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 cash advance to a merchant (MCA) was not a “disguised loan” and, therefore, was not subject to the Criminal Usury Act. Florida. MCA buy and sell contracts, 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 earnings from a trader by MCA. However, some traders have claimed that ACMs 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, the Florida Third District Court of Appeals issued a reasoned opinion finding that an MCA purchase and sale contract was not a loan and therefore was not subject to the Criminal Usury Act. Florida. This move sets a good precedent for MCAs facing requalification requests in Florida and welcome advice for MCA companies doing business with Florida traders.

In 2016, Merchant Capital sued Craton for the default of an MCA transaction. Craton responded with a counterclaim of 12 counts. In a nutshell, Craton argued that the purchase and sale contract was a disguised loan and that Merchant Capital violated Florida’s criminal usury law. The parties have filed concurrent summary judgment motions 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 usury laws. Florida.

Craton appealed to the Florida Third District Court of Appeals, arguing that the court of first instance made a mistake finding that the agreement 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 absence of a provision in the agreement allowing for “forgiveness” or “forgiveness” of “debt”, security that Merchant Capital has taken 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 agreement. 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 on Craton’s ability to generate income. Furthermore, and contrary to Craton’s assertions during the dispute, the owner’s personal deposit does 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 layout, which was designed to calibrate the drawdowns of Craton’s bank accounts based on the ups and downs of Craton’s business.

Ultimately, the Third District Court of Appeal upheld the trial court’s judgment, ruling that the purchase and sale contract was not a loan. Better yet, the one-page court order provided a basis for its ruling by citing several favorable Florida rulings. As such, this ruling sets a good legal precedent for MCA companies arguing similar claims. Notably, the court cited case law for the proposition that an MCA agreement is not a loan where “the repayment obligation is not absolute, but rather subordinate or dependent on the success of the underlying business.” . The court also cites an authority recognizing that a transaction is not a loan where “part of the investment is at speculative risk”.

To take with

The Market capital This move is very good news for MCA companies doing business with Florida merchants. The underlying lawsuit involved several issues commonly debated 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-crafted deal on its own will not fully protect MCA companies from successful requalification claims. Courts in states other than Florida have reclassified MCA’s purchase and sale contracts as loans based on how the parties deal, advertising, and other factors. Although useful, the Market capital the decision does not address the practices outside of the agreement which could present a risk of requalification. Businesses 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.