Legal Briefs
California Passes Law Extending Debt Collection Rules
January 30, 2025The new year brings yet more distressing news from the Golden State. If you are in the commercial finance space, and you want to collect that gold in California, you will soon have to heed all the rules that, until now, only applied to consumer debt collectors.
Beginning July 1, 2025, commercial loans of $500,000 or less will be subject to the debt collection protections of the Rosenthal Fair Debt Collection Practices Act (“RFDCPA”). What is potentially more troublesome is that the statute will apply not only to debt collectors, but creditors! That means that your in-house collection department will have to heed all the prohibitions and restrictions of the RFDCPA.
The rules are fairly straightforward and apply to debt collectors and creditors attempting to collect on their own paper. There are many, including:
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There is a plethora of other rules, but you get the picture.
There are other important issues, i.e.:
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One good thing about the expanded statute is that there is no licensing requirement for commercial debt collectors/creditors (yet!).
There is much more, but it is, as they say, beyond the scope of this article. My best advice is to have an attorney prepare a best practices guide to help you navigate this minefield. That is exactly what I am doing for my clients.
The Law Offices of Kenneth Charles Greene present this article. All copyrightable text, the selection, arrangement, and presentation of all materials (including information in the public domain), and the overall design of this presentation are the property of the Law Offices of Kenneth Charles Greene. All rights reserved. Permission is granted to download and reprint materials from this article for the purpose of viewing, reading, and retaining for reference. Any other copying, distribution, retransmission, or modification of information or materials from this article, whether in electronic or hard copy form, without the express prior written permission of Kenneth C. Greene is prohibited. The materials available from this article are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any issue or problem. Use of and access to these materials does not create an attorney-client relationship between the Law Office of Kenneth Charles Greene and the user or viewer. The opinions expressed herein are the opinions of the individual author.
Legal Complexities in the Revenue-Based Financing Industry: An Analysis of Recent Court Cases
January 6, 2025Jeffrey S. Paige is the General Counsel of CFG Merchant Solutions. Visit: https://cfgmerchantsolutions.com
Navigating the intricate legal landscape of the revenue-based financing industry has become increasingly complex, with recent court cases providing profound insights into the sector’s regulatory dynamics. Amidst legislative shifts, litigation between funders and merchants, and public enforcement actions, three prominent court cases have recently emerged, each offering further guidance into the nuanced legal dynamics governing this innovative sector.
SBFA vs. DFPI: Constitutional Challenges to California’s Regulatory Framework
In the Small Business Finance Association (SBFA) vs. California Department of Financial Protection and Innovation (DFPI), 9th Cir., Case No. 24-50, SBFA challenged the constitutional validity and federal preemption of California’s Commercial Financing Disclosure Law. Central to SBFA’s stance is the contention that the state’s regulatory framework infringes upon the First Amendment rights of its members. SBFA asserts that the regulations compel its members to disseminate inaccurate disclosures to customers, while simultaneously prohibiting any communication that could rectify or clarify purportedly misleading information. Furthermore, SBFA contends that California’s customized interpretation of the Annual Percentage Rate (APR) conflicts with the federal Truth in Lending Act (TILA), potentially causing confusion among merchants. The DFPI moved for summary judgment to dismiss the complaint.
Updates and Nuances: Recent Ruling on SBFA vs. DFPI
On December 4, 2023, the trial level judge ruled in favor of the DFPI, granting their motion for summary judgment and dismissing the case.
First Amendment Argument: The judge disagreed with SBFA, concluding that the disclosures would help small businesses understand the costs and were neither misleading nor unduly burdensome.
Federal Preemption Argument: The judge deferred to the Consumer Financial Protection Bureau (CFPB)‘s authority to resolve preemption issues. In March 2023, the CFPB ruled that the Commercial Financing Disclosure Law (CFDL) does not conflict with TILA.
The SFBA has filed an appeal of the lower court’s grant of summary judgment with the United States Court of Appeals for the Ninth Circuit. On May 28, 2024, SBFA filed their appellate brief setting forth the facts on the record on summary judgment and their specific legal arguments, emphasizing the reversible errors made by the district court, particularly regarding the false and misleading nature of the compelled disclosures, the controversy surrounding the use of APR metrics on products (like receivables-based funding transactions) that APR was not designed to properly describe, and the lack of justification for the regulations. The preemption argument is not being raised on appeal. Following this, on June 6, 2024, the Appellee DFPI’s unopposed motion for an extension of time to file the answering brief was granted. The answering brief of the DFPI is now due on August 30, 2024.
Given these developments, SBFA’s challenge continues to underscore significant constitutional, substantive, and procedural issues within California’s regulatory framework.
The People v. Richmond Capital Group: Uncovering Predatory Practices
In the case of The People v. Richmond Capital Group, 195 N.Y.S.3d 637 (N.Y. Sup. Ct. 2023, unpublished slip copy), allegations of predatory practices have uncovered crucial legal considerations for revenue-based financing providers. Initially filed by the People in 2020, the court ultimately found for the People, holding that the Defendants in that case were “predatory lenders” making thinly disguised loans with usurious interest. The keys to this decision were the reconciliation duty (which was allegedly never performed by the Defendants despite the mandatory contract provisions and requirement that merchants submit bank statements to Defendants on a monthly basis), the fact that the transactions were explicitly based upon fixed repayment amounts with fixed repayment timeframes (as opposed to revenue based funding products, where remittance of the purchased receivables may vary in amount and duration along with the merchant’s revenue stream), contract provisions such as making a few missed payments or declaration of bankruptcy events of default (shifting the risk of loss off of the funder), and the fact that Defendants always referred to their products as loans, and not a bona fide purchase and sale of future receipts. The reprehensible conduct of certain Defendants who harassed, bullied, and made numerous fraudulent statements to their merchant customers certainly did not help their cause. In September 2023 and February 2024, the court issued further decisions addressing accounting and disgorgement of funds, but the core principles related to reconciliation and data remain the same. It’s unclear if Richmond Capital Group appealed any of these rulings.
U.S. Info Group, LLC v. EBF Holdings: Implications for ISO Behavior and Funder Accountability
2023 WL 6198803 (S.D.N.Y., 2003), a case out of the Southern District of New York involving New York law, involves allegations by a Plaintiff against a receivables-based funder similar to those in Richmond Capital, but with a very different set of facts, and a different outcome. U.S. Info Group attempted a civil Racketeer Influenced and Corrupt Organizations Act (RICO) claim against EBF Holdings, alleging that the receivables-based funding transaction at issue was a disguised usurious loan under New York law.
In September 2023, the court dismissed the case entirely on the funder’s motion to dismiss the third amended complaint. The judge ruled that U.S. Info Group failed to adequately allege facts demonstrating a “RICO enterprise” or widespread fraud scheme involving EBF Holdings and their affiliates. In addition, the Court re-iterated the major hallmarks of a true purchase and sale receivables-based funding transaction: (i) that the contract contained a reconciliation provision (and that the funder actually preforms reconciliations where warranted such that the provision is not illusory); (ii) that the risk of non-performance due to bankruptcy or declined revenue of the merchant always rests with the funder; and (iii) that there is no finite, fixed repayment term, which would be typical of a loan.
Legal Recommendations for Funders
Funders should consult with knowledgeable and capable attorneys in this area of law to establish and effectuate clear provisions in their contracts along with steadfast adherence to their contract terms and best practices.
As for the DFPI and California’s disclosure requirements, they remain the law of the land unless the final, unappealable decision of a court states otherwise. Thus, funders should consult with their attorneys to ensure strict compliance with California’s disclosure law and regulations.
In conclusion, the recent legal battles involving the revenue-based financing industry underscore the need for continuous vigilance, genuine commitment to proper contract terms and best practices in servicing those contracts, and adaptation to emerging regulatory paradigms, in order to ensure sustainable growth and legal compliance within this dynamic sector.
15 Months in Prison for Fake LOC Scam Run by “Funder”
December 17, 2024Yisroel (“Scott”) Heber was sentenced to 15 months in prison for his role in a fake LOC scam, followed by 3 years of supervised release. Prosecutors said he lured small business victims into making upfront loan payments in exchange for getting a large loan afterwards, which wouldn’t come. As part of the sentencing Heber was also ordered to pay $921,594.75 in restitution, forfeit $240,000, and pay a fine of $25,000.
First Criminal Charges in MJ Capital Funding Saga
September 6, 2022Criminal charges have finally been introduced to the MJ Capital Funding ponzi scheme saga. Last week, 29-year-old Pavel Ramon Ruiz Hernandez was charged by federal prosecutors with Conspiracy to Commit Wire Fraud. According to the allegations, Hernandez helped manage the operations of MJ Capital and oversaw significant fundraising efforts for the company while knowing that the business was a ponzi scheme. All told, it’s alleged that he and his co-conspirators defrauded investors out of $42 million.
MJ Capital Funding pretended to be an MCA provider but did not actually operate an MCA business, nor was the company known within the MCA industry.
Much of the investigations have focused on Johanna M. Garcia, the CEO of the company, but to date she has not been criminally charged.
If Ruiz Hernandez is convicted, he faces a maximum penalty of 20 years in prison, the DOJ states. The MJ Capital ponzi scheme is reported to have affected over 9,000 investors.
Trial of Brendan Ross Postponed Again
July 17, 2022The criminal trial of Brendan Ross, the former alternative lending hedge fund operator accused of wire fraud, has been postponed to October 11, 2022. It had previously been set for July 26. Both sides agreed to the delay. Ross has been out on bond. He has pled not guilty.
Eight Charged in PPP Scheme in California
June 24, 2022Another alleged SBA fraud scheme has met its end after eight defendants were recently charged in the Eastern District of Pennsylvania. The group netted $7 million in Paycheck Protection Program loans, Economic Injury Disaster Loans, and pre-pandemic Small Business Administration loans. Defendants Frank Hamilton, Michael Jones, Tina Chen, Kenny Tran, Tim Park, Peter An, Joseph Greco, and Edwin Bonilla are all California residents.
Specifically for PPP loans, the conspirators allegedly created transactions designed to give the appearance that the funds were being used for payroll. However, the companies had no payroll and no business activities. As part of the scheme, they allegedly created fake bank statements and false tax documents to prove legitimacy. The defendants are being charged with conspiracy to commit wire fraud and face up to 20 years in prison if convicted.
Deal Gone Bad? Next Stop Arbitration
June 20, 2022When a funder is unable to resolve a breach of contract with a customer on its own, litigation may seem like the only option left. But there may be an alternative, a process known as arbitration.
“Arbitration is a creature of contract,” said Zachary Meyer, a partner at a law firm. Meyer is also the co-founder and Chief Administrator of RapidRuling, an arbitration forum that has recently experienced an uptick in cases from the small business finance space. An arbitration forum is an alternative to the courthouse, where disputes are adjudicated by an arbitrator instead of a judge. It’s binding. The prevailing party, for example, can take an arbitrator’s award to the Court and turn it into a judgment.
Meyer told deBanked that part of the original vision for RapidRuling was an entirely online system that would prevent one or both parties from having to incur travel costs to participate. The overall cost of arbitration for a respondent in Montana, for example, would go up if they had to pay for a flight to New York City just to appear for it. “It’s beneficial for the [respondent],” Meyer said.
But in 2019 when RapidRuling first launched, the industry was already well accustomed to relying on AAA, the acronym for the American Arbitration Association. AAA, which was founded in 1926, resolved more than 300,000 total cases in 2019 alone. But then, Covid hit.
“It was like a perfect storm,” Meyer said. As the court system ground to a halt and struggled to move online, an all-online arbitration forum like RapidRuling suddenly had significant appeal. Meyer explained that the forum’s low filing fee compared to alternatives also grabbed attention. It understandably took off.
But the path to arbitration, including which forum to rely upon, may all hinge on the original contract itself, which a funding company’s attorney should carefully draft. Copying and pasting a random contract off the internet, for example, carries great risk, Meyer explained, because one may later discover a boilerplate arbitration clause to be limiting or disadvantageous.
RapidRuling’s website describes its arbitration process in four steps:
1. Submit Your Dispute
2. Wait For Opposing Party To Respond
3. Arbitrator Reviews Submissions
4. Receive An Arbitration Award
Contrast that value proposition to litigation, which depending on the circumstances could be drawn out for years.
RapidRuling seeks out arbitrators that are well-qualified, fair-minded, and diverse. “We have a panel of six arbitrators right now,” Meyer said, “and we’re looking to add more.”
David Picon the Recipient of the Greg Nowak Impact Award
June 16, 2022The Alternative Finance Bar Association named Proskauer partner David A. Picon the recipient of the AFBA Greg Nowak Impact Award. Picon, who was also the keynote speaker of the AFBA conference, was selected by the association’s members for his all-around efforts for the legal community both on matters of law and outside of it.
Greg Nowak, who passed away suddenly last year, was a partner of Troutman Pepper and a beloved founding member of the AFBA. His wife and son were both present for the heartfelt moment in Nowak’s honor.