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13 Jul
New York Case Is a Win for the Merchant Cash Advance Industry

Providers of cash advances repaid by sales of future receivables in New York can have greater confidence that these advances are not loans and are not subject to usury laws.

On March 16, the Supreme Court of New York, Nassau County, issued a decision in IBIS Capital Group, LLC v. Four Paws Orlando LLC. The decision reaffirms the position consistently taken by New York courts that “For a true loan it is essential to provide for repayment absolutely and at all events [and where] the payment or enforcement [of an agreement to repay funds advanced] rests upon a contingency, the agreement is valid even though it provides for a return in excess of the legal rate of interest.”

Under section 190.40 of New York’s Penal Code, a person cannot intend to charge, take or receive interest on a loan greater than 25 percent. In this case, plaintiff IBIS advanced funds to defendant Four Paws under an agreement for the purchase and sale of future receivables. Four Paws subsequently refused to honor its commitment to pay IBIS on the basis that the payments called for a usurious rate of interest. IBIS sued Four Paws for breach of contract, and Four Paws asserted criminal usury as an affirmative defense.

In evaluating whether the agreement violated New York’s criminal usury law, the court first considered whether an agreement for the purchase and sale of future receivables could be deemed a loan. The court cited extensive New York precedent for the position that, in order to constitute a loan, the principal sum given to one party must be absolutely repayable and not contingent upon future events. The court then quoted provisions from the agreement stating that (i) IBIS would receive a percentage of Four Paws’ daily sales, (ii) the transaction was not a loan, and (iii) the agreement would be governed by the Uniform Commercial Code (which does not govern loans). According to the court, these provisions indicated that the transaction was not a loan and not subject to usury.

The court also addressed Four Paws’ contention that the agreement established a “set and finite fixed daily payment” that could be used to calculate a usurious interest rate. In this regard, the court noted that it could not find such a provision, but, even if one did exist, the defendants’ usury defense would still fail because “the Agreement provided no liability in the event that the seller’s business failed because it could not generate sufficient revenue to continue operating [and thus make payments].” The court also noted that Four Paws was not required to make any payments unrelated to revenue to cover deficiencies, and the agreement lacked a specific end date upon which all amounts owed by Four Paws would become due.

The court further said that, even if the agreement had created a loan, there would be no violation of New York’s criminal usury law because Four Paws could not show that IBIS intended to charge a usurious rate of interest. To this end, in order to commit criminal usury, a person must enter into the agreement knowing that they are charging interest that exceeds 25 percent.

The court said it was impossible for IBIS to have such intent when it entered into the agreement because Four Paws’ future sales were unknowable, and neither party could have known when or even if IBIS would recover the principal amount advanced to Four Paws, let alone the additional 25 percent needed to reach a usurious rate.

Lastly, the court refused to impute a rate of interest to the parties’ transaction based on the initial two-week period of repayments. It noted that, because IBIS’s right to collect its portion of sales proceeds was variable, doing so “asks the court to [impermissibly] treat variables that were subject to change many times over the course of the agreement as constants.” The court said that it was “fundamentally impossible for the parties to have usurious intent because it was mathematically impossible for the parties to calculate the equivalent to an interest rate at the time they entered into the Agreement. The only time the parties could have possessed sufficient data to calculate the comparable equivalent to an interest rate, would have been too late for IBIS to have possessed usurious intent.”

Pepper Points

  • Providers of cash advances repaid by sales of future receivables in New York can have greater confidence that these advances are not loans and are not subject to usury laws.
  • For a transaction to be considered a “loan,” the principal must be repayable absolutely and not be contingent upon some future event or set of circumstances outside the control of the parties to the agreement.
  • For a loan to be deemed usurious under New York law, the lender must know at the time the loan is made that the interest rate will exceed the criminal usury cap, which is not possible when there is no set date for repayment and the amount of the payments depends on the quality of the receivables purchased.
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