In an industry characterized by multi-billion dollar corporations, Christopher Cooley’s dental equipment and supplies distribution company, Parkway Dental Services LLC, punched above its weight. But that all changed when the coronavirus pandemic hit, as its overseas product makers began operating erratically and many of its customers shut down their businesses.

And now the New Jersey company is part of a litigation trend after turning to merchant cash advance companies, and its debt spiral has begun. One breakthrough turned into another. Meanwhile, as the gross revenues of the family business plummeted, merchant cash advance companies continued to collect their payments from Parkway.

Each merchant cash advance company was debiting about 15% of its future receivables, and Parkway quickly discovered that the merchant cash advance companies were collectively debiting about 45% of its daily receipts.

The effective interest rate on the combined cash advance of $1.8 million was above New York usury law and required a relatively short repayment period. But because these merchant cash advances were not considered loans under applicable state law, usury laws did not protect Parkway.

And two of those cash advance companies refused to reduce Parkway’s $5,000 daily repayment to $1,000 when its collections dried up and continued to electronically debit Parkway’s checking account for an amount higher.

The original deal required a personal guarantee from Cooley and a confession of judgment. When the lenders could no longer debit Parkway’s account, they obtained a default judgment. They froze Parkway’s accounts, rendering the business inoperable, but Cooley was still responsible for the money.

The lenders appeared to have contacted everyone who knew Cooley, including his teenage daughter who he said called him crying at a gas station because her bank account to which her father was a co-signer was frozen.

Cooley said in an interview that he started taking medication for his heart and for sleeping. He feared it was only a matter of time before lenders found a way to withdraw money from his wife’s retirement accounts.

“Do you know what it’s like to look your wife in the eye and tell her how much of a failure you are?” said Cooley, who now fears his only option is personal bankruptcy. ” I am broke. I wondered if it even made sense to live.

Loans, not the sale of receivables

Now, federal judges, who sit in the U.S. District Court for the Southern District of New York, have issued rulings finding that payment terms provided by cash advance companies to merchants are loans and not, like those companies asserted, a veritable sale of receivables.

These merchant cash advance companies, such as those of Haymount Emergency Care vs. GoFund Advance, Lateral recovery against Queen Fundingand Fleetwood Services v. Ram Capital Fundingclaim that their business model is to purchase future receivables and then collect the advance plus an additional amount by debiting the borrower’s daily or weekly collections.

But this payment obligation usually has an effective annual interest rate in the triple digits, a penalizing amount for many small and medium-sized businesses that can result in crippling debt.

Now, because of these federal decisions, the tables may have turned.

Shane Heskin, a partner at White & Williams in New York, is representing debtors in all three cases. Merchant cash advance companies all rely on laws made in New York that have found their way of doing business to be legal. And he said they could legitimize those merchant cash advance lenders by having them assume the risk of loss — a feature of a loan — and not have one-way contracts.

“Right now it’s the wild, wild West, with no regulations whatsoever,” Heskin said.

Heskins shared an exhibit in one of his cases in which an enforcer harassed his client, whose company went through a tough time causing him to default when he missed two payments, as per the contract.

On registration, a man said, “You won’t get my name. I told you that’s not my way of doing things. I prefer to do it the easier way, but if it’s the hardest way, that’s no problem. He then allegedly harassed the debtor, but as claimed by the business owner who received the call, more cordially than during their initial conversation.

Earlier, in a text message exposure in state court docketpresumably the same man had another exchange with the business owner about payments.

Although attorneys for these merchant cash advance companies did not respond to a request for comment, several attorneys and business owners provided insight into how these businesses operate and from the perspective of all parties to a given transaction.

“Truly a high interest loan”

The merchant cash advance arrangement owes its origin to the widespread use of credit cards in the 1990s and the ease of electronic debits. AdvanceMe, a Georgia-based company, filed the first patent on the technology, according to court documents. But in 2007, a A Texas judge struck down the patentopening the door to competitors.

The sector took off after the 2008 financial crisis as major banks consolidated and avoided taking out risky loans. And unlike a payday loan, its predecessor, these advances are for businesses — not individuals — and the industry is unregulated by financial protections, such as the Dodd-Frank Wall Street Reform Act and consumer protection.

Dodd-Frank authorized the creation of the Consumer Financial Protection Bureau, which regulates payday lenders. In the MCA industry, there are no licensing, training, or ethical requirements for a person to become a broker. But merchant cash advance lenders will say they provide business loans that, due to the decline of small banks, the banking industry often won’t touch.

Court documents show that in Fleetwood, a Texas-based company providing golf course construction and related services in Dallas, received $100,000 in financing from Richmond Capital Group LLC for “future receivables” of $149,900. The financing was provided under a merchant cash advance agreement, with terms that included, in the event of default, the owner of Fleetwood would be personally liable under a guarantee.

Richmond advanced $50,000 but declined to advance the remaining amount and began debiting Fleetwood’s account, according to the notice. Fleetwood requested a “brief pause in its daily payments” as it did not receive expected customer payments and its receivables turned out to be lower than expected. In response, the debt collector refused to stop his collection activity.

Richmond would charge nearly $45,000 more than it was entitled to under its deal, but refused to make an agreed reconciliation – a red flag for attrition when the cash advance company of the Merchant essentially did not bear the risk of loss related to Fleetwood’s claims, according to court documents. Additionally, the agreement did not enforce a fixed term and required a remedy when Fleetwood filed for bankruptcy.

Since a forum and governing law clause – found overwhelmingly in most trade agreements – required a judge to hear the dispute in New York, the court ruled in the opinion that the three-digit annual interest rate could be criminally usurious, and therefore the repayment obligation would be deemed uncollectible under state law.

Alan Rosenberg of Markowitz Ringel Trusty + Hartog in Miami. (Courtesy picture)

Additionally, Richmond will face civil RICO claims because the lender used emails and electronic debits to collect on its obligations, according to the ruling.

Alan R. Rosenberg is a partner at Markowitz Ringel Trusty & Hartog in Miami, whose practice includes his role as trustee in bankruptcy for a portfolio of merchant cash advance companies.

He said merchant cash advance companies have traditionally avoided bankruptcy filings because they didn’t want their business practices to fall under the scrutiny of a federal judge and inadvertently become the company that ruined the business. ‘industry.

“You don’t want to be the guy, you don’t want to be the person who ruins everything for everyone,” Rosenberg said.

Since the federal judges issued the three rulings, they caught the attention of New York Supreme Court Justice Leon Ruchelsman.

In the case, HT Bar Capital v. Parkway Dental Services, which had a similar set of circumstances to federal cases, Ruchelsman overturned the previous default judgment. Ruchelsman cited new analyzes of federal affairs interpreting merchant cash advances as loans, subjecting them to usury laws.

Ruchelsman wrote in the order that the debtor’s arguments, advanced by Haskin, raise “significant defenses as to whether the agreement, in this case, is truly a high-interest loan,” a departure from previous rulings. courts in the State of New York.

The decision gave hope to Cooley, the owner of Parkway.

The state judge added, “The federal courts have engaged in a deeper and more rigorous review of merchant cash advance agreements, reviewing the agreement in a holistic and comprehensive manner and the findings to which they have reached are convincing.”