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  1. #1

    Recent Adverse Decisions Against MCAs (really really really bad)

    My collection lawyer just e-mailed me this.

    Client Advisory - Negative MCA Authorities From SDNY

    Please be advised that in the last two months, three adverse decisions have come out in SDNY against MCA cases involving ACH debit transactions. In each case, the Court looked beyond the three factor test historically used by New York courts to determine that MCAs are not usurious loans and, instead, applied a different test to determine that the transactions were usurious loans or plausibly alleged usurious loans. Although in differing procedural contexts, the Court sustained RICO claims against MCA companies and/or their principals in each case. The decisions are incredibly negative and, worse still, were issued by three different federal judges, rather than a single outlier judge. There are several other cases in front of the same judges and it seems very likely that we’ll see at least 5-6 negative federal decisions in 2022. The three negative decisions have already circulated among judges in S.D.N.Y. and various state court judges around New York. The 3 federal cases in question are:

    Lateral Recovery LLC v Queen Funding, LLC, 2022 U.S. Dist. LEXIS 129032 (S.D.N.Y. July 20, 2022)

    Haymount Urgent Care PC v GoFund Advance, LLC, 2022 US Dist. LEXIS 112768 (S.D.N.Y. June 27, 2022)

    Fleetwood Servs., LLC v Ram Capital Funding, LLC, 2022 US Dist. LEXIS 100837 (S.D.N.Y. June 6, 2022)


    Some of the issues can be mitigated by updating MCA contracts and others will require significant focus on best practices.

  2. #2

  3. #3
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    The good news is that it appears that Fundkite's ACH split and CC splits will be protected.

    Reading the some of the complaints it boils down to this:
    While technically not a loan on paper, in order for it to be an MCA, funders have to carry it out as a true MCA.

    Haymount:
    "To begin with, the merchant may only seek reconciliation once per calendar month, and then only during the last five business days of a month. See ECF 69-2 at 4 (§ 1.4). Therefore, the contract only permits the merchant to seek reconciliation about 20% of the time."

    "Considering all of these factors, as well as the factual questions raised concerning the defendants' alleged usurious intent, the Court concludes that the Complaint has adequately pled that the MCA agreements at issue here function as loans."

    Lateral:
    "Queen Funding did not have a reconciliation department, did not perform reconciliations, and never refunded a merchant money as required under their reconciliation provision.
    Queen Funding's obligation to provide a reconciliation was contingent on the merchant's providing documentation requested by Queen Funding "in its sole judgment" and in its "sole and absolute discretion." As a result, the court concluded that Queen Funding had the absolute ability to nullify any obligation to reconcile.
    The Contracts described reconciliation as "a courtesy, and that [the funder] is under no obligation to provide same."
    The Contracts stated that Queen Funding had no obligation to do a reconciliation "if the Merchant fails to furnish the requested documentation within five (5) business days following the end of a calendar month."

    Also, one BIG GEM from all of them:
    If an "event of default" is a rejected ACH, by definition MCA companies have 100% protected themselves. Since an ACH bounce is a precursor to a reconciliation event, which can only happen once/month, which means that if have an ACH rejection on the 1st and the only time to do a reconciliation is on the 18th, the MCA will always win.

    Careful out there!

  4. #4
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    Damn a dark day indeed

  5. #5

  6. #6

  7. #7
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    this is why the first position lenders have spent $$ in partnering with Finwise, Celtic bank, Webank etc etc. It's a legal shield as the banks act as the "lender" on contract when a lawsuit emerges. Not saying that model doesn't have some challenges to bring in, but, anytime a lawsuit emerges, the attorneys have to challenge a bank that has different governing laws and exportation laws.

  8. #8
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    While this is all very bad, I would just say to look who the attorney on file is for at least 2 of these cases.

    If you know dont know anything about him, he goes after MCA companies. The files he usually works on are usually massive and the positions are usually killing the merchant.

    Obviously make sure your contracts are updated and legal. But assuming you are doing everything by the books you should be fine. Correct me if I'm wrong.

  9. #9
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    Keep your contracts tight and follow the rules. Refund your merchants if they overpay. Give them payment adjustments if they request them with documentation, and actively seek an adjustment if they're bouncing. There have been plenty of cases over the years against MCA companies, but none of them evolved into anything bigger.

  10. #10
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    Why not just have a real and true reconciliation program? Which basically means (in basic English) a “have some mercy” department..

  11. #11
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    Quote Originally Posted by SmartAdvanced View Post
    Why not just have a real and true reconciliation program? Which basically means (in basic English) a “have some mercy” department..
    But that might (GASP!) cost money!

  12. #12
    Member Reputation points: 3624 Fundkite Egor's Avatar
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    Quote Originally Posted by abfunders View Post
    The good news is that it appears that Fundkite's ACH split and CC splits will be protected.

    Reading the some of the complaints it boils down to this:
    While technically not a loan on paper, in order for it to be an MCA, funders have to carry it out as a true MCA.
    Thanks for the mention Micah, one of the few reasons we started pushing this program is to stay ahead of the curve, so far it's paid off.

    Hopefully, we'll see other funders follow suit before it's too late.
    Egor Gagarin
    ISO Relations Rep, FundKite
    Direct: 929-443-3300 | Email: egor.g@fundkite.com
    Web: fundkite.com

  13. #13
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    Quote Originally Posted by abfunders View Post
    The good news is that it appears that Fundkite's ACH split and CC splits will be protected.

    Reading the some of the complaints it boils down to this:
    While technically not a loan on paper, in order for it to be an MCA, funders have to carry it out as a true MCA.

    Haymount:
    "To begin with, the merchant may only seek reconciliation once per calendar month, and then only during the last five business days of a month. See ECF 69-2 at 4 (§ 1.4). Therefore, the contract only permits the merchant to seek reconciliation about 20% of the time."

    "Considering all of these factors, as well as the factual questions raised concerning the defendants' alleged usurious intent, the Court concludes that the Complaint has adequately pled that the MCA agreements at issue here function as loans."

    Lateral:
    "Queen Funding did not have a reconciliation department, did not perform reconciliations, and never refunded a merchant money as required under their reconciliation provision.
    Queen Funding's obligation to provide a reconciliation was contingent on the merchant's providing documentation requested by Queen Funding "in its sole judgment" and in its "sole and absolute discretion." As a result, the court concluded that Queen Funding had the absolute ability to nullify any obligation to reconcile.
    The Contracts described reconciliation as "a courtesy, and that [the funder] is under no obligation to provide same."
    The Contracts stated that Queen Funding had no obligation to do a reconciliation "if the Merchant fails to furnish the requested documentation within five (5) business days following the end of a calendar month."

    Also, one BIG GEM from all of them:
    If an "event of default" is a rejected ACH, by definition MCA companies have 100% protected themselves. Since an ACH bounce is a precursor to a reconciliation event, which can only happen once/month, which means that if have an ACH rejection on the 1st and the only time to do a reconciliation is on the 18th, the MCA will always win.

    Careful out there!
    Wow good to Know! your the man Micah!

  14. #14
    Quote Originally Posted by TheUnderwritingProdigy View Post
    My collection lawyer just e-mailed me this.

    Client Advisory - Negative MCA Authorities From SDNY

    Please be advised that in the last two months, three adverse decisions have come out in SDNY against MCA cases involving ACH debit transactions. In each case, the Court looked beyond the three factor test historically used by New York courts to determine that MCAs are not usurious loans and, instead, applied a different test to determine that the transactions were usurious loans or plausibly alleged usurious loans. Although in differing procedural contexts, the Court sustained RICO claims against MCA companies and/or their principals in each case. The decisions are incredibly negative and, worse still, were issued by three different federal judges, rather than a single outlier judge. There are several other cases in front of the same judges and it seems very likely that we’ll see at least 5-6 negative federal decisions in 2022. The three negative decisions have already circulated among judges in S.D.N.Y. and various state court judges around New York. The 3 federal cases in question are:

    Lateral Recovery LLC v Queen Funding, LLC, 2022 U.S. Dist. LEXIS 129032 (S.D.N.Y. July 20, 2022)

    Haymount Urgent Care PC v GoFund Advance, LLC, 2022 US Dist. LEXIS 112768 (S.D.N.Y. June 27, 2022)

    Fleetwood Servs., LLC v Ram Capital Funding, LLC, 2022 US Dist. LEXIS 100837 (S.D.N.Y. June 6, 2022)


    Some of the issues can be mitigated by updating MCA contracts and others will require significant focus on best practices.
    old, outdated contracts and bad players and bad practices. everyone else should be fine

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