Florida Court Says Merchant Cash Advance Proceeds Not Subject to Usury Act | Bradley Arant Boult Cummings LLP

[co-author: Shelby Lomax]

This month, a Florida appeals court ruled that an agreement to buy and sell a Merchant Cash Advance (MCA) was not a “disguised loan” and, therefore, was not subject to the Criminal Usury Act. Florida. MCA’s buy and sell agreements, which provide merchants with a fast and efficient way to obtain financing for their operations, are not loans. Rather, these agreements constitute the purchase of future receipts from a merchant by MCA. However, some traders have claimed that MCAs are “disguised loans” subject to the usury law of their respective states. While several states have well-developed case law that differentiates lending from the buying and selling of receivables, Florida suffers from a relative lack of authority on the matter. Fortunately, in Craton Entertainment, LLC v Merchant Capital Group, LLC, Florida Third District Court of Appeals issued a Reasoned Opinion stating that a contract to buy and sell MCA was not a loan and therefore not subject to the Criminal Usury Act from Florida. This decision provides a good precedent for MCAs facing requalification claims in Florida and welcome advice for MCA companies doing business with merchants in Florida.

In 2016, Merchant Capital sued Craton for the default of an MCA transaction. Craton responded with a counterclaim on 12 counts. In a nutshell, Craton argued that the buy and sell agreement was a disguised loan and that Merchant Capital had violated Florida’s criminal usury law. The parties have filed concurrent motions for summary judgment on their respective claims and counterclaims. Ultimately, the trial court ruled in favor of Merchant Capital, ruling that the underlying transaction was the sale of future receivables subject to a reconciliation provision, and not a loan subject to lending laws. Florida wear.

Craton appealed to the Florida Third District Court of Appeals, arguing that the court of first instance made a mistake by arguing that the contract of purchase and sale was not a loan. Specifically, Craton claimed that the agreement contained all the characteristics of a loan. For example, Craton cited the common practice of subjecting the company to a credit check, the lack of any provision in the agreement allowing for the “forgiveness” or “cancellation” of “debt”, the security that Merchant Capital took over the assets of Craton, and the personal guarantee signed by the owner of Craton.

In response, Merchant Capital argued that the clear language of the agreement indicated that the parties were considering a buy-sell arrangement. Perhaps more importantly, the agreement itself did not bear the hallmark of a loan: the absolute right of the party advancing the funds to demand repayment. Instead, Merchant Capital’s ability to obtain funds from Craton was expressly conditioned by Craton’s ability to generate income. In addition, and contrary to Craton’s assertions during the litigation, the owner’s personal guarantee did not guarantee reimbursement. On the contrary, the owner of Craton has guaranteed the performance of Craton under the contract of purchase and sale. Merchant Capital also referred to the reconciliation provision, which was designed to calibrate withdrawals from Craton’s bank accounts based on the ebb and flow of Craton’s business.

Eventually, the Third District Court of Appeal upheld the judgment of the lower court, ruling that the purchase and sale contract was not a loan. Better yet, the one-page court order served as the basis for its decision, citing several favorable decisions in Florida. As such, this ruling sets a good legal precedent for MCA companies arguing similar claims. Notably, the court cited case law to assert that an MCA agreement is not a loan where “the repayment obligation is not absolute, but rather depends or depends on the success of the underlying business”. The court also cites case law recognizing that a transaction is not a loan where “part of the investment is at speculative risk”.


the Market capital This move is very good news for MCA companies doing business with merchants in Florida. The underlying lawsuit involved several commonly contentious issues in the MCA space, and the court ruled unequivocally on the side of the MCA company. This case also illustrates the importance of a carefully structured purchase and sale contract. Keep in mind, however, that a well-designed deal on its own will not fully protect MCA companies from successful requalification requests. Courts in states other than Florida have reclassified MCA’s purchase and sale contracts as loans based on how the parties treat, advertising, and other factors. Although useful, the Market capital the decision is not about the practices outside of the agreement which could present a risk of requalification. Companies should invest time and resources to perform internal and external audits of all business processes, including marketing, websites and social media, as well as internal policies and procedures to monitor compliance with various corporate laws. States differentiating loans from MCAs.

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