SDNY Is The New Worst Place To Litigate MCA Disputes

• Jurisdiction: United States,Federal,New York
• Law Firm: Carter Ledyard & Milburn
• Subject Matter: Litigation, Mediation & Arbitration, Arbitration & Dispute Resolution, Class Actions
• Author: Mr Jacob H. Nemon
• Published date: 17 March 2023

Once upon a time, I lamented that The Worst Place To Litigate Merchant Cash Advance Disputes Is Out-of-State. Since last June, beginning with the issuance of the befuddling decision in Fleetwood Services v. Ram Capital Funding LLC, 2022 U.S. Dist. LEXIS 100837 (S.D.N.Y. June 6, 2022), the Southern District of New York has taken over the "worst place to litigate" title for these merchant cash advance (MCA) transactions. Indeed, some SDNY judges are developing a federal MCA legal doctrine that may be read to substantially deviate from New York state authorities.

New York Law

In MCA transactions, the funder purchases a percentage of future receivables from a merchant for a discount and receives regular remittances'usually a fixed daily or weekly amount as an estimate of the specified percentage of the merchant's average receivables'until the full purchased amount is delivered from the merchant's actual receivables.

New York State courts, including Principis Cap., LLC v. I Do, Inc., 201 A.D.3d 752 (2d Dept. 2022), established a useful tripartite test for determining whether MCA contracts met the criteria for being true purchases contingent upon the merchant's generation of receivables (that are not covered by New York's criminal usury cap of 25% per annum) rather than loans.

(1) Does it contain a reconciliation provision to adjust regular remittance amounts?

(2) Does it effectively have an unlimited term if the merchant requires more time to deliver receivables due to business slowdowns or is the term finite?

(3) Does the funder have recourse against the merchant in bankruptcy?

'Fleetwood's' New Approach

In Fleetwood, Judge Lewis Liman decided that these three factors'the touchstone of New York law since at least 2017'"provide only a guide to analysis," but neither dictate the conclusion nor need to all be present for an MCA transaction to be judicially recharacterized as a loan.

Fleetwood shredded apart the contract at issue and determined that in light of some of its other (usually overlooked) provisions (not to mention a factual record of egregious misconduct by that particular funder treating the transaction as a loan with absolute payment obligations), there was no transfer of the risk of loss to the funder in the event the merchant's business failed.

Fleetwood found (i) an overbroad description of the receivables being purchased, (ii) no provision giving the MCA funder direct control over the account into which receivables are deposited, and (iii) an...