Par Funding’s attorneys at Fox Rothschild filed a strong response with the Court over the apparent actions taken by the Receiver to lock out its employees and suspend ACH debits, the docket shows.
“On the afternoon of July 28, the SEC advised that Mr. Stumphauzer (the appointed receiver) would cause the immediate dismissal of all the employees of the businesses and that no employees of the business would be permitted to enter the premises – leading to over 100 employees being barred from the business premises for the last week despite the fact that thousands of merchants around the country rely on ongoing communication with CBSG to ensure the ongoing viability of their business operations.”
“To date, not a dollar has been taken in by the Receiver to pay investors, and they have not been paid. The Receiver’s and SEC’s actions are ruining a business with excellent fundamentals and a strong financial base and essentially putting it into an ineffective liquidation causing huge financial losses. In taking this course of action against a fully operational business, the key fact that has been lost by the SEC, is that their actions are going to unilaterally lead to massive investor defaults.”
Par’s attorneys are expected to file a more comprehensive opposition by the end of the week.
deBanked did not reach out to any party for comment given the unlikelihood that any would be shared on pending litigation.
Ready Capital, a multi-strategy real estate finance company and one of the largest non-bank SBA lenders in the country, was the top PPP lender by loan volume in the country. Company CEO Thomas Capasse appeared on Fox Business yesterday and announced key statistics that aligned with data published by the SBA. By dollars, Ready Capital was the 15th largest PPP lender.
“As a leading non-bank, SBA lender, there’s 14 of us, we’re number two in terms of originations last year,” Capasse said on Fox Business, “we focused broadly, we don’t have deposit relationships, so we open our doors broadly to in particular the smaller mom and pop, the local deli, the pizzeria, the nail salon, so just in terms of the numbers, round one of the PPP, we approved 40,000 loans which is number one in the US, it was about $3 billion in total approvals. And our average balance was only $73,000 versus $230,000 for the average in round one.”
Among Ready Capital’s channels for acquiring PPP loan applications is Lendio, who reported consistent figures (a rough average of $80,000 per PPP loan facilitated), and high volume. Lendio has said on social media that they have been working with several partners, Ready Capital among them.
Ready Capital’s Capasse reasoned that their speed could probably be attributed to an affiliated fintech lender. “We are maybe more efficient than some of the banks because we have an affiliated fintech lender which is able to create online portals and processes to work in a more efficient manner and that enabled us to not only process these loans more efficiently but also to provide broad access to the program, to the smaller business owners.”
The company acquired Knight Capital, a small business finance provider, late last year.
Funding Circle’s Sam Hodges appeared on Fox Business on Monday, September 28th. One of the things he said is that loans under $1 million are still out of reach for most small businesses.
He also mentioned that his company has the lowest loss level of any digital small business lender anywhere in the world.
Details about Funding Circle disclosed:
- $1 billion lent to more than 10,000 businesses
- 40,000 investors globally
- $25,000 to $500,000 small business loans
Watch the full video below:
In April of this year, Threadgill’s – a legendary Austin music venue and beer joint that, in the 1960s, famously launched the career of blues singer Janis Joplin — turned off the lights and pulled the plug on its sound stage.
A converted gasoline station, Threadgill’s had been a rollicking music scene since 1933 when musician and bootlegger Kenneth Threadgill secured the first liquor license in Texas after Prohibition. His juke box was crammed with Jimmie Rodgers songs and Threadgill himself famously sang and yodeled Rodgers’ tunes.
For generations of students at the University of Texas, Threadgill’s was a rite of passage.
“The first time I went to Threadgill’s was in the fall of 1968, when I was a freshman at UT,” recalls Perry Raybuck, a songwriter-folksinger and retired government worker who, as a member of the Southwest Regional Folk Alliance, played the stage in 2018. “It was the beginning of an education for me,” he adds. “I had been a Beatles and rock n’ roll kid and it opened me up to different music styles. I became a convert.”
In 1981, Threadgill’s was taken over by another acclaimed club owner, Eddie Wilson, who previously had been the proprietor of the Armadillo, a fabled music venue. Wilson began to actually pay musicians – Threadgill had compensated them mainly with free cold beer – and installed a circular stage.
It was Threadgill’s and an assortment of funky clubs and stages with names like the Soap Creek Saloon and Liberty Lunch helped put Austin on the map as “The Live Music Capital of the World.” The city remains home to the widely acclaimed television program “Austin City Limits” on PBS and the internationally renowned South by Southwest festival, which was canceled this year amid fears of a “superspread” of the coronavirus.
“Live music,” says Laura Huffman, chief executive at the Austin Chamber of Commerce, “is why people come here. It is a central component of Austin’s cultural and economic life.”
Omar Lozano, director of music marketing for Visit Austin, the city’s main tourism organization, says: “We have close to 250 places in the greater Austin region where you can hear live-music, although it’s closer to 50-70 on any given night. During South by Southwest, no stone is left unturned — everything becomes a stage: parking garages, grocery stores, housing co-ops. There are also four or five stages at the Airport, which helps liven up the mood.”
But that identity is being put to the test. So far this year, Austin has lost a raft of live music venues. Among those joining Threadgill’s in honky-tonk heaven since the pandemic struck are Barracuda, Plush, Scratchhouse, Shady Grove, and Botticelli, all of which provided niche audiences to both established musicians and up-and-coming acts.
The roller-coaster ride of government mandated shutdowns followed by a limited re-opening in the spring and another shutdown since July fourth is making life miserable and untenable for both club owners and already hardpressed musicians and artists, says Marcia Ball, a piano player and blues singer.
Ball, who was named by the Texas Legislature as “2018 Texas State Musician” and whose musical style was once described by the Boston Globe as “mixing Louisiana swamp rock and smoldering Texas blues,” told deBanked: “There was already a limited amount of opportunity for musicians to perform and monetize their work in Austin, so it has always been necessary to travel to make a living. But we still depend on a thriving local scene, and we’re losing that when key venues like Threadgill’s disappear.”
Adds Graham Williams, a prominent Texas promoter of touring bands: “These venues and bars are vital to the music ecosystem. Local bands and cover bands need hangouts, even if people are not buying tickets. They’re places to play every night of week.”
While unheralded outside the Austin scene, the local music joints were often a port-of-call for out-of-town promoters and nightclub owners checking out Austin talent – “most notably Barracuda (which) had super-popular acts and was like a hipster garage venue,” says promoter Williams. “A lot of touring bands played there on their way up.”
A July study by the Hobby School of Public Affairs at the University of Houston found that the city’s live music industry is in desperate straits. Sixty-two percent of live music spots and 55% of the bar-and-restaurant businesses reported to researchers that that they can endure for no more than four months, making them the most vulnerable of 16 industries surveyed.
And the situation has become “even more ominous” since the report was published, explains Mark P. Jones, a political scientist at Rice University in Houston and a lead researcher on the Hobby study. “That survey finished polling two hours before all bars and restaurants closed back down,” he says. “Everything people were saying was when bars were at 50% capacity. That’s a best-case scenario.”
Austin’s experience amid the Covid-19 pandemic mirrors what is occurring nationwide as bars, nightclubs and music halls in myriad cities and towns experience similar trauma. In Seattle, Steven Severin is co-owner of three nightclubs – Neumos, Barboza and recently opened Life on Mars – all in trendy Capitol Hill, the hub of the city’s club and live-music scene. He reports that he is barely holding on thanks to some help from the city and a sympathetic landlord who is “a big music advocate.”
“He knocked down the rent a little bit,” Severin says of his landlord, but the situation is dire. “We just had a fifth venue, Re bar, close at the end of August,” he says. “It was a punch in the gut. This could be me.”
The Bitter End in Greenwich Village is also keeping its head above water despite not opening its doors since March. The nightclub has a storied past: owner Paul Rizzo recounts that it is where pop singer Neil Diamond got his start and where “everyone from Curtis Mayfield to Randy Newman” has performed since its opening in 1961. But the club is silent now since the pandemic overwhelmed the city’s hospitals and made New York the epicenter of sickness and suffering during the spring. So far the club is getting help from a landlord’s forbearance and loyal musicians.
Peter Yarrow (the “Peter” in the bygone trio Peter, Paul and Mary), donated a streamed concert to patrons who contributed to a fundraiser that raised more than $50,000. And grateful local musicians also put on a benefit directing people to a Go Fund Me page on the Internet that raised another $16,000. “We’re a major venue for local musicians,” Rizzo says. “We should pull through.”
It’s in their self-interest for artists to do whatever they can to keep the doors open at a club like The Bitter End. “These days because of the last two decades of declining record sales — live music is the bread and butter of a musician’s income,” says journalist Edna Gundersen, a recently retired, 28-year-veteran of USA Today. “That’s true whether it’s a local entertainer or an international superstar.” (Gundersen earned the reputation as Bob Dylan’s favorite journalist; it was she who scored his only interview after he won the Nobel Prize for literature in 2018, publishing his eccentric musings in the The Telegraph of London and breaking the news that he would indeed accept the prize.)
“Touring has been crushed,” Gundersen adds, “and festivals have been canceled. So people doing the circuit and clubs are gone for all intents and purposes. Streaming — while initially up — is down because people aren’t listening to music in the gym or in their cars. Physical record sales are also down because people aren’t going to stores. All of this is just killing musicians.”
The Paycheck Protection Program, the multi-billion, multi-tranche aid package for small business which Congress authorized as part of the CARES Act in March, has provided some funding for the live-music and entertainment industry. But because of the PPP’s requirements that only 40% of the funds can be spent on rent, mortgage and utilities, which are major expenses for nightclubs and music venues, the program has largely been a disappointment.
Hoping to win attention and assistance for their plight from the federal government — “We’re the first to close and the last to reopen,” Severin says — live-music entrepreneurs like himself and Rizzo and more than 2,800 club-owners and promoters across the country have banded together to form the National Independent Venue Association.
Their membership includes independent proprietors (no corporate members allowed) of saloons, cabarets and concert halls as well as theaters, opera houses and auditoriums from every state plus the District of Columbia. To help plead their case with Congress, the organization hired powerhouse law firm Akin Gump Strauss Hauer & Feld, the largest Washington, D.C. lobbying firm by revenue.
NIVA also blanketed Congressional offices with two million letters, e mails and correspondence generated from hordes of fans and performers. Among the many scriveners are a slew of boldface names: Mavis Staples, Lady Gaga, Willie Nelson, Billy Joel, Earth Wind & Fire, and Leon Bridges. Comedians Jerry Seinfeld, Jay Leno and Jeff Foxworthy have also penned notes to lawmakers championing NIVA’s cause.
Their message: without federal funding, 90% of independent stages will go under over the next few months. “The heartbreak of watching venues close is that once a building is boarded up, it’s not going to be a music venue any more,” warns Audrey Fix Schaefer, communications director at NIVA. “They operate on thin business margins to begin with and they’re too hard to develop.” For touring acts, each city stage is “an integral part of the music ecosystem,” Schaefer explains. “When artists finally do get back on the tour bus, they might have to skip the next five cities and go on to the sixth.”
Thanks to the bi-partisan efforts of Senator Amy Klobuchar (D-Minn.) and Senator John Cornyn (R-Texas), NIVA’s campaign has gotten traction. The unlikely couple have teamed up to author a rescue bill, known as the Save Our Stages Act. If enacted, it would establish a $10 billion grant program for live venue operators, promoters, producers, and talent representatives.
The legislation would provide grants up to $12 million for live entertainment venues to defray most business expenses incurred since March, including payroll and employees’ health insurance, rent, utilities, mortgage, personal protection equipment, and payments to independent contractors.
NIVA’s chief argument for the legislation is coldly economic rather than sentimentally cultural. The organization cites a 2008 study by the University of Chicago that spending by music patrons produces a “multiplier effect” for the broader economy. For every dollar spent by a concert-goer at a live performance, the Chicago study determined, $12 in downstream economic activity occurs.
Explains Scott Plusquellec, nightlife business advocate for the City of Seattle: “You buy a ticket to a show and the direct economic impact of that purchase is that it pays the artist, bartender and the club itself as well as the band, advertisers, and promoters. The indirect economic impact,” he adds, “is that after you bought the ticket, you went to a barber shop or a hair salon to look good that night. You might also have dinner, go to a bar for a drink and tip the bartender. That’s the whole the idea of a ‘multiplier.’”
In Austin, that economic logic is an article of faith with city burghers, asserts Lozano of Visit Austin, who reports that live music in the capital city is roughly a $2 billion industry. To promote live music, the tourism bureau sponsors such endeavors as “Hire an Austin Musician.” That program, Lozano says, “sends musicians around the U.S. to represent us during marketing season.” In another promotional campaign, Visit Austin arranged for singer-songwriter Julian Acosta to play a gig at travel agents’ offices in London when Norwegian Air inaugurated direct flights between London and Austin in 2018. “The U.K. is one of our best markets,” he reports.
Even so, efforts by the business community and the City of Austin have failed to stanch much of the industry’s bleeding. According to its website, the city has disbursed $23.7 million in loans and grants to small businesses and individuals, but slightly less than $1 million of that has gone to live-music and performance venues, entertainment and nightlife, and live-music production and studios.
In late September, The city of Austin’s Economic Development Department released a slide show breaking down how the $981,842 in industry grants and loans – of which $484,776 was provided by the federal government under the CARES Act – were awarded. Most top recipients appeared to be well known nightclubs and entertainment venues downtown or close to the city’s inner core.
The Continental Club on South Congress – a key fixture in the hip “SoCo” strip just over the Colorado River from downtown – appeared to do best. It picked up $79,919 from two programs: $40,000 in the CARES-backed small business grants program, and $34,919 from the city’s Creative Space Disaster Relief Program. Other clubs receiving $40,000 in the small business grants program included Stubbs, The Belmont, Cheer Up Charlies and the White Horse. (For a full list go to: http://www.austintexas.gov/edims/document.cfm?id=347299)
Joe Ables, owner of the Saxon Pub, a major Austin venue for jazz – blues singer Ball hailed it as one of several important Austin clubs “that sustains creative endeavor, especially for songwriters” – was vexed that his grant application was denied by the city “with no explanation.” Ables also voiced dissatisfaction that the city paid the Better Business Bureau a 5% administration fee to handle $1.14 million in relief funds, including determining which applicants were approved. “What would they know about live music,” he says.
Even for clubs that received city largesse, it hasn’t been nearly enough to sustain them. The North Door, which got $15,240, closed for good on September 11 (an ominous day — the anniversary of the attacks on the World Trade Center and the Pentagon.)
Meanwhile, enough clubs and venues were left out in the cold that club owner Stephen Sternschein could tell deBanked just before the slide show was released: “I’ve heard talk of a $21 million grant program but most people I know haven’t seen a dollar of that.”
Sternschein is managing partner of Heard Presents, an independent promoter and operator of a triad of downtown clubs that includes the spacious Empire Garage, which features hip hop and urban jazz, and has space for 1000 music-goers. A member of NIVA, Sternschein describes efforts by both the state and local governments as “woefully inadequate.” Says he: “People are looking to the federal government for answers.”
The diminution of places for musicians to ply their trade is a double edged sword. If Austin loses its luster as a hot music town, it puts the city’s overall economy in jeopardy. Explains Jones, the Rice political scientist: “The difficulty for Austin is that it could lose its comparative advantage. Unlike restaurants, movie theaters or sports events, which people can find just as easily in other cities, the Austin music scene draws capital and revenue from across the country.
“You can go out to dinner in Waco,” he observes, referring to the mid sized Texas city between Austin and Dallas best known as home to Baylor University and its “Bears” football team, fervent Baptist religiosity, and unremarkable night life. “Music brings in revenue to Austin and to Texas that wouldn’t otherwise come here.”
In addition, Jones says, the large presence of “artists, creative types, and freelancers” helps make Austin a strong selling point for “brain industries” to attract talent from the East and West Coasts. “It supports the technology industry by making it easier to recruit employees to live there,” he says. “Austin is an alternative to Silicon Valley. People who are progressive might be hesitant to come to conservative, red-state Texas from California but they’ll come to Austin because it’s culturally cool.”
Austin, which embraces the slogan “Keep Austin Weird,” is on the verge of becoming just like every place else in Texas. Should it relinquish its flavor and charm, it could discourage many of the assorted business groups and professionals from keeping Austin on their dance card as a popular destination for meetings, conferences and get-away trips.
Howard Freidman, managing director at Bluechip Jets, a broker of private luxury aircraft, had an earlier career as a technology industry executive. Partly drawn by his previous experiences with the city, Freidman moved to Austin earlier this year. “It had the same coolness and weirdness of New Orleans — but also with the professionalism of a tech city,” he says.
“Whenever we’d come here,” Freidman adds, “the music was always integral to the Austin scene. Even when you’d go to private parties you’d end up downtown at the club scene on Sixth Street. Austin was always a place everybody liked going to.”But as Austin has steadily been morphing into more of a high-technology center than a live-music town, it’s experiencing a silent exodus of musicians and artists who are being gentrified out of their apartments and Craftsman duplexes. Displacing them are software engineers, website designers and the like, their sleek BMWs and black, tinted-glass SUVs glistening in the parking lots of steel-and-glass corporate centers.
Many of the technology firms – including such needy companies as Samsung, Intel, Rackspace, Facebook, and Apple – have each received tax breaks, grants and subsidies worth tens of millions of dollars from a variety of local jurisdictions. Not only have the city of Austin and Travis Country been beneficent, but adjacent county governments and the state of Texas have provided abundant support. A 2014 study by the Workers Defense Project, in collaboration with UT’s Lyndon B. Johnson School of Public Affairs, reported that the state of Texas showers big business with $1.9 billion annually in state benefits. Most recently, officials with Travis County and a local school district granted Tesla more than $60 million in tax rebates to build a massive “gigafactory” southeast of town near Austin-Bergstrom International Airport.
To house the burgeoning cohort of “knowledge workers,” there are condominium conversions, tear-downs, high-rises and other forms of frenetic real estate development which, in their train, bring higher property taxes, steeper rents, and unaffordable housing.
Add in some of the country’s most snarled traffic, dirtier air, and a growing homeless population, and members of the artistic community are increasingly decamping for smaller satellite towns like Lockhart and San Marcos. Others in the diaspora are abandoning Texas altogether for more hospitable locales like Fayetteville Ark., Asheville, N.C., or Olympia, Wash. “Whatever made anybody think this would be a better town with a million people,” laments blues singer Ball. “This was a perfect town with 350,000. Now we’ve got Silicon Hills, Barton Springs are cloudy, and drinking water’s going to be scarce. Why is this supposed to be better?”
The drop-off in live music and the belt-tightening by musicians is causing third-party pain for people like veteran Austin journalist and publicist Lynne Margolis, whose national credits include stories for Rolling Stone online, and radio spots for NPR. “The public relations aspect of my work has dropped away because artists can’t afford to pay,” she says, “and music journalism is falling by the wayside. It’s hard not to feel to like a double dinosaur.”
Led by bars, restaurants and music venues, on many days the solemn departure of small establishments has the business news sections of Austin newspapers reading more like the obituary page. One hardy survivor is Giddy Ups – a throwback honky-tonk on the town’s outskirts that advertises itself as “the biggest little stage in Austin” – promising “just about everything,” says owner Nancy Morgan, including “country, blues, rock, bluegrass, and soul.” For the past 20 years Giddy Ups has developed a devoted following of musicians and patrons while fending off hyper modernity.
“It has an untouched, back-to-the-seventies, cosmic cowboy vibe,” says local musician Ethan Ford, a guitarist and bass player whose trio, The Slyfoot Family, has graced its stage. “It’s a time capsule,” Ford adds.
Morgan declined to disclose her annual receipts but in 2019, she reports paying out $188,000 in wages to employees, $72,000 to musicians, and $185,000 in combined sales taxes to the city of Austin and to the state. Despite her status as a taxpayer, employer and entrepreneur, she has received no state aid and is disqualified from receiving city pandemic assistance programs, meager as they may be, because she’s located in an extra-territorial jurisdiction.“
Nancy still bartends most nights and does all of the booking,” says Ford. “Her knowledge of the Austin music scene could fill a couple of books. I know a decent fistful of Austin venue owners and she’s about the only one that hasn’t given up, been forced out, or just retired. She’s a dynamo.”
Unless the cavalry arrives for Morgan and other holdouts, though, their musical days may be numbered.
Editors Note: Threadgill’s didn’t make it. The venue “has closed for good, the property has sold, and the building will eventually be torn down,” according to information disseminated for its Last Call Music Series. Its November 1st grand finale show featured Gary P. Nunn, Dale Watson, Whitney Rose, William Beckman, and Jamie Lin Wilson.
The building will be replaced with apartments.
In the wake of public outrage at the news that public companies have received millions of dollars from the Paycheck Protection Program, Treasury Secretary Steven Mnuchin today spoke out against such businesses. His comments come after the SBA and Treasury further clarified which businesses actually qualify for PPP, noting that only companies with no access to other forms of capital, such as selling shares or debt, would qualify.
Speaking on Fox Business, the Treasury Secretary explained that “anybody who took the money that shouldn’t have taken the money, one, it won’t be forgiven and two, they may be subject to criminal liability, which is a big deal … I encourage everybody to look at this and pay back these loans now so we can recycle the money if you made a mistake.” Mnuchin made clear that any company that receives a loan of over $2 million will be audited by the SBA.
A number of cases have made headlines, with Shake Shack and Ruth’s Chris Steak House returning $10 and $20 million, respectively, following calls from the public to refund it. Other publicly funded companies that have returned PPP money include AutoNation ($77 million); Penske Automotive Group Group ($66 million); and the Los Angeles Lakers basketball franchise, which received $4.6 million.
“I’m a big fan of the team but I’m not a big fan of the fact that they took a $4.6 million loan,” Mnuchin said of the Lakers. “I think that’s outrageous and I’m glad they returned it or they would have had liability.”
With the launch of the second round of PPP funding yesterday, the SBA reported that it had processed more than 100,000 loans by 4,000 lenders by 3:30pm that day. Senator Marco Rubio explained on Twitter that a new pacing mechanism had been integrated into the SBA’s E-Tran portal system, lowering the minimum amount of PPP loan applications required for lenders to send a bulk submission from 15,000 to 5,000. The hope for this is that it will enable smaller businesses to reach the funds through more regional lenders and “allow more banks to submit,” explained Rubio.
Update 4/16/20: The SBA has put up an official statement on its website that says “The SBA is currently unable to accept new applications for the Paycheck Protection Program based on available appropriations funding. Similarly, we are unable to enroll new PPP lenders at this time.”
A number of fintech companies have just joined the Paycheck Protection Program, but they’re a tad late to the PPParty. On Twitter, Senator Marco Rubio, one of the co-sponsors of the CARES ACT that developed this program, confirmed the rumors that the well had run dry. “Sadly it appears #PPP will grind to a halt tonight as the limit on $ allocated to guarantee #PPPloans about to be hit.”
Now 700000 small business applications are in limbo & no new loans will be made until the game of chicken in Congress ends & additional $ approved.
— Marco Rubio (@marcorubio) April 15, 2020
Here’s the math
Congress approved $349 billion to guarantee #PPP
At 2pm today had over $300 billion in approved #PPPloans
Need $10 billion to cover fees & processing
When we reach $339 billion limit PPP will stop until they end with the ridiculous games & approve more funds
— Marco Rubio (@marcorubio) April 15, 2020
The SBA has often made reference to total funds “approved” when calculating its numbers rather than loaned out, so if you’re a business that has already been approved, then presumably funds have already been allocated for your business and you will still receive them. But if your application is pending, well it’s possible that funding may require additional congressional authorization. That however, as noted by Rubio’s remarks, will require some political compromise.
Update: 4/16 8 AM: Senator Rubio said on Fox Business that the PPP program was now frozen after having reached its limit and has stopped.
We’ll update this as more information becomes available.
Caton Hanson, the chief legal officer and co-founder of the online credit-reporting and business-to-business matchmaker Nav, says that his Salt Lake City-based company would not associate with a small-business financier that included “confessions of judgment” in its credit contracts.
“If we understood that any of our merchant cash advance partners were using confessions of judgment as a means to enforce contracts,” Hanson told deBanked, “we would view that as abusive and distance ourselves from those partners. As a venture-backed company,” Hanson adds, “we have some significant investors, including Goldman Sachs, and I’m sure they would support us.”
Steve Denis, executive director of the Small Business Finance Association, which represents companies in the merchant cash advance (MCA) industry, says that, as an organization, “We’ve taken a strong stance against confessions of judgment.”
He reports that his Washington, D.C.-based trade group is prepared to work with legislators and policy-makers of any political party, regulators, business groups and the news media “to ban that type of practice.
“We’re fighting against the image that we’re payday lenders for business,” Denis says of the merchant cash advance industry. “We’re trying to figure out internally what we can do to stop that from happening and we have been speaking to members of Congress and their staff.”
“Confessions of judgment,” says Cornelius Hurley, a law professor at Boston University and executive director of the Online Lending Policy Institute, “are to the merchant cash advance industry what mandatory arbitration is to banks. Neither enforcement device reflects well on the firms that use them.”
These are just some of the reactions from members of the alternative lending and financial technology community to a blistering series of articles published by Bloomberg News on the use—and alleged misuse—of confessions of judgment (COJs) by merchant cash advance companies. The series charges the MCA industry with gulling unwary small businesses by not only charging high interest rates for quick cash but of using confession-laden contracts to seize their assets without due process.
The Bloomberg articles also reported that it doesn’t matter in which state the small business debtors reside. By bringing legal action in New York State courts, MCA companies have been able to use enforcement powers granted by the confessions to collect an estimated $1.5 billion from some 25,000 businesses since 2012.
“I don’t think anyone can read that series of articles and honestly say what went on were good practices and in the best interest of small business,” says SBFA’s Denis, noting that none of the companies cited in the Bloomberg series belonged to his trade group. “It’s shocking to see some companies in our space doing things we’d classify as predatory,” he adds. “As an industry we’re becoming more sophisticated, but there are still some bad actors out there.”
A confession of judgment is a hand-me-down to U.S. jurisprudence from old English law. The term’s quaint, almost religious phrasing evokes images of drafty buildings, bleak London fog, and dowdy barristers in powdered wigs and solemn black gowns. (And perhaps debtor prisons as well.)
Yet while the legal provision’s wings have been clipped—the Federal Trade Commission banned the use of confessions of judgment in consumer credit transactions in 1985 and many states prohibit their use outright or in such cases as residential real estate contracts—COJs remain alive and well in many U.S. jurisdictions for commercial credit transactions.
Even so, most states where COJs are in use, such as California and Pennsylvania, have adopted safeguards. Here’s how the San Francisco law firm Stimmel, Stimmel and Smith describes a COJ.
“A confession of judgment is a private admission by the defendant to liability for a debt without having a trial. It is essentially a contract—or a clause with such a provision—in which the defendant agrees to let the plaintiff enter a judgment against him or her. The courts have held that such a process constitutes the defendant’s waiving vital constitutional rights, such as the right to due process, thus (the courts) have imposed strict requirements in order to have the confession of judgment enforceable.”
In California, those “strict requirements” include not only that a written statement be “signed and verified by the defendant under oath,” but that it must be accompanied by an independent attorney’s “declaration.” If no independent attorney signs the declaration or—worse still—the plaintiff’s attorney signs the document, the confession is invalid.
But if the confession is “properly executed,” the plaintiff is entitled to use the full panoply of tools for collection of the judgment, including “writs of execution” and “attachment of wages and assets.”
In Pennsylvania, confessions of judgment are nearly as commonplace as Philadelphia Eagles’ and Pittsburgh Steelers’ fans, particularly in commercial real estate transactions. Says attorney Michael G. Louis, a partner at Philadelphia-area law firm Macelree Harvey, “They may go back to old English law, but if you get a business loan or commercial lease in Pennsylvania, a confession of judgment will be in there. It’s illegal in Pennsylvania for a consumer loan or residential real estate. But unless it’s a national tenant with a ton of bargaining power—a big anchor store and the owner of the shopping center really wants them—95% of commercial leasing contracts have them.
“And any commercial bank in Pennsylvania worth its salt includes them in their commercial loan documents,” Louis adds.
Pennsylvania’s laws governing COJs contain a number of additional safeguards. For example, the confession of judgment is part of the note, guaranty or lease agreement—not a separate document—but must be written in capital letters and highlighted. One of the defenses that used to be raised against COJs, Louis says, was that a contractual document was written in fine print “but we haven’t seen fine print for years.”
Other reforms in Pennsylvania have come about, moreover, as a result of a 1994 case known as “Jordan v. Fox Rothschild.” Says Louis: “It used to be lot worse. You used to be able to file a confession of judgment and levy on a defendant’s bank account before he knew what happened. It was brutal. But after the Fox Rothschild case, they changed the law to prevent taking away a defendant’s right of notice and the opportunity to be heard.”
Because of that case, which takes its name from the Fox Rothschild law firm and involved a dispute between a Philadelphia landlord renting commercial space to Jordan, a tenant, the law governing COJs in Pennsylvania requires, among other things, a 30-day notice before a creditor or landlord can execute on the confession. During that period the defendant has the opportunity to stay the execution or re-open the case for trial.
Defenses against the execution of a COJ can entail arguments that creditors failed to comply with the proper language or procedures in drafting the document. But the most successful argument, Louis says, is a “factual defense.” Louis cites the case of a retail clothing store renting space in a shopping center that has a leaky roof. In the 30-day notice period after the landlord invoked the confession of judgment, the tenant was able to demonstrate to the court that he had asked the landlord “ten times” to fix the roof before spending the rent money on roof repairs. In such a case, the courts will grant the defendant a new trial but, Louis says, the parties typically reach a settlement. “Banks generally will waive a jury trial,” he notes, “because they don’t want to take a chance of getting hammered by a jury.”
A number of states, including Florida and Massachusetts ban the use of confessions of judgment. That’s one big reason that Miami attorney Roger Slade, a partner at Haber Law, advises clients that “there’s no place like home.” In other words: commercial contracts should specify that any legal disputes will be adjudicated in Florida. “It’s like having home field advantage in the NFL playoffs,” Slade remarked to deBanked. “You don’t want to play on someone else’s turf.”
He has also been warning Floridians for several years against the way that COJs were treated by New York courts. Writing in the blog, “The Florida Litigator,” Slade—a native New Yorker who is certified to practice law there as well as in Florida counseled in 2012: “If you live in New York, a creditor can have your client sign a confession of judgment and, in the event of a default on a loan, can march directly to the courthouse and have a final judgment entered by the clerk. That’s right—no complaint, no summons, no time to answer, no two-page motion to dismiss. The creditor gets to go right for the jugular.”
In addition, because of the “full faith and credit clause of the U.S. Constitution,” Slade notes in an interview, a contract that’s enforced by the New York courts must be honored in Florida. “Courts in Florida have no choice,” Slade says. “It’s a brutal system and it’s unfortunate.”
In December, two U.S. senators from opposing parties—Ohio Democrat Sherrod Brown and Florida Republican Marco Rubio—introduced bipartisan legislation to amend both the Federal Trade Commission Act and Truth in Lending Act to do away with COJs. Their legislative proposal reads:
“(N)o creditor may directly or indirectly take or receive from a borrower an obligation that constitutes or contains a congnovit or confession of judgment (for purposes other than executory process in the State of Louisiana), warrant of attorney, or other waiver of the right to notice and the opportunity to be heard in the event of suit or process theron.”
But with a dysfunctional and divided federal government, warring power factions in Washington, and an influential financial industry, there’s no telling how the legislation will fare. Meantime, the New York State attorney general’s office announced in December that it will investigate the use of COJs following the Bloomberg series. And New York Governor Andrew Cuomo has declared support for legislation that will, among other things, prohibit the use of confessions in judgment for small business credit contracts under $250,000 and restrict judgments by New York courts to in-state parties.
But if New York State or Congressional legislation are adopted it can have “unintended consequences” to merchant cash advance firms in the Empire State—and to their small business customers as well—asserts the general counsel for one MCA firm. “Losing the confession of judgment will be removing what little safety net there is in a risky industry,” the attorney says, noting that the industry has roughly a 15% default rate.
“It is not as powerful a tool as the Bloomberg news stories would have you believe,” this attorney, who spoke on the condition of anonymity, told deBanked. “The suggestion seems to be that the MCAs can use the confession of judgment to get back the total amount of money due—and then some—while leaving a trail of dead bodies behind. But that’s not the case.
“What is much more likely to be the case,” he adds, “is that MCA companies try to get the defaulting merchant back on track. And—probably more than we should and only after we’ve tried to reach out to them and failed—do we then reluctantly use the COJ as a last resort. At which point we hope we can recover some part of our exposure. The numbers vary, but the losses are always in the thousands of dollars. These are not micro-transactions.
“What’s going to happen,” he concludes, “is that It will not make sense for us to work with those merchants most in need of working capital. The unfortunate reality is that businesses who don’t have collateral and can’t get a Small Business Administration product will be left out in the cold.”
All of which prompts BU professor Hurley to argue that the “Swiss cheese” system of financial regulation among the 50 states continues to be a root cause of regulatory confusion. Echoing Miami attorney Slade’s concern about New York courts’ dictating to Florida citizens, Hurley likens the situation governing COJs with the disorderly array of state laws governing usury regulations.
In the 1978 “Marquette” decision, the U.S. Supreme Court ruled that a Nebraska bank, First of Omaha, could issue credit cards in Minnesota and charge interest rates that exceeded the usury rate ceiling in the Gopher State. Since then, usury rates enacted by state legislatures have become virtually unenforceable.
“The problem we’re seeing with confessions of judgment is a subset of the usury situation,” Hurley says. “One state’s disharmony becomes a cancer on the whole system. It’s a throwback to Colonial times with 50 states each having their own jurisdictions—and it doesn’t work.”
Hurley’s Online Lending Policy Institute has joined with the Electronic Transactions Association and recruited a phalanx of “academics, non-banks, law firms and other trade associations as members or affiliates” to form the Fintech Harmonization Task Force. It is monitoring the efforts by the 50 states to align their regulatory oversight of the booming financial technology industry which was recently recommended by a U.S. Treasury report.
Tom Ajamie, who practices law in New York and Houston and has won multimillion-dollar, blockbuster judgments against “dozens of financial institutions” including Wall Street investment firms, also argues for greater regulatory oversight. He urges greater funding and expansion of the powers of the Consumer Financial Protection Bureau to rein in “the anticipatory use” of confessions of judgment in commercial transactions.
However, notes Catherine Brennan, a partner at Hudson Cook in Baltimore, the job of protecting small businesses is outside the agency’s mandate. “The CFPB doesn’t have authority over commercial products as a general rule,” she explained in an interview. “Consumers are viewed as a vulnerable population in need of protections since the 1960’s.” As a society “we want protection for households because the consequences are high. A family could become homeless if they lose a house. Or (they) could lose employment if they lose a car and can’t drive. And there is also unequal bargaining power between lenders and consumers.
“Large institutions have lawyers to draft contracts and consumers have to agree on a take it or leave it basis. So there’s not a lot of negotiation and government has decided that consumers need protections, including a (Federal Trade Commission) ban on confessions of judgment.”
But Christopher Odinet, a law professor at the University of Oklahoma and a member of Hurley’s harmonization task force, sees the efforts of the federal government and the states to grapple with confessions of judgment as further recognition that small businesses have more in common with consumers than with big business. The COJ controversy follows on the recent passage of a commercial truth-in-lending bill by the State of California which, for the first time, stipulated that consumer-style disclosures should be included in business loans and financings under $500,000 made by non-bank financial organizations.
He cites the close-to-home example of an accomplished professional who got in over his head in financial dealings. “I recently observed a situation where a family member who is a very successful and affluent medical professional was relying on his own untrained business skills,” Odinet says. “He was about to enter into a sophisticated and complex business partnership relying on his intuition and general sense of confidence in the other party.”
Odinet says that he recommended that his relative hire a lawyer. Which, Odinet says, he did.
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