Sean Murray is the President and Chief Editor of deBanked and the founder of the Broker Fair Conference. Connect with me on LinkedIn or follow me on twitter. You can view all future deBanked events here.
Articles by Sean Murray
Exercise of Ordinary Intelligence Would’ve Revealed Merchant Cash Advance Contract Was Not a Loan, Court Says
May 9, 2017
In the New York Supreme Court, the Honorable Linda S. Jamieson was tasked with ruling on twelve causes of action in a merchant cash advance contract case. While the 18-page decision covers a lot of ground, one notable section was the plaintiffs’ request for rescission based on “misrepresentations or unilateral mistake” and “damages for fraudulent inducement.” According to the order, the plaintiffs, K9 Bytes, Inc., Epazz, Inc., Strantin, Inc., MS Health Inc., and Shaun Passley, “claim that the defendants misled them by representing that they were entering into “loans governed by usury laws,” but instead caused them “to enter into ‘merchant agreements.'” Exhibits on the docket attached by the plaintiffs purport to demonstrate the word loan being used in communications, though the judge noted that the plaintiffs failed to identify how the individuals in those communications specifically attributed to the defendants. Nevertheless, the judge was unmoved by plaintiffs given the overt language spelled out in the contract itself.
[The plaintiffs] state that they would not have knowingly entered into merchant agreements, because what they really wanted were loans. Indeed, plaintiffs allege that “the word ‘purchase’ or ‘sale’ would have caused Passley to decline a transaction with [defendants] because a loan – the product Passley wanted to obtain – is not a purchase or sale.”
A review of the contracts in this action shows that not only do they all clearly state that they involve purchases or sales, but they all expressly state they are not loans. Even if someone were confused by the contracts, or did not understand the obligation or the process, by reading the documents, one would grasp immediately that they certainly were not straightforward loans. The very first heading on the page was “Merchant Agreement,” and the second heading says “Purchase and Sale of Future Receivables.”
[…] For plaintiffs to state that they would not have entered into a purchase or sale if they had known that that is what they were doing is utterly undermined by the documents themselves. As the Second Department has held, in Karsanow v. Kuehlewein, 232 A.D.2d 458, 459, 648 NY.S.2d 465, 466 (2d Dept. 1996), “the subject provision was clearly set out in the … agreements, and where a party has the means available to him of knowing by the exercise of ordinary intelligence the truth or real quality of the subject of the representation, he must make use of those means or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.” So too here, plaintiffs had the means to understand that the agreements set forth that they were not loans. As it has long been settled that a party is bound by that which it signs, the Court finds that the ninth cause of action, for recission based on misrepresentation or mistake, and the tenth cause of action, for fraudulent inducement based on misrepresentation, must be dismissed as a matter of law. Pimpinello v. Swift & Co., 253 N.Y. 159, 162-63 (1930) (“the signer of a deed or other instrument, expressive of a jural act, is conclusively bound thereby. That his mind never gave asset to the terms expressed is not material. If the signer could read the instrument, not to have read it was gross negligence; if he could not have read it, not to procure it to be read was equally negligent; in either case the writing binds him.”).
The plaintiffs are likely to be disappointed with the rest of the ruling as well. The decision can be found in the New York Supreme Court in the County of Westchester under Index Number 54755/2016 or can be downloaded in full here.
MCA Company Wins Case After Judge Actually Reads the Contract
May 5, 2017
An explosive New York Supreme Court decision in December against a merchant cash advance company just lost some of its bite, thanks to a decision handed down by the Honorable Catherine M. Bartlett in Orange County.
By all accounts, plaintiff Merchant Funding Services, LLC (“MFS”) had reason to be worried when Long Island attorney Amos Weinberg appeared on behalf of defendants Micromanos Corporation and Atsumassa Tochisako. MFS and Weinberg squared off last year in an almost identical case when Weinberg represented a company named Volunteer Pharmacy, Inc. There, a Westchester County judge decided the agreement in question to be criminally usurious on its face, leaving no question of fact for a trier of fact to resolve. According to court records, Weinberg has been relying on that decision to bolster his legal arguments against other MCA agreements ever since.
But up in Orange County, less than an hour northwest of Westchester, the court there sided in favor of MFS on Thursday, even after being briefed on the Volunteer Pharmacy decision.
Defendants, citing Merchant Funding Services, LLC v. Volunteer Pharmacy Inc., 44 NYS3d 876 (Sup. Ct. Westchester. 2016), assert that a plenary action is not required in the circumstances of this case because the Secured Merchant Agreement is, on its face and as a matter of law, a criminally usurious loan. However, Defendants’ position is grounded on a dubious misreading of the Agreement.
Micromanos, like Volunteer Pharmacy, was seeking to vacate the confession of judgment entered against them by way of a motion rather than by filing an entirely new lawsuit.
Here, the judge not only rejected that the confession of judgment be vacated but she also admonished Micromanos for misleading the court over the actual wording of the contract in order to serve their argument.
The agreement on its face provided for MFS’s purchase of 15% of Micromanos’ future receipts until such time as the sum of $224,250 has been paid. Paragraph 1.8 of the Agreement recited the parties’ understanding – directly contrary to Defendants’ claims herein – that (1) MFS’ purchase price was being tendered in exchange for the specified amount of Micromanos’ future receipts, (2) that such purchase price “is not intended to be, nor shall it be construed as a loan from MFS to Merchant”, and (3) that payment by Micromanos to MFS “shall be conditioned upon Merchant’s sale of products and services and the payment therefore by Merchant’s customers…”
These provisions not withstanding, Defendants contend that the Addendum altered the essential nature of the Agreement by requiring a Daily Payment of $2,995.00 on pain of default, thereby eliminating any element of risk or contingency in the amount or timing of payment to MFS, and converting the Agreement into a criminally usurious loan bearing interest at the rate of 167% per annum. Not so. The Addendum expressly provided that the $2,995.00 Daily Payment was only “a good-faith approximation of the Specified Percentage” of 15% of Micromanos’ receipts, and that Micromanos was entitled to request a month-end reconciliation to ensure that the cumulative monthly payment did not exceed 15% of Micromanos’ receipts. Defendants’ contention that MFS was entitled under the Addendum to the $2,995.00 Daily Payment without being obliged to offer Micromanos a month-end reconciliation is founded on an incomplete and palpably misleading quotation of paragraph “d” of the Addendum.
According to Defendants, paragraph “d” states:
“The Merchant specifically acknowledges that ***the potential reconciliation*** [is] being provided to the Merchant as a courtesy, and MFS is under no obligation to provide same”.
As noted above, paragraph “d” actually states:
“The Merchant specifically acknowledges that: (I) the Daily Payment and the potential reconciliation discussed above are being provided to the Merchant as a courtesy, and that MFS is under no obligation to provide same, and (ii) if the Merchant fails to furnish the requested documentation within five (5) business days following the end of a calendar month, then MFS shall not effectuate the reconciliation discussed above.”
The Defendants’ omission fundamentally alters the meaning of paragraph “d”. Contrary to Defendants’ assertion, the gist of paragraph “d” is that the institution of the fixed Daily Payment plus month-end reconciliation mechanism as a substitute for Micromanos’ daily payment of 15% of its actual receipts was a non-obligatory courtesy. Paragraph “d” plainly does not enable MFS to require a $2,995.00 Daily Payment while concomitantly refusing Micromanos’ request for a reconciliation.
Defendants further contention that the Agreement as a matter of law eliminated all risk of hazard of nonpayment by placing Micromanos in default upon any material adverse change in its financial condition is not borne out by the language of the Agreement. Under Paragraphs 2.1 and 3.1 of the Agreement, Micromanos’ failure to report a material adverse change in its financial condition, not the adverse change itself, was defined as an event of default.
Therefore, the Secured Merchant Agreement is not on its face and as a matter of law a criminally usurious loan. Consequently, Defendants have failed to establish an exception to the general requirement that relief from a judgment entered against them upon the filing of an affidavit of confession of judgment must be sought by way of a separate plenary action.
It is therefore ORDERED, that Defendants’ motion is denied.
Alarmingly, court documents show that Micromanos attorney Amos Weinberg is relying on the same “incomplete and palpably misleading quotation” in other cases involving other merchant cash advance contracts to serve his arguments. Fortunately, in this case, the Honorable Catherine M. Bartlett compared his quotation of the contract to the actual language of the contract and saw they didn’t match up. While a decision from the Supreme Court in Orange County doesn’t mean that the matter is settled for good in New York State, it does potentially put the decision that arose from Volunteer Pharmacy on very shaky ground.
Merchant Funding Services, LLC v. Micromanos Corporation d/b/a Micromanos and Astsumassa Tochisako can be found in the New York Supreme Court under index number: EF000598-2017
System Error: Prosper Showed Incorrect Returns to Investors
May 3, 2017Investor returns weren’t what they claimed for at least seven quarters, according to a notice Prosper issued on Wednesday.
It recently came to our attention that the annualized net return numbers displayed on your account overview page were inaccurate due to a system error. This error affected the Annualized Net Return and Seasoned Net Annualized Return numbers and has now been fixed.
This error did not impact any other part of your account, including payments, deposits, monthly statements, tax documents and note and loan level information – including estimated returns.
We sincerely apologize for this error. If you have any questions, please email us at investorquestions@prosper.com.
And this was no small adjustment. On LendAcademy, Ryan Lichtenwald said his returns were adjusted from 13.55% down to 9.27%. One user on the LendAcademy forum said his returns were adjusted down from 10% to 8% and another from 14% to 7%. Yet another individual who interacted with me on twitter claims his return dropped from 10% to 1.2%. While we can’t confirm some of these accounts, Prosper’s admission and Lichtenwald’s post on LendAcademy are pretty alarming.
An old LendAcademy forum post shows users mulling over Prosper’s return calculation more than a year ago, but were unsure what to make of it.
In December 2016, the subject came up again.
That same month, Prosper hired a new CFO, Usama Ashraf.
Update: According to Bloomberg, “some of the investors that were affected saw their annual returns fall in half, but in most cases returns fell less than 2 percentage points.” A Prosper spokesperson said that the issue has been going on for several quarters.
Update 2: According to Financial Times, “The miscalculations affected a majority of Prosper’s customers and date back as far as seven quarters.”
Links to additional websites that show investors were growing suspicious of Prosper’s calculations:
Oct 2016: Prosper showing return of 8% – “What I don’t understand, is that when I look at my statements and compare account balances, I’m seeing a return of closer to 4%.”
Reactions from Prosper investors on the Internet:
“My displayed returns are now 1/2 of what they used to be.”
“I was at 16.81%. Today my account shows 9.42% – so not exactly half, but a lot.”
“Prior to the update I was somewhere close to 11%. After the correction…6.65% HAHA”
Words Matter in Contracts (And everywhere else)
April 25, 2017
The Counselor Library conference powered by law firm Hudson Cook LLP was a big hit in Baltimore this week. While focused on consumer lending, they held a special one-day program on merchant cash advance and small business lending. The topics and discussions were off-limits to press reporting but what was largely visible on the exhibition floor was the Merchant Cash Advance Basics training course.
Recent merchant cash advance case law suggests that it is of critical importance for sales reps and underwriters to be knowledgeable of their own products. To be specific, the words you use to communicate with merchants over emails, on the phone and in your contracts should always be consistent and in compliance with applicable laws. What you write on forums and the promises you make in your ads should also pass legal muster.
Even if you consider yourself to be an industry veteran, the Merchant Cash Advance Basics course should refresh your memory on fundamental industry practices. If you are a newcomer, consider Merchant Cash Advance Basics an absolute necessity.
Hudson Cook, LLP has established itself as a leader in the MCA legal arena and we were proud to participate in their event.
A Tale of “Debt Restructuring”?
April 19, 2017
Here’s a doozy for you: A merchant signed an agreement with a purported law firm on September 29, 2016 for assistance with restructuring their debts. As part of that agreement, the law firm, which goes by the name Protection Legal Group, LLC, also offers “Litigation Defense Services” in case the merchant gets sued for non-payment of debts. The basic “non-legal” services alone, however, required that this merchant pay approximately $100,000 to Protection Legal Group, according to court filings. That’s a pretty hefty service fee for a business that was only claiming $400,000 in debts, most of which it improperly classified as debt since they were actually sales of future receivables.
The very next day, a merchant cash advance (MCA) company sued the merchant in New York for breach of contract, claiming that they were owed more than $300,000. And three months later, the merchant, represented by an attorney named Amos Weinberg, sued the first law firm that they hired. According to that complaint, filed on January 6, 2017, Protection Legal Group never even contacted the MCA company even though they were hired to negotiate with them specifically. Stranger yet, the merchant alleges that Protection Legal Group could not even have defended them in litigation because the MCA agreement’s jurisdiction was New York and Protection Legal Group has no lawyers that are licensed in that state. Naturally, the complaint further alleges that Protection Legal Group accepted payments anyway and has refused to return it.
The merchant’s new attorney, Amos Weinberg, is no friend to MCA companies, according to New York court records. Nevertheless, he offers harsh words for these new purported debt restructuring companies on his blog. “A growing industry that preys on people all over the country who are sued in New York is the debt resolution industry,” he wrote. “These companies promise to settle lawsuits for a portion of the sum sued by inducing the client to stop paying the creditor and instead pay sizeable weekly sums into an escrow account.” He then goes on to call out Protection Legal Group by name.
To summarize, a merchant hired a lawyer for an exorbitant fee to restructure their debts that weren’t debts, got sued and then had to hire a lawyer to sue their lawyer.
Protection Legal Group is also being sued by Forward Financing, an MCA company, for interfering with its contracts. That story has made the news in legal circles.
Court documents show that Protection Legal Group is fighting on another front as well since less than three weeks ago, a class action lawsuit (Case: 1:17-cv-02445) was filed against them for violating the TCPA. According to the complaint, they are allegedly marketing their services via pre-recorded voice messages to cell phones.
As an aside, most MCA contracts already permit merchants to have their payments lowered in the event that their revenues drop. Typically, they just need to send in their recent banking activity to demonstrate the drop and the MCA company will reimburse the merchant for anything collected above the specified percentage of sales. As this is a fundamental part of the agreement, the merchant shouldn’t require a debt negotiator or an expensive attorney to aid them with this.
MCA Case One of the Most Notable of the Year for Factoring Industry
April 17, 2017
At the 2017 Factoring Conference in Fort Worth, TX, industry attorney and talk radio show host Bob Zadek, cited Merchant Cash & Capital, LLC v G&E Asian American Enterprise., Inc. as one of the most notable legal decisions in 2016.
The contract in question was a purchase of future receivables, i.e. a merchant cash cash advance. A summary of the decision appeared on the Usury Law Blog last year.
During Zadek’s Reports from the Courts session at the conference, he summarized the lessons as follows:
This case is interesting because it appears to confirm that a common contract structure utilized by merchant cash advance companies protects them from usury defenses. When analyzing whether a transaction is usurious, courts look to whether usurious interest is or will be charged to the Borrower from inception of the transaction. Subsequent events do not affect the analysis.
To paraphrase what Zadek also said, the New York Court correctly acknowledged that usury cannot be backwards-looking.
In that case, the MCA company was represented by New York attorney Christopher Murray of Giuliano McDonnell & Perrone, LLP
81% of Online Business Lending Borrowers Report Being Satisfied or Neutral
April 12, 2017The latest Small Business Credit Survey published by the Federal Reserve shows that 81% of small business borrowers were either satisfied or neutral about their online loan experience. Online lenders were defined as nonbank alternative and marketplace lenders, including Lending Club, OnDeck, CAN Capital, and PayPal Working Capital.
Of the 19% that were dissatisfied, nearly half cited transparency as a root cause. But that’s to be expected given that businesses dissatisfied with their loan from a large or small bank also cited transparency just as often.
While these charts indicate that there is still room for online lenders to improve, the 2016 report paints a more honest narrative than last year. Last year’s report used net satisfaction scores, which measured the difference between satisfied and dissatisfied borrowers. That methodology resulted in 15% net satisfaction for online lenders in 2015, which unless you read the fine print, easily misled even the most sophisticated of readers to conclude that only 15% of borrowers were satisfied. (Those readers included experts testifying in congressional hearings, the media, and government agencies, all of whom relied on that report to argue that online borrowers were terribly dissatisfied).
The 2016 report shows that businesses borrowing from an online lender were only slightly more likely to be dissatisfied than those that borrowed from a large bank (19% vs. 15%). And it’s the high interest rates that stand out to those dissatisfied online borrowers. 33% said that a high interest rate was the reason for their dissatisfaction. This is to be expected since non-banks inherently suffer from a higher cost of capital than banks.
Cash Advances?
Unfortunately, all of their data on “cash advances” is tainted. If they meant “merchant cash advances” or sales of future receivables, they should’ve specified such in the survey that went out to small businesses. Instead, the survey repeatedly asked about cash advances, a term most commonly associated with borrowing money through an ATM with a credit card. Those surveyed were also asked if they used personal loans, auto loans or mortgages so the multiple choice context suggests a credit card cash advance. Similarly, a cash advance could also mean a payday loan. With so many interpretations, the consequence is that it’s impossible to tell what the Federal Reserve meant or what those being surveyed thought they were being asked.
Notably, one question asked businesses if “portions of future sales” were used as collateral for a debt, but since merchant cash advances do not collateralize future sales (the future sales are actually sold, they don’t serve as collateral for a loan), it’s difficult to understand what they meant or how a respondent might interpret that.
Statistically representative?
The 2016 report also spends more time defending the Fed’s sampling methodology. Perhaps they are aware that their data is being put under the microscope.
Read the full Fed report here
For Factoring, Different Spin, Same Issues as MCA
April 10, 2017
They called it the 2017 Factoring Conference, but an MCA professional would’ve hardly noticed. On the agenda was news about Dodd-Frank’s Section 1071, the now-dead NY lending legislation, usury litigation, confessions of judgment, stacking, fintech and gripes about brokers. And yet factors and MCA companies still largely live separate lives.
The underlying differences between the two industries are as much cultural as they are contractual. The International Factoring Association’s directory reports having nearly twice as many members from Texas as they do from New York. They also list having more members from Utah than they do New Jersey. Compare that to our own readership at deBanked in which website visitors and magazine subscribers are most heavily concentrated in New York, California, Florida and New Jersey. Texas ranks 8th for subscribers and Utah is much, much farther down. And while purely based on my unscientific observation, I’d wager a bet that the average age of a factoring company owner is at least a decade older (probably much more) than the average age of an MCA company owner.
Differing philosophies between the two industries are perhaps exacerbated by this generational and demographic gap.
On a fintech disruption panel at the factoring conference last week, Pearl Capital CEO Sol Lax told attendees that the MCA industry was not only innovative but ultra competitive. “You either need to evolve or become a phone booth,” he said. Other panelists explained that today’s average small business is focused on speed and simplicity and that they’ve built their models around that.
But factoring has survived the test of time. In the latest issue of The Commercial Factor, Jeremy B. Tatge traces the first factoring agreement in America to 1628. “This spirit has endured and survived wars of independence, such as the American Revolution, two World Wars in the Twentieth Century, and even down to the present day (NATO being but one of many examples),” he writes.
Will technology finally break that spirit or will today’s stereotypical young MCA company owner from New York and Florida eventually find themselves becoming older, wiser, and ready to lay down roots in the midwest? Will they trade the Las Vegas conferences for honky tonks in Cowtown?
I don’t believe that such a transition even has to happen. Whatever differences the two industries have, they are united by common causes and issues and can evolve together.
