of Warren County, New York, denying her motion to vacate a default judgment entered against her on a renegotiated promissory note. The Supreme Court, Appellate Division, reversed the order and vacated the default judgment.

Key Points of Law/Holdings:

1. The law favors resolving cases on the merits, and a party moving to vacate a default judgment must demonstrate a valid excuse for the default and a meritorious defense to the underlying action.
2. A debtor's usury claim, alleging that a renegotiated note imposed a 24% interest rate in violation of the law, implicates sufficient public policy considerations to justify vacating a default judgment in the interest of justice.
3. If a renegotiated note is found to be void due to usury, the debtor is not relieved of obligations under the original note with a legitimate interest rate. However, any payments made on the unenforceable note must be applied to reduce the principal debt or lawful interest reflected in the original note.

Conclusion:

This case demonstrates that a debtor's allegation of usury in a renegotiated promissory note can be a compelling reason to vacate a default judgment, even if the debtor does not provide a strong excuse for the default. The court's decision to vacate the default judgment allows the case to be resolved on its merits and ensures that the debtor is not subject to an unlawful interest rate.

Case Citation: Rockefeller v. Jeckel, 557 N.Y.S.2d 648, 648–50 (N.Y. App. Div. 3d Dept. 1990).

Enforceability of Merchant Cash Advances

In Tender Loving Care Homes Inc. v. Reliable Fast Cash, LLC, the Supreme Court of Richmond County adjudicated on the nature of a merchant cash advance (MCA) agreement, allegations of usury, and the enforceability of a confession of judgment. Plaintiffs contested that the MCA was a disguised usurious loan and claimed fraud, while the defendant argued the agreement was a legitimate purchase of receivables.

Key Points of Law:

1. Nature of Agreement: The court examined whether the MCA was a genuine purchase of receivables or a disguised loan. It held that the agreement was validly for purchasing receivables, primarily because repayment was not absolute but contingent on business revenue.

2. Usury Claims: New York law prohibits usury claims from corporations, and usury requires an actual loan. Since the court determined no loan existed, the plaintiffs could not claim usury.

3. Unjust Enrichment Claims: Despite the existence of a valid contract, the court did not dismiss the unjust enrichment claim. It found that allegations of unrecorded payments were sufficient to plead this cause at the pleading stage, allowing this claim to proceed to discovery.

Conclusion:

The court concluded that the MCA was not a usurious loan but a valid contractual agreement to purchase future receivables. It dismissed claims related to usury and fraud due to insufficient evidence of a disguised loan and actionable fraud. However, it allowed the unjust enrichment claim to proceed, recognizing the potential discrepancies in payment recordings. The main takeaway is that proper contractual framing of financial agreements like MCAs can protect against usury claims, but parties must still ensure transparent transaction recordings to avoid unjust enrichment claims.

Case Citation: Tender Loving Care Homes Inc. v. Reliable Fast Cash, LLC., 172 N.Y.S.3d 335, 335–42 (N.Y. Sup. Ct. 2022).

Usurious Intent as a Question of Fact in Civil Usury Cases

In Freitas v. Geddes Savings and Loan Association, the Court of Appeals of New York addressed whether a bank lender is civilly liable for usury, in the absence of usurious intent, solely on the basis of the failure to properly itemize an otherwise authorized bank charge. The plaintiffs, borrowers who were charged a "commitment fee" in addition to the maximum legal interest rate, brought a usury action against the bank.

Key points of law/holdings:

1. Usurious intent, an essential element of usury, is a question of fact where usury does not appear on the face of the note.
2. A bona fide mistake of fact, such as an imprecise lending disclosure or computer error, vitiates usurious intent and is insufficient to establish the requisite intent for civil usury.
3. The court held that the trial court and Appellate Division properly considered the import of the commitment fee as a question of fact in determining whether it constituted additional interest that rendered the transaction usurious.

Conclusion:

The Court of Appeals affirmed the Appellate Division's order, finding that the plaintiffs failed to establish by clear and convincing proof that the bank, in charging the commitment fee, had a general intent to take and receive a rate of interest in excess of the legal rate. The court emphasized that where usury cannot be discerned from the face of the mortgage instrument, it is the function of the trier of fact to determine whether an error in the description of the bank charge was bona fide or a clandestine attempt to exact a usurious rate of interest.

Case Citation: Freitas v. Geddes Sav. and Loan Ass'n, 471 N.E.2d 437, 439–47 (N.Y. 1984).

Evaluating Usury Claims in Commercial Transactions Involving Future Receivables

In LG Funding, LLC v. United Senior Properties of Olathe, LLC, the Appellate Division of the Supreme Court of New York faced the issue of whether a transaction structured as the purchase of future receivables could be considered a criminally usurious loan. The buyer, LG Funding, LLC, initiated a breach of contract lawsuit against the seller, United Senior Properties, which countered by alleging the agreement was a usurious loan. The Supreme Court denied the buyer's motion for dismissal and summary judgment, prompting an appeal.

Key Points of Law:

1. Usury and Transaction Nature: To determine if a transaction is usurious, the agreement must be analyzed in its entirety to discern its real character, not merely by the labels parties assign to it. The essence of usury requires the existence of a loan with absolute repayment obligations.

2. Reconciliation Provisions and Risk: The presence of a reconciliation provision in the agreement and the risk assumed by the buyer in potential non-payment scenarios are critical in assessing if the agreement constitutes a loan.

3. Dismissal Standards: A motion to dismiss based on documentary evidence can only be granted if the evidence conclusively establishes a legal defense that refutes the plaintiff's claims as a matter of law.

Conclusion:

The court affirmed the lower court’s decision, modifying it to dismiss the counterclaim of usury but maintaining the denial of the motion for summary judgment on the breach of contract. This decision underscores the legal principle that the true nature of a financial agreement, whether as a loan or a purchase of receivables, depends on the specifics of repayment obligations and the risk undertaken by the financier, rather than the terminology used in the agreement. The case emphasizes the importance of careful contractual drafting and clarity in defining the terms of financial agreements to avoid potential usury claims.

Case Citation: LG Funding, LLC v. United Senior Properties of Olathe, LLC, 122 N.Y.S.3d 309, 309–13 (N.Y. App. Div. 2d Dept. 2020).

Sidenote: What is a "Reconciliation Provision" in the Purchase of Future Receivables

Here's a breakdown of the key components:

1. Reconciliation Provision: This clause is typically found in agreements involving the sale or advance of future receivables. It allows for adjustments to the payments to be made based on actual sales or revenue figures, as opposed to a fixed repayment schedule typical of loans. The purpose is to align the repayments more closely with the actual cash flow of the business, reducing the burden during slower business periods. The presence and terms of such a provision can imply that the repayment obligation is not absolute but contingent on the business's performance, which is a characteristic not typically associated with loans.

2. Risk Assumed by the Buyer: This refers to the financial risk the buyer (or financier) takes on in the agreement. In a traditional loan, the lender expects to be repaid the principal plus interest regardless of the borrower’s financial situation. However, in agreements like those for purchasing future receivables, the buyer may assume more risk. For instance, if the repayment depends significantly on the business's ongoing sales or revenue, and these are lower than expected, the amount repayable may be reduced accordingly. This contingent nature of repayment, where the financier assumes part of the business’s performance risk, is more characteristic of an investment or a purchase of receivables rather than a loan.

Implication: In legal terms, these factors are crucial because they help define whether the financial instrument should be treated as a loan, subject to usury laws (which limit the amount of interest that can be charged), or as a different mechanism where such laws do not apply. If the agreement is deemed a loan, it must not exceed the statutory interest rates; otherwise, it could be considered usurious, which is illegal. However, if it is determined as a purchase of receivables with risk shared between the parties, it may not be bound by these restrictions, even if the cost to the seller (or borrower) is high.

Evaluating Merchant Cash Advance Agreements for Usury and Racketeering Claims

In K9 Bytes, Inc. v. Arch Capital Funding, LLC, the Supreme Court of Westchester County, New York, addressed claims brought by merchants against funding companies, alleging usury and racketeering concerning their merchant cash advance agreements. The court examined whether these agreements constituted loans subject to usury laws or valid purchases of future receivables.

Key Points of Law:

1. To determine if a transaction is a loan subject to usury laws, the court must examine whether repayment is absolute or contingent on the merchant's success, considering factors such as reconciliation provisions, indefinite term, and recourse in case of bankruptcy.
2. Unconscionability is a defense, not an actionable claim, and prima facie tort requires a showing of "disinterested malevolence" as the sole motive for the defendant's actions.
3. Under New York law, a corporation can only assert criminal usury as a defense, not as an affirmative claim for relief.

Conclusion:

The main takeaway from this case is that the presence of certain provisions in merchant cash advance agreements, such as reconciliation clauses and indefinite repayment terms, can support the characterization of these transactions as purchases of future receivables rather than loans subject to usury laws. The court dismissed the usury and racketeering claims against one defendant whose agreement contained these provisions while allowing similar claims to proceed against another defendant whose agreement lacked a reconciliation provision.

Case Citation: K9 Bytes, Inc. v. Arch Capital Funding, LLC, 57 N.Y.S.3d 625, 628–34 (N.Y. Sup. Ct. 2017).

Evaluating Merchant Cash Advance Agreements for Usury, Coercion, and Unconscionability Claims

In 92 Palm Foods LLC v. Fundamental Capital LLC, the Supreme Court of New York addressed claims brought by a merchant and guarantor against a merchant cash advance provider, alleging that the confession of judgment should be voided due to coercion, criminal usury, and unconscionability. The court examined the merchant cash advance agreement to determine whether it constituted a loan subject to usury laws or a valid purchase of future receivables.

Key Points of Law:

1. To determine if a merchant cash advance agreement is a loan subject to usury laws, the court must consider three factors: (a) the presence of a reconciliation provision allowing the merchant to seek an adjustment of amounts taken based on cash flow; (b) whether the agreement has a finite term; and (c) whether there is any recourse for the provider if the merchant declares bankruptcy.
2. Generalized contentions of coercion, such as allegations of "high pressure tactics" or "implied threats," are insufficient to plead a cause of action for coercion, which requires specific factual allegations demonstrating that the party was forced to agree to the contract using a wrongful threat precluding the exercise of free will.
3. Allegations of unconscionability may be undermined if the plaintiffs are sophisticated business people with prior experience in similar merchant cash advance agreements.

Conclusion:

The main takeaway from this case is that the presence of a reconciliation provision, an indefinite repayment term, and the lack of recourse for the provider in the event of the merchant's bankruptcy support the characterization of a merchant cash advance agreement as a purchase of future receivables rather than a loan subject to usury laws. The court dismissed the plaintiffs' claims of coercion and unconscionability due to insufficient factual allegations and evidence of the plaintiffs' prior experience with similar agreements.

Case Citation: 92 Palm Foods LLC v. Fundamental Capital LLC, 195 N.Y.S.3d 636 (N.Y. Sup. Ct. 2023).

Sidenote: Example of a "Reconciliation Provision":

92 Palm Foods LLC v. Fundamental Capital LLC contained the following provisions as analyzed in the above summary:

Paragraph 1.18 of the Merchant Agreement, entitled “Adjustments to the Specific Daily Amount” clearly allows the Merchant to seek an adjustment of the amounts taken from the account. The Agreement States:

¶ 1.18.1 ..... Additionally, if Merchant has not defaulted under this Agreement, Merchant may request that [the Purchaser] reconcile Merchant's actual receipts and adjust the Specific Daily Amount so that the amount received by [the Purcharer in the future more closely represents the Specified Percentage.

¶ 1.18 2. Merchant may request a reconciliation by sending [the Purchaser] a request in writing, including by email, and including a copy of Merchant's most recent bank statements or credit card statements (which statements shall also include the Merchant's bank account report showing transactions in the month to date). Upon receipt of a written reconciliation request from Merchant, FC may request any and all information from Merchant that [the Purchaser], in its sole judgment, believes is necessary to accurately reconcile the amount [the Purchaser] has received from Merchant with the actual Specified Percentage. [The Purchaser] shall not be required to adjust the Specific Daily Amount until such time as it has received all such requested information. After each adjustment made pursuant to this paragraph, the new dollar amount shall be deemed the Specific Daily Amount until any subsequent adjustment. 92 Palm Foods LLC v. Fundamental Capital LLC, 195 N.Y.S.3d 636 (N.Y. Sup. Ct. 2023)

In conclusion, the reconciliation provision in the Merchant Agreement allows the merchant to request adjustments to the daily amounts taken from their account based on actual cash flow, which is a key factor in determining whether the agreement constitutes a loan or a purchase of future receivables. The court's finding that the express language of the reconciliation provision satisfies the first prong of the LG Funding, LLC test underscores the importance of carefully drafting and reviewing merchant agreements to ensure they are not characterized as loans subject to usury laws.

Restrictions and Exceptions on Usury Defenses for Corporations in New York State

Under New York General Obligations Law § 5-521(1), corporations are generally restricted from using usury as a defense in lawsuits, except under specific circumstances. Section 5-521(3) allows corporations to assert a defense of criminal usury when interest rates exceed 25% per annum. This exception is purely a defensive measure, not a vehicle for a corporation to initiate a claim to recover usurious payments. In the context of the Intima-Eighteen, Inc. v. A.H. Schreiber Co., Inc. case, and later referenced in LG Funding, LLC v. United Senior Properties of Olathe, LLC, the appellate court upheld that this statutory exception is strictly limited to defenses against repayment demands of a loan, disallowing its use to proactively seek recovery of an overpaid interest by a corporate borrower. For individuals, the maximum permissible interest rate is 16% per annum (GOL § 5-501(1)), with any agreement exceeding this rate deemed usurious and void, thereby nullifying the obligation to repay principal or interest. However, a strong legal presumption against findings of usury exists, reinforcing the necessity for clear evidence of usurious intent or terms. Additionally, usury defenses are inapplicable where the note's terms stipulate a rate exceeding the statutory maximum only after default or maturity.

Key Legal Principles:

1. Prohibition of Usury Defense by Corporations: General Obligations Law § 5-521(1) generally prevents corporations from using usury as a defense, which aligns with the principle that corporate entities are expected to engage in loans under terms they are presumed to have evaluated thoroughly.

2. Exception for Criminal Usury: Under GOL § 5-521(3), corporations can defend against claims where the interest rate exceeds 25% per annum, characterizing such rates as criminally usurious. This provision underscores the legal boundary meant to protect corporate entities from excessively predatory lending practices.

3. Non-Recovery of Usurious Payments: As established in Intima-Eighteen, Inc. v. A.H. Schreiber Co., Inc., 172 A.D.2d 456, 568 N.Y.S.2d 802 (1st Dep't 1991), and reiterated in LG Funding, LLC v. United Senior Properties of Olathe, LLC, 181 A.D.3d 664, 122 N.Y.S.3d 309 (2d Dep't 2020), the defense of usury is strictly a shield against repayment, not a sword for recovery. This interpretation aims to limit the exploitation of usury laws by corporate borrowers.

Conclusion:

The legal landscape in New York sets a clear delineation on how and when usury defenses can be employed, particularly emphasizing protection against predatory lending without enabling strategic exploitation of these defenses by corporate entities. The adherence to strict statutory guidelines ensures that usury claims are carefully scrutinized, supporting fair lending practices while maintaining a robust defense against genuine instances of usurious exploitation.

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Plaintiff's Failure to Establish Validity of Agreement Containing Alternative Service of Process Provisions

In Wynwood Capital Group LLC v. Confluence Corporation, the Supreme Court of Kings County dismissed a breach of contract action due to lack of personal jurisdiction. The plaintiff claimed that the defendants were properly served according to the terms of a merchant cash advance agreement, which provided for alternative methods of service. However, the court found that the plaintiff failed to establish the validity of the agreement and, consequently, could not rely on its alternative service provisions.

Key Points of Law:

1. Parties to a contract may agree to alternative methods of service of process, rendering inapplicable the statutes that normally govern service.
2. The burden of proving the existence, terms, and validity of a contract rests on the party seeking to enforce it.
3. To establish the validity of a contract, the party relying on it must provide evidence of its authenticity, such as through a certificate of acknowledgment, comparison of handwriting, or testimony from a witness to the signing of the document.

Conclusion:

This case underscores the importance of establishing the validity of a contract when relying on its alternative service of process provisions to establish personal jurisdiction. Plaintiffs must provide sufficient evidence to prove the authenticity and enforceability of the agreement. Failure to do so may result in the dismissal of the action for lack of personal jurisdiction.

Case Citation: Wynwood Capital Group LLC v. Confluence Corp., No. 503752/2024, 2024 WL 2479615 (N.Y. Sup. Ct. May 10, 2024).​​

Vacating a Default Judgment Due to Lack of Proof of Proper Service by Certified Mail

In Reserve Funding Group LLC v. JL Capital Holdings LLC, the Supreme Court of Kings County vacated a default judgment entered against the defendants due to the plaintiff's failure to provide proof of proper service of the summons and complaint by certified mail, as allegedly agreed upon in a Revenue Purchase Agreement (RPA) between the parties. The court held that without evidence of the date the defendants received the commencement papers, the plaintiff could not establish that the defendants' time to appear in the action had been triggered.

Key Points of Law:

1. Parties to a contract may agree to alternative methods of service of process, rendering inapplicable the statutes that normally govern service.
2. When service is made by certified mail, return receipt requested, the time to respond is calculated from the date of the recipient's actual receipt of the documents.
3. To obtain a default judgment, the plaintiff must establish that the defendant's time to appear or answer has expired, which requires proof of the date of service completion.

Conclusion:

This case highlights the importance of providing proper proof of service when relying on alternative methods of service agreed upon by the parties. Plaintiffs seeking a default judgment must demonstrate that the defendant's time to respond has expired, which necessitates evidence of the date the defendant received the summons and complaint. Failure to do so may result in the vacatur of the default judgment.

Case Citation: Reserve Funding Grp. LLC v. JL Capital Holdings LLC, No. 514245/2022, 2022 NY Slip Op 51322(U) (Sup. Ct. Kings Cnty. Oct. 17, 2022).

Appellate Division Vacates Default Judgment, Unmasking Merchant Agreement as Criminally Usurious

In Crystal Springs Capital, Inc. v. Big Thicket Coin, LLC, the Appellate Division, Second Department, held that a merchant cash advance agreement constituted a criminally usurious loan, voiding the agreement. The court vacated a default judgment against the defendants, dismissed the complaint, and vacated a restraining notice on the defendant's bank account.

Key Points of Law:

1. A loan is criminally usurious and void if it exceeds an annual interest rate of 25%.
2. Courts determine whether a transaction is a loan by evaluating its totality and real character, not just its form or name.
3. Repayment is considered absolute, indicating a loan, if there is no reconciliation provision, the agreement has a finite term, and there is recourse in case of bankruptcy.

Conclusion:

This case demonstrates that merchant cash advance agreements may be deemed criminally usurious loans if their terms indicate an absolute obligation to repay, regardless of how the agreement is labeled. This decision provides a potential avenue for relief for borrowers who have been subjected to predatory lending practices, even if they initially failed to respond to the lawsuit. The case emphasizes the importance of closely examining the terms of merchant cash advance agreements to determine if they violate usury laws, regardless of how the agreements are characterized by the lender.

Case Citation: Crystal Springs Capital, Inc. v. Big Thicket Coin, LLC, 198 N.Y.S.3d 142 (N.Y. App. Div. 2d Dept. 2023).

Court Vacates Default Judgment in the Interest of Justice for Alleged Criminally Usurious Loan

In Slate Advance v. Saygan Global Steel, Ltd., the Appellate Division, Second Department, affirmed the Supreme Court's decision to deny the plaintiff's motion for a default judgment and grant the defendants' cross motion to vacate their default and compel acceptance of their late answer. The defendants alleged that the merchant agreement between the parties constituted a criminally usurious loan.

Key Points of Law:

1. CPLR 5015(a) does not provide an exhaustive list of grounds for vacating a default judgment; courts may vacate a default for sufficient reason and in the interests of substantial justice.
2. A party is not necessarily required to establish a reasonable excuse to be entitled to vacatur in the interest of justice.
3. The court may exercise its discretion to vacate a default judgment based on a proposed affirmative defense that the agreement constituted a criminally usurious loan.

Conclusion: This case highlights the court's discretionary power to vacate a default judgment in the interest of justice, particularly when the defendant raises a potentially meritorious defense of criminal usury. The decision emphasizes that a reasonable excuse is not always necessary for a court to grant relief from a default judgment.

Case Citation: Slate Advance v. Saygan Global Steel, Ltd., 167 N.Y.S.3d 824 (N.Y. App. Div. 2d Dept. 2022).

The Role of Reconciliation Provisions and Default Terms in Assessing the Nature of Merchant Cash Advance Agreements as Loans

In an action brought by borrowers against alleged lenders and their corporate officers for breach of merchant cash advance (MCA) agreements and violation of RICO, the Supreme Court, Appellate Division, First Department, New York, affirmed in part and modified in part the lower court's decision to deny the defendants' motions to dismiss.

Key Points of Law/Holdings:

1. Corporate officers who are not parties to MCA agreements cannot be held liable for breach of contract in the absence of allegations supporting piercing the corporate veil.
2. Allegations that MCA agreements were loans subject to usury laws, based on discretionary reconciliation provisions, refusal to permit reconciliation, and other factors, were sufficient to support claims that criminal usury precluded enforcement of the agreements and rendered them void.
3. Allegations that MCA agreements were usurious loans supported a RICO claim based on collection of unlawful debt, but not based on a pattern of racketeering activity, which requires a showing of threats or use of violence.

Conclusion:

This case highlights the importance of properly alleging the nature of MCA agreements as loans subject to usury laws to support claims for breach of contract, criminal usury, and RICO violations. The main takeaway is that courts will consider various factors, such as discretionary reconciliation provisions and default terms, when determining whether an MCA agreement is a loan subject to usury laws, and that RICO claims based on collection of unlawful debt may be sustained if the agreements are found to be usurious.

Case Citation: Davis v. Richmond Capital Grp., LLC, 194 A.D.3d 516, 150 N.Y.S.3d 2 (N.Y. App. Div. 2021).

Criminally Usurious Loans with Floating-Price Convertible Options Are Void Under New York Law

The New York Court of Appeals addressed certified questions from the Second Circuit regarding the treatment of floating-price convertible options in determining whether a loan violates New York's criminal usury law. The court held that if a loan is found to be criminally usurious, with an interest rate exceeding 25%, the loan is void, and the borrower is relieved of the obligation to repay both principal and interest. The court also held that the value of floating-price convertible options should be included in determining the loan's interest rate for usury purposes.

Key Points of Law/Holdings:

1. When a loan to a corporation is found to violate the criminal usury rate of 25% under N.Y. Penal Law § 190.40, the loan is void and unenforceable, resulting in the borrower being relieved of the obligation to repay both principal and interest.
2. In assessing whether a loan's interest rate exceeds the statutory usury cap, the value of floating-price convertible options should be included in determining the interest rate, to the extent such value can be reasonably determined at the time of contracting.
3. The mere possibility that a future exercise of a floating-price conversion option may result in a return exceeding 25% does not render a loan usurious on its face; the value of such an option is a question of fact, and the burden to prove that value is on the borrower.

Conclusion:

This decision clarifies that, under New York law, criminally usurious loans with floating-price convertible options are void, and the value of such options must be considered when determining the loan's interest rate. The main takeaway is that lenders must carefully structure loans with convertible options to ensure compliance with New York's usury laws, as a finding of criminal usury will result in the complete invalidation of the loan.

Case Citation: Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320, 179 N.E.3d 612 (N.Y. 2021).

Choice-of-Law Provision Allowing Criminally Usurious Interest Rate Violates New York Public Policy

A corporate lender located in New York brought an action against corporate borrowers and a personal guarantor for breach of a loan agreement with a 34% interest rate. The defendants moved to dismiss, arguing that the agreement's choice-of-law provision, which called for the application of Virginia law, violated New York's public policy against usury. The Supreme Court granted the motion to dismiss, holding that the choice-of-law provision was invalid, and the agreement was void under New York law.

Key Points of Law/Holdings:

1. New York has a strong public policy against usury, with a criminal usury rate limit of 25% for loans under $2.5 million.
2. Choice-of-law provisions that would allow the application of an interest rate that is usurious under New York law are invalid for violating New York public policy.
3. Usurious loans are void under New York law, and lenders are not entitled to reformation of the agreement, even if it contains a "usury savings clause."

Conclusion:

This case demonstrates that New York courts will not enforce choice-of-law provisions that allow for the application of interest rates that are criminally usurious under New York law, as such provisions violate the state's fundamental public policy against usury. Lenders cannot circumvent this policy through the use of choice-of-law provisions or usury savings clauses, and usurious loan agreements will be deemed void.

Case Citation: Samson Lending LLC v. Greenfield Mgt. LLC, 196 N.Y.S.3d 850, 850–58 (N.Y. Sup. Ct. 2023), aff'd, 208 N.Y.S.3d 786 (N.Y. App. Div. 4th Dept. 2024).

Enforceability of Choice-of-Law Provisions Allowing Higher Interest Rates in Loan Agreements

In an action brought by an Israeli bank against a borrower and guarantor, the Westchester County Court addressed the validity of a choice-of-law provision in a loan agreement executed in New York that designated Israeli law, which apparently had no usury limits, as the governing law. The court held that the provision was invalid and unenforceable, as it violated New York's fundamental public policy against usury and because New York had the most substantial relationship to the loan agreement.

Key Points of Law/Holdings:

1. Choice-of-law provisions in agreements will generally be honored, but the chosen jurisdiction must bear a reasonable relation to the agreement, and enforcement of the provision must not violate New York's fundamental public policy.
2. New York's usury laws represent a fundamental public policy, and permitting a loan agreement executed in New York to be governed by the laws of a jurisdiction that does not outlaw usury would violate this policy.
3. When New York bears the most substantial relationship to a loan agreement, a choice-of-law provision designating the law of a jurisdiction with no usury limits is invalid and unenforceable.

Conclusion:

This case demonstrates that New York courts will not enforce choice-of-law provisions in loan agreements that allow for interest rates exceeding New York's usury limits, as such provisions violate the state's fundamental public policy against usury. The decision to invalidate a choice-of-law provision depends on the chosen jurisdiction's relationship to the agreement and the extent to which applying its law would contravene New York's public policy.

Case Citation: North American Bank, Ltd. v. Schulman, 123 Misc. 2d 516, 474 N.Y.S.2d 383 (County Ct. 1984).

New York Appellate Court Affirms Jurisdiction and Denies Dismissal in Revenue-Based Factoring Agreement Dispute

In Kapitus Servicing, Inc. v. Point Blank Constr., Inc., a servicer under a revenue-based factoring agreement sued the seller and its guarantor for an outstanding balance due under the agreement. The defendants moved to dismiss, arguing lack of subject-matter jurisdiction and that the agreement was a criminally usurious loan. The trial court denied the motion, and the defendants appealed.

Key Points of Law:

1. Subject-matter jurisdiction: The trial court had subject-matter jurisdiction because the agreement was made in New York, where the servicer performed the last necessary act by sending funds to the seller's bank account. The place of making a contract is established when and where the last act necessary for its formulation is done.
2. Dismissal based on usurious loan: Dismissal on the basis that the agreement was a criminally usurious loan was not warranted because the record did not support a finding that the existence of a loan could be determined from the face of the agreement as a matter of law.

Conclusion:

The Appellate Division affirmed the trial court's denial of the defendants' motion to dismiss, holding that the court had subject-matter jurisdiction and that dismissal based on the agreement being a criminally usurious loan was not warranted at this stage.

Key Takeaway: The court will look to the last necessary act to determine where a contract was made for jurisdictional purposes and will not dismiss an action based on an agreement being a loan unless it is clear from the face of the agreement.

Case Citation: Kapitus Servicing, Inc. v. Point Blank Constr., Inc., 202 N.Y.S.3d 1, 1–3 (N.Y. App. Div. 1st Dept. 2023).

Contractual Consent to Jurisdiction Insufficient for Out-of-State Service in Default Judgment Proceedings

This case addresses the requirements for obtaining a default judgment against an out-of-state defendant in New York. The plaintiff, a Virginia corporation operating in New York, sought a default judgment against a Rhode Island resident for sums owed under a merchant cash advance agreement. The court denied the motion for default judgment due to the plaintiff's failure to establish valid service under New York law.

Key Points of Law/Holdings:

1. To obtain a default judgment, the movant must establish valid service, the nonmoving party's default, and the facts constituting the movant's claim.
2. For out-of-state service under CPLR 313 to be valid, a defendant must be subject to general personal jurisdiction under CPLR 301 or long-arm specific personal jurisdiction under CPLR 302.
3. A contractual provision submitting to the jurisdiction of New York courts is not sufficient to establish valid service under CPLR 313; the plaintiff must still demonstrate that jurisdiction exists under CPLR 301 or 302.

Conclusion: The main takeaway from this case is that plaintiffs seeking default judgments against out-of-state defendants in New York must strictly adhere to the service requirements outlined in the CPLR. Merely having a contractual provision submitting to New York jurisdiction is not enough; plaintiffs must demonstrate that the defendant is subject to personal jurisdiction under specific statutory provisions. This ruling emphasizes the importance of properly establishing jurisdiction and valid service in default judgment proceedings.

Citation: Kapitus Servicing, Inc. v Dilone, 75 Misc 3d 1233(A) (Sup Ct, NY County 2022).

Why Requiring Statutory Jurisdiction Despite Forum Selection Clauses Ensures Fairness

1. Due process protection: It ensures that out-of-state defendants are afforded proper due process. Simply agreeing to jurisdiction in a contract doesn't mean a defendant has been properly notified of a lawsuit. This rule protects defendants from potentially unfair default judgments when they may not have actual knowledge of the proceedings.
2. Prevents abuse: It prevents plaintiffs from using broad contractual clauses to circumvent proper legal procedures. This discourages predatory practices where a party might include such clauses in contracts of adhesion and then try to obtain default judgments without proper notice.
3. Consistency with statutory intent: It upholds the intent of New York's long-arm statute, which specifies the circumstances under which the state can exercise jurisdiction over non-residents. This maintains the balance between providing access to New York courts and respecting the limits of state jurisdiction.
4. Encourages proper service: By requiring plaintiffs to demonstrate that jurisdiction exists under specific statutory provisions, it encourages them to make genuine efforts to properly serve defendants, increasing the likelihood that defendants will have actual notice of lawsuits against them.
5. Fairness in default judgments: Default judgments can have serious consequences. This rule ensures that such judgments are only entered when there's a high degree of certainty that the defendant had the opportunity to respond but chose not to.
6. Respects state boundaries: It respects the boundaries between states by not automatically enforcing jurisdictional provisions that may overstep the limits of New York's authority over out-of-state residents.
7. Promotes careful contracting: It encourages parties to consider jurisdictional issues more carefully when drafting contracts, potentially leading to clearer and more enforceable agreements.
8. Protects vulnerable parties: It can protect less sophisticated parties who may not fully understand the implications of jurisdictional clauses in contracts they sign.

This rule strikes a balance between honoring contractual agreements and ensuring fundamental fairness in legal proceedings. It leads to fair outcomes by protecting due process rights, preventing abuse of the legal system, and ensuring that default judgments are entered only when truly warranted.

Threshold for Obtaining Evidentiary Hearings on Disputed Service of Process

This case addresses the requirements for a defendant to successfully challenge service of process and obtain a hearing on the issue in a mortgage foreclosure action. The New York Appellate Division, Second Department, reversed the lower court's denial of the defendant's motion to vacate a default judgment, ruling that the defendant was entitled to a hearing on whether service was properly effected.

Key Points of Law/Holdings:

1. A defect in service is not cured by the defendant's subsequent receipt of actual notice of the commencement of the action.
2. Where there is a sworn denial that a defendant was served with process, the affidavit of service is rebutted and the plaintiff must establish jurisdiction at a hearing by a preponderance of the evidence.
3. To warrant a hearing on the issue of service, a defendant must swear to detailed and specific facts that rebut the statements in the process server's affidavit.

Conclusion: The main takeaway is that courts must grant hearings on service of process when defendants provide sworn denials with specific factual discrepancies that contradict the process server's affidavit. This ruling emphasizes the importance of proper service in foreclosure actions and the defendant's right to challenge it when significant discrepancies exist.

Citation: Emigrant Mortg. Co., Inc. v Westervelt, 105 AD3d 896, 964 NYS2d 543 (2d Dept 2013).

Criminally Usurious Loan Void and Unenforceable in Foreclosure Action

A lender provided a secured loan to a borrower in financial distress. The loan agreement included a $200,000 deposit "against future commitment fees" that the lender could retain at its discretion. When the lender attempted to foreclose on the collateral, the borrower raised a usury defense. The court found the loan to be criminally usurious and therefore void and unenforceable.

Key Legal Principles:

1. To determine if a transaction is usurious, courts examine its substance rather than its form.
2. Contingent payments to a creditor that are beyond the borrower's control constitute interest under usury statutes.
3. Criminal usury renders a loan transaction void and unenforceable, including associated agreements.

Conclusion: The main takeaway is that loans with effective interest rates exceeding the criminal usury threshold are void and unenforceable, even in foreclosure actions. Lenders should carefully structure fees and deposits to avoid the appearance of disguised interest charges.

Citation: Blue Wolf Capital Fund II, L.P. v Am. Stevedoring Inc., 105 AD3d 178 (1st Dept 2013).

Validity of Contractual Waiver of Service and E-mail Service in International Litigation

This case involves a dispute over a guaranty agreement where the defendant, a resident of the Netherlands, challenged service of process by e-mail. The plaintiff had served a motion for summary judgment in lieu of complaint via e-mail, relying on contractual provisions that waived personal service and authorized communication by e-mail. The court upheld the validity of the e-mail service based on the contractual agreements between the parties.

Key Legal Principles:

1. Parties can contractually waive formal service of process requirements, including those outlined in the Hague Convention for international service.
2. A valid contractual waiver of service confers jurisdiction and precludes successful challenges to the court's jurisdiction over the defendant.
3. Service by e-mail can be deemed proper and compliant with due process requirements if it is "reasonably calculated" to apprise the defendant of the pending action, especially when contractually agreed upon.

Conclusion: The court's decision emphasizes the enforceability of contractual provisions waiving formal service requirements and consenting to alternative methods of service, even in international contexts. This ruling underscores the importance of carefully drafting and considering the implications of jurisdictional and notice provisions in contracts.

Citation: Alfred E. Mann Living Trust v ETIRC Aviation S.a.r.l., 78 AD3d 137 (1st Dept 2010).

Jurisdiction Denied in Healthcare Financing Dispute: New York Court Rejects Forum Selection Clause

A recent case involving a healthcare financing company and an out-of-state medical practice highlighted critical issues in personal jurisdiction and forum selection. The court examined these matters closely, given the defendants' lack of New York connections, despite a contractual clause allowing for New York as a potential venue.

Key Legal Principles:

1. Establishing personal jurisdiction over non-domiciliaries requires either business transactions or contracts for goods/services within New York (CPLR § 302(a)(1)).
2. Non-resident forum selection clauses designating New York courts require the application of New York law to be valid (General Obligations Law §§ 5-1401 and 5-1402).
3. New York forum selection clauses under General Obligations Law § 5-1402 are enforceable only for contracts valued at $1 million or more and explicitly choosing New York law.

Conclusion: The court ultimately dismissed the case due to lack of personal and subject matter jurisdiction. This decision underscores the importance of precise drafting in interstate contracts, particularly regarding choice of law and forum selection clauses. It demonstrates that merely designating New York as a possible forum is insufficient without also selecting New York law and meeting other statutory requirements.

Case Reference: Bankers Healthcare Group, LLC v Pediatric Assoc., Inc., 79 Misc 3d 1218(A), 190 NYS3d 920 (Sup Ct, Onondaga County 2023).

Court Orders Monetary Judgment and Accounting in Predatory Lending Case

The New York Supreme Court ruled on a case involving predatory lending practices. The court ordered the defendants to provide an accounting of their merchant cash advance (MCA) transactions and pay restitution to affected merchants. The defendants failed to comply with the court's order to produce an accounting, arguing that the burden was on the plaintiff to demonstrate what portion of the judgment didn't include principal. The court disagreed and ruled that a monetary judgment in favor of the plaintiff was appropriate.

Key Legal Principles:

1. The burden of proving entitlement to a reduction in judgment amount falls on the party seeking the reduction.
2. Willful failure to comply with a court order can result in findings of contempt and additional sanctions.
3. Courts may order restitution and damages in cases involving predatory lending practices.

Conclusion: The main takeaway is that parties must comply with court orders for accounting and cannot shift the burden to the opposing party to prove the composition of damages. Failure to comply can result in adverse judgments and potential contempt findings.

Citation: People v. Richmond Capital Group LLC, N.Y. Sup. Ct., Index No. 451368/2020 (Feb. 6, 2024).

Court Orders Monetary Judgment Against Predatory Lenders for Failing to Provide Accounting

A New York court granted the Attorney General's motion for monetary judgment against lending companies accused of predatory practices. The court ordered the companies to provide an accounting of their merchant cash advances (MCAs) and pay restitution. When the companies failed to comply and argued the burden of proof was on the Attorney General, the court rejected their arguments and allowed entry of the full judgment amount sought.

Key Legal Principles:

1. Defendants bear the burden of demonstrating what portion of a judgment includes principal versus interest.
2. Willful failure to comply with court orders can result in criminal contempt.
3. Courts may order full restitution and damages when defendants fail to provide required accountings.

Conclusion: The main takeaway is that predatory lenders cannot avoid judgments by failing to provide court-ordered accountings and cannot shift the burden to prove damages onto the plaintiff. The court's ruling demonstrates a strong stance against abusive lending practices and willful non-compliance with court orders.

Citation: People v Richmond Capital Group LLC, __ Misc 3d __, __ NYS3d __ (Sup Ct, NY County 2024).

Court Determines Merchant Cash Advance Agreement Not Subject to Usury Laws

The Appellate Division, Second Department reversed a lower court's denial of summary judgment in a case involving a merchant cash advance agreement. The plaintiff had purchased an interest in the defendant's future receivables. When the defendant defaulted, the plaintiff sued for breach of contract. The court held that the agreement was not a loan subject to usury laws, but rather a valid purchase of future receivables.

Key Legal Principles:

1. The fundamental element of usury is the existence of a loan or forbearance of money; without a loan, there can be no usury.
2. To determine if a transaction is a usurious loan, courts examine whether repayment is absolutely required under all circumstances.
3. Courts typically consider three factors in determining if repayment is absolute or contingent: presence of a reconciliation provision, finite term of the agreement, and recourse in case of bankruptcy.

Conclusion: The main takeaway is that merchant cash advance agreements structured with contingent repayment terms based on future receivables are not loans subject to usury laws. This ruling provides guidance on how to structure such agreements to avoid usury claims.

Citation: Principis Capital, LLC v I Do, Inc., 201 AD3d 752, 160 NYS3d 325 (2d Dept 2022).

Federal Courts Address CFPB's Structure and Regulatory Authority Over Legal Funding Companies

A federal district court initially ruled that the Consumer Financial Protection Bureau's (CFPB) structure was unconstitutional and dismissed its claims against companies offering cash advances on settlement awards, while allowing state claims to proceed. The court held that the cash advance agreements were void assignments functioning as loans subject to consumer protection laws. Subsequently, the U.S. Court of Appeals for the Second Circuit vacated this ruling following a Supreme Court decision that found the CFPB's structure unconstitutional but severable from the rest of the Consumer Financial Protection Act. The case was remanded for reconsideration of the CFPB Director's ratification of the enforcement action.

Key Legal Principles:

1. The CFPB's single-director structure removable only for cause violates separation of powers, but this provision is severable from the rest of the Consumer Financial Protection Act.
2. Assignments of settlement awards can be void if prohibited by the settlement agreement or statute.
3. Cash advance agreements that function as loans may be subject to usury and consumer protection laws even if labeled as sales.

Conclusion: The main takeaway is that while the CFPB's original structure was found unconstitutional, this does not invalidate the entire agency or necessarily its enforcement actions. State authorities can still bring consumer protection claims against companies offering cash advances on settlement awards. The case demonstrates the evolving nature of challenges to the CFPB's authority and the importance of proper ratification of its actions. Courts must now consider the validity of post-ruling ratifications by the CFPB Director when evaluating the agency's enforcement actions.

Citations: Consumer Fin. Protection Bur. v RD Legal Funding, LLC, 332 F Supp 3d 729 (SD NY 2018), vacated and remanded, 828 Fed Appx 68 (2d Cir 2020).

Merchant Cash Advance Agreement Upheld Against Usury and Statute of Limitations Challenges

A New York court denied plaintiffs' motion for a preliminary injunction and granted defendant's motion to dismiss in a case challenging a merchant cash advance agreement. The plaintiffs argued the agreement was a usurious loan and that the confession of judgment was invalid. The court rejected these arguments, finding the agreement contained a valid reconciliation provision and was not a loan. The court also held the action was time-barred under a one-year statute of limitations.

Key Legal Principles:

1. Mandatory reconciliation provisions in merchant cash advance agreements indicate the transaction is a purchase of future receivables rather than a loan subject to usury laws.
2. A one-year statute of limitations applies to actions challenging merchant cash advance agreements as usurious.
3. Plaintiffs cannot use usury as an offensive tool to escape a confession of judgment in a commercial transaction.

Conclusion: The court's decision reinforces the enforceability of properly structured merchant cash advance agreements against usury challenges and emphasizes the importance of timely filing any claims. This ruling provides guidance for both providers and recipients of merchant cash advances in New York.

Citation: Am. Water Restoration, Inc. v AKF Inc., 74 Misc 3d 1203(A), 157 NYS3d 919 (Sup Ct, Ontario County 2022).

What is a Confession of Judgment?

A Confession of Judgment (COJ) is a legal document in which a debtor agrees to allow a creditor to enter a judgment against them without going through standard court proceedings. It's essentially a way for a debtor to "confess" to owing a debt and agree to a judgment in advance, often in exchange for a loan or other financial arrangement. This can be a powerful tool for creditors, as it allows them to bypass normal legal processes and quickly obtain a judgment if the debtor defaults.

New York's law on Confessions of Judgment is codified in:

N.Y. C.P.L.R. § 3218

Key elements of each subsection:

(a) Affidavit of defendant:

• Must be executed by the defendant
• Can be for money due, to become due, or to secure against contingent liability
• Must state:
  • Sum for which judgment may be entered
  • Authorization for entry of judgment
  • County where defendant resides
  • If applicable, that interest rate for consumer debt applies
• For money due/to become due:
  • Must concisely state facts of debt origin
  • Show sum confessed is justly due
• For securing against contingent liability:
  • Must concisely state facts of liability
  • Show sum confessed doesn't exceed liability amount

(b) Entry of judgment:

• Must be filed within 3 years of affidavit execution
• Can only be filed in county where defendant resided at execution or at filing
• Clerk enters judgment in supreme court for confessed sum
• $15 in costs plus disbursements are taxed
• Judgment can be docketed and enforced like any Supreme Court judgment
• Cannot be entered after defendant's death
• Non-natural persons reside where they have a place of business
• Government agencies can file in any county for law enforcement purposes

(c) Execution where judgment is not all due:

• Execution only for sum that has become due
• Execution form similar to full amount, but specifies only collecting due amount
• Judgment remains as security for future sums
• Further executions allowed as more sums become due

(d) Confession by joint debtors:

• One or more joint debtors can confess for a joint debt
• If not all confess, judgment only against those who did
• Not a bar to action against non-confessing joint debtors

New York Amends Confession of Judgment Law to Protect Out-of-State Debtors

The 2019 amendment to New York's Confession of Judgment law (CPLR 3218) was primarily aimed at protecting non-resident debtors, particularly small businesses, from abusive practices by creditors. Here's why it was amended and the purpose behind protecting non-resident debtors:

1. Abuse of the system: Prior to the amendment, out-of-state creditors were using New York's courts to obtain judgments against non-resident debtors who had no connection to New York. This practice had increased dramatically, with about 32,000 judgments entered under the state's confession procedures between 2014 and 2019.
2. Burden on New York courts: The large influx of confession of judgment filings was placing an unnecessary burden on New York's court system, dealing with cases that had no real connection to the state.
3. Protecting small businesses: Many of these judgments were being used against small businesses from other states, who found it difficult to defend themselves in New York courts.
4. Fairness and due process: The amendment aims to ensure that debtors have a fair opportunity to defend themselves in their local courts, rather than being subject to judgments in a distant state.
5. Limiting scope: The new law limits the use of confessions of judgment to debtors who have a residence or place of business in New York, ensuring that there's a genuine connection to the state.
6. Preventing forum shopping: The amendment discourages creditors from using New York as a convenient forum for obtaining judgments against out-of-state debtors, a practice that was seen as unfair and potentially abusive.

By making these changes, New York sought to balance the legitimate use of confessions of judgment in appropriate cases while protecting non-resident debtors from potentially unfair practices and ensuring that its courts are used primarily for matters with a genuine connection to the state.

Fenix Capital's Summary Judgment Motion Denied Due to Inadequate Authentication of Financial Records

Fenix Capital Funding LLC sought summary judgment against a borrower and guarantors for an alleged breach of a merchant cash advance agreement. The court denied the motion, finding that Fenix failed to properly authenticate its business records, including payment logs, ACH transfers, and wire transfer documents, which were essential to proving the breach of contract claim.

Key Legal Principles:

1. Business records must be properly authenticated as exceptions to the hearsay rule under CPLR 4518(a) to be admissible in summary judgment motions.
2. When business records incorporate information from external sources (e.g., banks or financial institutions), a proper foundation must be provided by someone with personal knowledge of those external entities' business practices and procedures.
3. Coded data in business records must be explained for the records to be considered admissible evidence.

Conclusion: The court's decision highlights the stringent requirements for authenticating business records in merchant cash advance cases, particularly when relying on data from external financial institutions. Fenix Capital's failure to provide proper authentication and explanation of its records, including ACH transfers, wire payments, and coded payment logs, resulted in the denial of its summary judgment motion. This ruling sets a high standard for plaintiffs in similar cases, emphasizing the need for thorough and properly authenticated documentation.

Citation: Fenix Capital Funding LLC v Sunny Direct, LLC, 81 Misc 3d 1243(A), 203 NYS3d 921 (Sup Ct, Kings County 2024).

Summary Judgment Denied in Merchant Cash Advance Case Due to Inadequate Business Record Authentication

A merchant cash advance company's motion for summary judgment against a borrower was denied. The court found that the plaintiff failed to properly authenticate its business records, particularly a "Remittance History" document, which was crucial to establishing the alleged default.

Key Legal Principles:

1. Admissibility and authentication of business records:
   • Records must be properly identified and related to the case at hand
   • Affidavits must accurately describe and authenticate submitted documents
   • Records must be shown to be made in the regular course of business
   • It must be the regular course of business to make such records at or near the time of the event recorded
   • Vague or unspecified references to record-keeping processes are insufficient
2. Consistency in evidence:
   • Inconsistencies between affidavits and supporting documents undermine the prima facie case
   • Numerical discrepancies (e.g., claimed vs. documented NSF transactions) are material
3. Requirements for summary judgment motions:
   • Evidence must be in admissible form
   • Material issues of fact must be absent
   • Even unopposed motions require a prima facie showing
   • Hearsay evidence without proper foundation is insufficient

Conclusion: The court's decision emphasizes the critical importance of properly authenticating and presenting consistent business records in merchant cash advance cases, particularly when seeking summary judgment. These principles are crucial even in the absence of opposition from the defendant. Failure to establish a proper foundation for business records can be fatal to a motion for summary judgment, even when unopposed.

Citation: Atipana Credit Opportunity Fund I, LP v Empire Restaurants AZ Corp., 80 Misc 3d 1208(A), 194 NYS3d 715 (Table) (Sup Ct, Kings County 2023) (unreported disposition)

New York Court Rules "Future Receipts" Agreement May Be Challenged as Usurious Loan Despite Form of Transaction

A mushroom company entered into an agreement purportedly selling $554,850 of future receipts for $411,000, requiring daily payments of $2,935.71. When the company sought to reduce payments due to decreased sales, the counterparty obtained a confession of judgment. The Appellate Division held that the company's affiliates and principal adequately pleaded that the transaction was actually a usurious loan disguised as a purchase of future receipts.

Key Legal Principles:

1. When determining whether a transaction is a loan subject to usury laws, substance controls over form and must be considered in its totality
2. Three factors determine if repayment is absolute enough to constitute a loan: presence of reconciliation provisions, finite term, and recourse upon bankruptcy
3. A plenary action is the proper mechanism for seeking to vacate a judgment by confession based on fraud or misconduct

Conclusion: Courts will look beyond the label of "purchase of future receipts" to determine if a transaction is actually a disguised loan, focusing on whether repayment is effectively absolute based on the agreement's actual terms and operation.

Citation: Oakshire Properties, LLC v Argus Capital Funding, LLC, 229 AD3d 1199 (4th Dept 2024).