Southern District of New York Finds Merchant Cash Advance Financier (“MCA”) Really Operated as Disguised Lender
From an article Written by: The Rodman Law Group, LLC
For those operating in the MCA space, New York federal and state courts hold a preeminent role in guiding FinTech companies to structure non-loan products in ways that are alternative, at times clever, yet legally compliant. Recently, the U.S. Bankruptcy Court for the Southern District of New York found certain MCAs as disguised loans.[i]
By way of background, Radium2 entered into a series of MCA transactions with customer and receivables-seller J.P.R. Mechanical, and most of its facility structure complied with existing New York law, except for one small aspect of its reconciliation provision.
The court summarizes established New York law:
“The hallmark of a loan is that the lender is absolutely entitled to repayment under all circumstances, or put otherwise, the principal sum is repayable absolutely. New York courts usually weigh three factors in making that determination: (1) whether there is a reconciliation provision in the agreement; (2) whether the agreement has a finite term; and (3) whether there is any recourse should the merchant declare bankruptcy. Within the first two of these factors, courts examine whether the merchant could practicably invoke the reconciliation provision, and whether, even if the agreement purports to have no maturity date, it has a ‘de facto fixed term.’ Courts also at times consider a question the parties did not emphasize here: whether the daily payment rates appear to be good faith estimates of the merchant’s revenues. The root of all of these factors is the transfer of risk. Where the lender has purchased the accounts receivable, the borrower’s debt is extinguished and the lender’s risk with regard to the performance of the accounts is direct, that is, the lender and not the borrower bears the risk of non-performance by the account debtor.”[ii]