Legal Briefs
Nulook Capital Bankruptcy Envelops PSC
April 27, 2017Nulook Capital was not the only casualty of its April 4th Chapter 11 bankruptcy filing. On Wednesday, April 26th, a federal judge in a separate action issued an order aimed at one of Nulook’s alleged creditors, PSC. PSC is also a Long Island-based company engaged in the merchant cash advance business.
In the order, the Honorable Arthur D. Spatt appointed a receiver for International Professional Services Inc. dba PSC and PSC Financial, granting him exclusive dominion and control over all of their assets, books, records and business affairs.
PSC was originally listed as a creditor in the Nulook bankruptcy with $400,000 owed. Another creditor however, GWG MCA Capital, Inc., argued that PSC had interfered with its first position lien and taken possession of its collateral. Alas, in the suit that GWG brought, the court found the full extent of their arguments compelling enough to appoint a receiver over PSC.
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
Update in the Argon Credit Bankruptcy Case
March 31, 2017On March 28th, United States Bankruptcy Judge Deborah L. Thorne, ordered the trustee in the Argon Credit case to transfer the net proceeds and loan portfolio payments to the biggest creditor, Fund Recovery Services (FRS). That cash will be used to satisfy the approved secured claim of $37.3 million. FRS is an assignee of Princeton Alternative Income Fund, LP. Argon Credit was an online consumer lender that made loans between $2,000 and $35,000 with APRs ranging from 4.99% to 149%.
Initially, Argon Credit had applied for Chapter 11 bankruptcy after “experiencing financial difficulty,” though allegations of improprieties and mismanagement have come up in the legal filings. When FRS tried to stop their collateral from being spent, Argon argued in court that such a thing was unnecessary because they had more than enough collateral to pay off their debt to FRS, including $5.5 million worth of leads. By FRS’s calculations, the leads were worth as little as $1,500, not millions. Ultimately, the judge attributed no value to them.
The case was converted to Chapter 7 and FRS should be able to get repaid.
Legal Battles to Keep an Eye On
February 18, 2017CFPB
The CFPB’s organizational structure might not be unconstitutional after all. The D.C. Circuit which originally concluded it was unconstitutional, has decided to rehear the case. Oral arguments on the matter are scheduled to take place on May 24, 2017. A detailed summary of the issues can be found on The National Law Review.
TCPA law
Serial litigant Craig Cunningham is one of two petitioners behind the challenge to an FCC interpretation of what constitutes “prior express consent.” Specifically, the petitioners want to get rid of implied consent resulting from a party’s providing a telephone number to the caller. The FCC has called upon the public to comment. If the FCC indeed decides to narrow the scope of their interpretation, it would become easier for litigants like Cunningham to bring lawsuits. Read a longer brief of the issue here.
New York Lending License
Governor Cuomo’s budget proposal contains changes to Section 340 of New York’s banking law and it has the potential to completely change the alternative landscape in the state. Read a full analysis here.
Platinum Rapid Funding Group Ltd v VIP Limousine Services Inc. and Charles Cotton
After a landmark trial court decision surrounding merchant cash advance last year, plaintiff Platinum Rapid Funding Group went on to obtain a judgment against defendants in an amount exceeding $100,000. However, filed papers on the docket show the case may be heading to the Appellate Division.
Merchant Funding Services, LLC v. Volunteer Pharmacy Inc
Merchant cash advance companies may find themselves having to answer for an unfavorable ruling issued in Westchester County, New York, in which a judge vacated a Confession of Judgment and voided the underlying future receivables transaction. A more in-depth brief can be read here. Notably, the judge in that decision was the same one that decided Pearl Capital Rivis Ventures, LLC v. RDN Construction, Inc.
Analysis: New York’s Lender/Broker Licensing Proposal
February 7, 2017
New York Governor Andrew Cuomo’s proposed budget includes a legislative proposal to “allow the Department of Financial Services (“DFS”) to better regulate the business practices of online lenders.”1 This legislation, which would amend Section 340 of the Banking Law, could have a dramatic impact on lending and brokering loans to New York businesses, as such lenders would have to obtain licenses to engage in business-purpose lending and could only charge rates and fees expressly permitted under New York law.2 It may impact the secondary market for merchant cash advances. If passed, the licensing requirements will take effect January 1, 2018.
The proposed law would amend NY Banking Law § 340 to require anyone “engaging in the business of making loans” of $50,000 or less for business or commercial purposes to obtain a license. The term “engaging in the business of making loans” means a person who solicits loans and, in connection with the solicitation, makes loans; purchases or otherwise acquires from others loans or other forms of financing; or arranges or facilitates the funding of loans to businesses located or doing business in New York.
Although the proposed law would require a license only for a person who “solicits” loans and makes, purchases or arranges loans, the DFS takes the position that the licensing law (as currently enacted) applies broadly and that “out-of-State entities making loans to New York consumers . . . are required to obtain a license from the Banking Department.”3 As a result, there is probably no exemption from licensing for a person who does not “solicit” loans in New York.
The potential impact of the legislation is significant.
Potential Impact on Lenders:
Licensing Required and Most Fees Prohibited. New York law already requires a lender to obtain a license to make a business or commercial loan to individuals (sole proprietors) of $50,000 or less if the interest rate on the loan exceeds 16% per year, inclusive of fees. The proposed law would require any person who makes a loan of $50,000 or less to any type of business entity and at any interest rate to obtain a license. And a licensed lender is governed by New York lending law that regulates refunds of interest upon prepayment;4 and significantly limits most fees that a lender can charge to a borrower, including prohibiting charging a borrower for broker fees or commissions and origination fees.5
Essentially, the DFS will regulate lenders who originate loans to businesses of $50,000 or less in the same manner as consumer loans of less than $25,000. The proposed law would exempt a lender that makes isolated or occasional loans to businesses located or doing business in New York.
Potential Effect on Choice-of-Law. The proposed law could lead courts to reject contractual choice-of-law provisions that select the law of another state when lending to New York businesses. With new licensing requirements and limits on loans to businesses, a court could reasonably find that New York has a fundamental public policy of protecting businesses from certain loans, and decline to enforce a choice-of-law clause designating the law of the other state as the law that governs a business-purpose loan agreement.
For example, the holding of Klein v. On Deck6 might have come out differently if New York licensed and regulated business loans at the time the court decided it. In the Klein case, a business borrower sued On Deck claiming that its loan was usurious under New York law. The loan contract included the following choice-of-law provision:
“[O]ur relationship including this Agreement and any claim, dispute or controversy (whether in contract, tort, or otherwise) at any time arising from or relating to this Agreement is governed by, and this Agreement will be construed in accordance with, applicable federal law and (to the extent not preempted by federal law) Virginia law without regard to internal principles of conflict of laws. The legality, enforceability and interpretation of this Agreement and the amounts contracted for, charged and reserved under this Agreement will be governed by such laws. Borrower understands and agrees that (i) Lender is located in Virginia, (ii) Lender makes all credit decisions from Lender's office in Virginia, (iii) the Loan is made in Virginia (that is, no binding contract will be formed until Lender receives and accepts Borrower's signed Agreement in Virginia) and (iv) Borrower's payments are not accepted until received by Lender in Virginia.”
The court concluded that this contract language showed that the parties intended Virginia law to apply. However, the court also considered whether the application of Virginia law offended New York public policy. The court compared Virginia law governing business loans against New York law governing business loans, and decided that the two states had relatively similar approaches. As a result, the court found that upholding the Virginia choice-of-law contract provision did not offend New York public policy.
The loan amount in the Klein case was above the $50,000 threshold for regulated loans in the proposed New York law, so this exact case would not have been affected. However, the court’s analysis in the Klein case would have been the same for loans of $50,000 or less. Accordingly, the new law could cause a New York court to reject a contractual choice-of-law provision.
Effect on Bank-Originated Loans. This proposed law apparently would not directly affect loans made by banks that are not subject to licensing under the statute.7 But, the law would require non-banks that offer business-purpose lending platforms that partner with FDIC-insured banks to obtain a license to “solicit” loans. And, it is possible, that the DFS could later, by regulation or examination, prohibit such licensees from soliciting loans at rates higher than permitted under New York law.
Potential Impact on Merchant Cash Advance Companies:
The proposed law imposes a license requirement if a person “purchases or otherwise acquires from others loans or other forms of financing.” New York law does not define the term “other forms of financing.” However, the DFS may consider merchant cash advance transactions to be a regulated transaction for which licensing is required.
As written, only purchasing or acquiring other forms of financing, such as a merchant cash advance, might require a license. As a result, the proposed law only has the potential for affecting the sale and syndication of merchant cash advances. It is unclear whether buying only a portion of a merchant cash advance, or “participation” could require a license, or if only purchasing the entire obligation could require a license.
Potential Impact on Brokers:
Because the new law would require a license to “arrange or facilitate” a business loan of $50,000 or less, ISOs and loan brokers would need a license. As mentioned above, a licensed lender is prohibited from charging broker fees or commissions. It is not clear at the moment whether an ISO or loan broker could contract directly with the borrower for a commission.8
1 See https://www.budget.ny.gov/pubs/executive/eBudget1718/fy18artVIIbills/TEDArticleVII.pdf, page 243. Although not discussed in this article, the proposal would also impose new licensing requirements on certain consumer lenders.
2 A licensed lender may impose a rate in excess of the 16% civil usury limit in New York, but is still subject to the 25% criminal usury limit. See, New York Banking Law § 351(1) and New York Penal Law § 190.40.
3 See http://www.dfs.ny.gov/legal/interpret/lo991206.htm The term “solicitation” of a loan includes any solicitation, request or inducement to enter into a loan made by means of or through a direct mailing, television or radio announcement or advertisement, advertisement in a newspaper, magazine, leaflet or pamphlet distributed within this state, or visual display within New York, whether or not such solicitation, request or inducement constitutes an offer to enter into a contract. NY Banking Law § 355.
4 NY Banking Law § 351(5).
5 NY Banking Law § 351(6).
6 Klein v. On Deck Capital, Inc., 2015 N.Y. Misc. LEXIS 2231 (June 24, 2015).
7 See NY Banking Law § 14-a; 3 NY ADC 4; NY Gen. Oblig. Law § 5-501.
8 See NY Gen. Oblig. Law § 5-531 that limits fees that brokers can charge on non-mortgage loans to not more than 50 cents per $100 loaned.
Katherine C. Fisher is a partner in the Hanover, MD office of Hudson Cook, LLP. Kate can be reached at 410-782-2356 or by email at kfisher@hudco.com.
If a Bank Made the Loan in California, It Doesn’t Matter What Happened Next, Federal Court Holds
January 27, 2017There’s no reason to examine whether a party intended to enter into a usurious loan if there is a constitutional exemption that permitted the lender to make the loan in the first place, a federal court in California’s central district ruled. In Jamie Beechum et al. v. Navient Solutions, Inc. et al, a student loan borrower argued that loans made by Stillwater National Bank and Trust Company, are a sham because the defendants who bought the loans from Stillwater (who were not a bank) originated, underwrote, funded, and bore the risk of loss on the loans.
Beechum asked the court to examine the substance and intent of the agreements between the bank and the defendants, which they claim were designed specifically to evade state usury laws. The court did not believe it was necessary to look beyond California’s constitutional exemption since both plaintiff and defendant agreed that Stillwater Bank was the lender. The complaint was therefore dismissed.
As a secondary defense, defendants had also contended that as a national bank, Stillwater was also exempt from state usury laws under the National Bank Act, but the court did not even have to consider that to arrive at their conclusion.
A good analysis of the case (including why buying a loan from a bank differs from buying a loan from a tribe) was written in Leasing News by Tom McCurnin, a partner at Barton, Klugman & Oetting in Los Angeles, California.
The Leads Are Weak, Court Rules
January 21, 2017
One disagreement that has come out of the Argon Credit bankruptcy case is the value of the consumer loan leads that the company has in its possession. Argon argued that it has 300,000 leads worth $5.5 million based on its alleged cost to acquire them.
In a court filing, Fund Recovery Services, LLC (FRS), a creditor, called that valuation “absurd on its face,” explaining that these were prospects that Argon had already declined for a loan and that they had not been able to sell these leads previously. A representative for FRS testified that the leads might be worth somewhere between a 1/2¢ and 1¢ each, giving them a value of only $1,500 on the lower end.
Presented with two completely different valuations for the leads, one for $1,500 and one for $5.5 million, the court ruled that it did not find Argon’s valuation credible and could not attribute any significant value to the leads.
Argon had hoped to use the leads’ value as collateral to keep the creditor at bay so that it could continue to spend its cash while the proceedings play out. The bankruptcy has been changed from Chapter 11 to Chapter 7.
The court has yet to rule on the motion to preclude non-closers from drinking the coffee.
