California DFPI Seeks to Dismiss Commercial Financing Disclosure LawsuitMarch 17, 2023
Clothilde Hewlett, in her official capacity as Commissioner of the California Department of Financial Protection and Innovation, has asked the Court to dismiss the lawsuit over commercial financing disclosures brought by the Small Business Finance Association (SBFA). Both sides have entered in all their arguments (the DPFI filed its reply on March 13th.) It is now up to the Court to decide if the claims survive this stage of litigation.
“Lender” Sued for $10 MillionFebruary 21, 2023
King Family Lending says that it offers loans from $10,000 to $2M with 1-4 month terms that can be funded within 24 hours. There’s a collateral requirement, however, which could be anything from inventory, to real estate, to equipment, to sports contracts, to POs, to crypto. Founded in 2020, the lender was a borrower itself, allegedly borrowing more than $10 million from a law firm in order for it to make 97 loans to third parties.
According to a lawsuit filed on February 11, however, its alleged that King Family Lending and its owner never made any such loans and that the owner simply committed fraud and swindled the money.
The story behind King Family Lending, which includes all types of twists and turns, is best told by the Daily Mail. Enjoy.
New Challenge to MCA Legality in New YorkFebruary 10, 2023
It’s effectively well settled law, that proper purchases of future receivables are not considered loans in New York State. But a three year-old merchant cash advance case is poised to become center stage for a fresh review of that policy.
At issue is AH Wines Inc., et al. v C6 Capital Funding LLC which the New York Court of Appeals recently agreed to hear. The crux of the plaintiff’s arguments has been that defendant’s purchase of future receivables was actually a usurious loan. The plaintiff was unsuccessful at both the trial court level and appellate level with their case and so appealed to the highest possible court in New York, the Court of Appeals. On February 9, the motion for leave to appeal was granted.
Trial of PPP Lending CEO To Start in May at EarliestJanuary 2, 2023
The trial of Rafael Martinez, the CEO of MBE Capital Partners, LLC that was arrested last year for fraud related to PPP lending and borrowing, is slated to begin in May at the earliest, according to the docket. The government accused Martinez of using false representations and documents to fraudulently obtain the approval of the SBA for his company to be a non-bank lender through the PPP. He subsequently used that approval to obtain $932M to issue PPP loans and generate $71M in lender fees. It is the first known case of a PPP lender being charged criminally. Martinez pled not guilty.
Tackling the California Disclosure Law With David J. Austin, Esq.December 16, 2022
“I believe the law can be complied with in a technical sense based on how the statute is written,” said David J. Austin, Esq. of Austin LLP, “however, it opens up a funder to a number of attacks when they’re trying to enforce the funding.”
Austin, an attorney well-read on California’s new commercial financing disclosure law, has created a compliance guide specifically for merchant cash advance funders. Now that the law is in effect, he’s noticed a sudden urgency from small business finance companies to quickly wrap their heads around what they need to be doing.
“There’s nothing ambiguous about certain things in the statutes,” he said. “And it’s very specific, you have to use this font, you can’t use bold or italics, and I discussed that a little bit in [the guide]. It’s very specific about what you need to do.”
Austin imparted some helpful wisdom based upon the risks he sees. First, that funders need not just worry about the Department of Financial Protection and Innovation (DFPI) auditing one’s compliance, but also about what attorneys on the opposite side of the table might attempt to attack if these contracts ever end up in litigation, which they inevitably will. There should be concern, he said, about surrendering some control of the disclosure process to brokers, especially for this reason.
“In my view, the biggest liability in this statute is the broker screwing you up,” Austin said. “I can’t begin to say how important I think it is to—just for that one disclosure, take the broker out of the equation…”
Austin suggested that as far as California is concerned, funders should have direct communication with the merchant early on in the process so that when it comes time to make offers, the funder is able to send the required disclosures to the merchant themselves, and that the broker can simply be included in those communications. This workflow system might depart from one where a broker is accustomed to retaining all control of merchant communications, but Austin is looking at the risks through the lens of a funder.
“I think you just have to say, ‘look, it’s the law and we’re not going to do it any other way,'” he said.
While a much more complete scope of what’s required is all part of the guide he’s offering, he hinted that the “reasonably anticipated true-up” requirement of the disclosure was mostly centered around the knowable seasonality of a business and that he likes the Historical Method of predicting a business’s future sales versus the state’s other allowable option, the Underwriting Method. The Historical Method requires that a funding company examine at least 4 months of a business’s previous history, so if any brokers have been left wondering why a funder has recently started asking for 4 months bank statements instead of 3, this is probably the reason. Austin believes that the Underwriting method, by contrast, creates a lot of extra work, like state audits and additional litigation risk.
“The statute [on the Underwriting Method] is long,” he said. “And like I said, it requires auditing. So the first thing that’s going to happen in any litigation is you’re going to be asked to provide those auditing details.”
Any mca funder curious about compliance, including for access to the full guide, should contact David Austin directly at firstname.lastname@example.org.
Since the law has gone into effect, deBanked has determined that some funders are complying with the law already and are continuing to operate in the state like normal while others are taking a wait-and-see approach. Any funder thinking they can fly under the radar of the DFPI and ignore the regulations should consider that a compliance failure could likely be exposed in litigation.
“We know what the defense counsel is going to do,” said Austin, speaking on merchants’ lawyers using the disclosure requirements as a weapon. “They’re gonna push, push, push, push, push.”
Weigh In: Should The New York Commercial Financing Disclosure Law Be Preempted by TILA?December 7, 2022
The CFPB issued a statement on Wednesday to announce that it does not believe that New York’s commercial financing disclosure law is preempted by the Truth in Lending Act (TILA).
In a simple sense, the question of whether or not commercial finance companies can potentially disregard portions of New York’s commercial finance disclosure law on the basis that a similar federal law (TILA) has the superior claim to the legalities surrounding APR disclosures, has been answered by the CFPB. It says no. The agency believes that the two laws do not conflict with each other on the stated basis that TILA regulates “consumer purpose transactions” hence New York’s law is not preempted by TILA. At this time this is merely the CFPB’s “preliminary determination.” Now it is asking for the public’s thoughts on the matter.
“The CFPB is requesting comment on whether it should finalize its preliminary determination that the New York law – as well as potentially similar laws in California, Utah, and Virginia – are not preempted.”
The formal Request for Comment and instructions to submit comment can be found here.
The timing is a bit curious given that this issue has just been legally raised in another state. The deadline to submit comment to the CFPB is January 20, 2023.
First Criminal Charges in MJ Capital Funding SagaSeptember 6, 2022
Criminal 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 AgainJuly 17, 2022
The 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.