New York Case A Victory For The Merchant Cash Advance Industry | Troutman pepper

Providers of cash advances repaid by the sale of future receivables in New York may have more 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 IBIS Capital Group, LLC v Four Paws Orlando LLC. The decision reaffirms the position consistently taken by New York courts that “For a genuine loan, it is essential to provide for absolute repayment and in any event. [and where] payment or performance [of an agreement to repay funds advanced] is based on a contingency, the agreement is valid even if it provides for a return higher than the legal interest rate. “

Under section 190.40 of the New York Criminal 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 grounds that the payments demanded a usurious interest rate. IBIS sued Four Paws for breach of contract and Four Paws cited criminal usury as an affirmative defense.

In assessing whether the agreement violated New York’s criminal usury law, the court first considered whether a future receivables buy and sell agreement qualifies as a loan. The court cited extensive New York precedent for the position that in order to constitute a loan, the principal sum given to a party must be absolutely repayable and not dependent on future events. The court then cited provisions in the agreement 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 Code. of uniform trade (which does not govern loans). According to the court, these provisions indicated that the transaction was not a loan and was not subject to usury.

The court also considered Four Paws’ contention that the agreement established a “fixed, limited 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 there was one, the defendants’ usury defense would always fail because “the contract did not give rise to any liability in the event of such a provision. failure of the seller’s business because it could not generate enough revenue to continue operating [and thus make payments]. The court also noted that Four Paws was not required to make unrelated payments to cover shortfalls and that the agreement did not have a specific end date by which all amounts owed by Four Paws would become payable.

The court further said that even if the deal created a loan, there would be no violation of the New York Criminal Usury Act because Four Paws could not show that IBIS had the intention to charge a usurious interest rate. To this end, to commit criminal usury, a person must enter into the agreement knowing that they are charging interest above 25%.

The court said it was impossible for IBIS to have such an intention when entering into the deal because future sales of Four Paws 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% needed to achieve a wear rate.

Finally, the court refused to charge an interest rate on the parties’ transaction based on the initial two-week repayment period. He noted that, since IBIS ‘right to collect its share of the sales proceeds was variable, in doing so “requests the court to [impermissibly] Treat variables that have been subjected to many changes during tuning as constants. The court said it was “fundamentally impossible for the parties to have a usurious intention because it was mathematically impossible for the parties to calculate the equivalent of an interest rate at the time they entered into the agreement. ‘Agreement. The only time the parties could have had sufficient data to calculate the comparable equivalent of an interest rate would have been too late for IBIS to have usurious intent. “

Pepper dots

  • Providers of cash advances repaid by the sale of future receivables in New York may have more 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 fully repayable and not depend on a future event or set of circumstances beyond the control of the parties to the agreement.

  • For a loan to be considered 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 limit, which is not possible. when there is no fixed repayment date and the amount of the payments depend on the quality of the receivables purchased.


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