When someone is looking for a New York MCA defense attorney, it generally means that a lawsuit has been filed against them. Now, what is that lawsuit about? Typically, these types of lawsuits are involved with a financing product called a “merchant cash advance,” or an MCA financing transaction. There are many brokers and financing arrangers who set up these kinds of funding transactions, presumably it’s because these types of funding transactions are very lucrative, even for the brokers or arrangers. And why are they so lucrative? Let me explain.
To be clear, these financing transactions are lucrative for the MCA financing companies and for the people who set them up or arrange them, but they are typically not lucrative for the businesses and individuals accepting the advances. On a shorthand basis, a lot of folks refer to these financings as “loans,” but the courts in New York have held and often continue to hold that these MCA financing transactions are not loans, but rather that they are receivables purchases. In the eyes of the law, this is a huge difference because for loans, usury laws apply, and for receivables purchases, usury laws do not apply, per New York law. However, on principle, and as a New York MCA defense attorney, I believe these transactions, because of the way they are structured, are more akin to loans, for which New York’s laws on usury should apply.
This is because of the risk assessment and shift. Historically, a loan is a loan because it is an unconditional promise to pay. That is, regardless of the borrower’s financial condition, the loan has to be repaid no matter what. This is what makes a loan a loan under New York law. On the other hand, what makes a receivables purchase a receivables purchase is that, again, under the law, it is not an unconditional promise to pay. Instead, the company receiving the cash advance funding (remembered, it’s not a “borrower” in the conventional sense), or, more specifically, the obligation of that company to repay the cash advance, is limited to the receivables the MCA financing company purchased. If, so the theory goes, there are no more receivables, the MCA financing company is out of luck and there’s no repayment.
However, and this is a very big however, this is not the way that these receivables transactions are typically structured. Because if they were, they would be true receivables purchases. However, they are not true receivables purchases, and I will explain why shortly. Again, to be clear, I wanted to make sure everyone understands why this is so important: it’s so important because if it’s characterized as a loan, usury law applies, meaning there is a cap on interest. If it’s a receivables purchase, usury laws do not apply and there is no cap on interest — let me be clear about this — there is no cap on interest. This means that the MCA financing company could lend you $5,000 and at the end of the day you could have to repay it over $15,000 in a relatively short period of time. Therein lies the rub. And therein lines the issue.
These MCA financing companies are run by talented individuals and have talented attorneys other teams. But, as a New York MCA defense attorney I am giving them a good run for their money.
Back to the rub here. To protect themselves against nonpayment due to the prospect of there being no receivables, because if there are no receivables, the MCA financing company does not get paid, it adds a document to the transaction called a performance guaranty. This has been interpreted to mean that a personal guarantor, usually the company’s founder or shareholder, is on the hook to pay the amounts due to the MCA financing company even though there are no more receivables, and even though the company may be out of business.
So what’s the difference between a performance guaranty and and guaranty of payment under the law, and is it correct? We will leave that as a discussion for another time.
For now, you’re looking for a New York MCA defense attorney to help you defend your lawsuit, and to give you your options, rather than pontificate about the legal theories. So, how do we approach these cases? It’s rather straightforward.
We analyze the complaint and the MCA transaction documents and look for defendable positions. We also analyze and discuss with our clients what their goals are. For instance, a lot of our clients say they need more time because they want to take care of the debt down the road, and they are expecting business to pick up. Other clients want to resolve the lawsuits right away and so we work on fast settlements for those clients. And other clients want to simply fight. We help find out where our clients stand on these issues and then work to meet their needs. This is the value that we add to clients as their New York MCA defense attorney.
Some of the strategies we employ involve pre-answer motion practice. Other strategies involve filing an answer and engaging in discovery. The strategies and tactics we employ are directly tied to the goals of our clients.
I’ve spoken with a lot of clients who claim that these MCA financing companies have ruined their business and these MCA financing companies are predatory lenders. That may be true or it may not be true — the jury remains to be out on that question. While the New York Appellate Division has ruled that these are receivables purchase transactions are exempt from usury laws, did the Appellate Division get it wrong? Is there a basis to reverse existing law, or to tweak it, or to send it back for further analysis and fact finding? This is one of the roles of a New York MCA defense attorney, to ask these questions, and to see if we can get the answers.
The issue with getting the answers, however, lies in the typically limited, or otherwise earmarked or devoted, assets of the merchants — or businesses — who receive these merchant cash advances. So it is very likely that we may never get the answers we need to clarify this market.