Florida Court Affirms That Merchant Cash Advance Product Not Subject to Usury StatuteThis month, a Florida appellate court held that a merchant cash advance (MCA) purchase and sale agreement was not a “disguised loan” and, therefore, was not subject to Florida’s criminal usury statute. MCA purchase and sale agreements, which offer merchants a fast and efficient way to obtain funding for their operations, are not loans. Rather, these agreements constitute the purchase of a merchant’s future receipts by the MCA company. However, some merchants have claimed that MCAs are “disguised loans” subject to their respective states’ usury law. While several states have well-developed case law differentiating loans from the purchase and sale of receivables, Florida suffers from a relative lack of authority on the issue. Fortunately, in Craton Entertainment, LLC v. Merchant Capital Group, LLC, Florida’s Third District Court of Appeal issued a reasoned opinion holding that an MCA purchase and sale agreement was not a loan, and therefore not subject to Florida’s criminal usury statute. This decision provides good precedent for MCAs facing recharacterization claims in Florida and welcome guidance for MCA companies doing business with Florida merchants.

In 2016, Merchant Capital sued Craton over the default of an MCA transaction. Craton responded with a 12-count counterclaim. In a nutshell, Craton contended that the purchase and sale agreement was a disguised loan, and that Merchant Capital violated Florida’s criminal usury statute. The parties filed competing motions for summary judgment on their respective claims and counterclaims. Ultimately, the trial court ruled in favor of Merchant Capital, holding that the underlying transaction was the sale of future receivables subject to a reconciliation provision, not a loan subject to Florida’s usury laws.

Craton appealed to Florida’s Third District Court of Appeal, arguing that the trial court erred by holding that the purchase and sale agreement was not a loan. Specifically, Craton claimed that the agreement contained all of the characteristics of a loan. For instance, Craton cited the common practice of subjecting the business to a credit check, the lack of a provision in the agreement allowing “forgiveness” or “voiding” of the “debt,” the security interest Merchant Capital took in Craton’s assets, and the personal guarantee signed by Craton’s owner.

In response, Merchant Capital argued that the plain language of the agreement stated that the parties contemplated a buy-sell agreement. Perhaps more importantly, the agreement itself did not bear the hallmark of a loan: the absolute right by the party advancing the funds to demand repayment. Instead, Merchant Capital’s ability to obtain any funds from Craton was expressly conditioned on Craton’s ability to earn revenue. Moreover, and contrary to Craton’s assertions during the litigation, the owner’s personal guarantee did not guarantee repayment. Rather, Craton’s owner guaranteed Craton’s performance under the purchase and sale agreement. Merchant Capital also referenced the reconciliation provision, which was designed to calibrate draws from Craton’s bank accounts based on the ebbs and flows of Craton’s business.

Ultimately, the Third District Court of Appeal affirmed the trial court’s judgment, holding that the purchase and sale agreement was not a loan. Even better, the court’s one-page order provided a basis for its decision by citing several favorable Florida decisions. As such, this decision provides good legal precedent for MCA companies litigating 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 contingent on or dependent upon the success of the underlying venture.” The court also cites authority recognizing that a transaction is not a loan where “a portion of the investment is at speculative risk.”

Takeaway

The Merchant Capital decision is very good news for MCA companies doing business with Florida merchants. The underlying lawsuit involved several commonly litigated issues in the MCA space, and the court unambiguously came down on the side of the MCA company. This case also illustrates the importance of a carefully structured purchase and sale agreement. Keep in mind, however, that a well-crafted agreement alone will not fully protect MCA companies from successful recharacterization claims. Courts in states other than Florida have recharacterized MCA purchase and sale agreements as loans based on the parties’ course of dealing, advertising, and other factors. While helpful, the Merchant Capital decision does not address practices outside of the agreement that could pose a recharacterization risk. Companies should invest time and resources to perform internal and external audits of all business processes, including marketing, websites and social media, and internal policies and procedures to monitor for compliance with the various state laws differentiating loans from MCAs.

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Photo of Lauren G. Raines Lauren G. Raines

Lauren Raines is a member of the Banking and Financial Services Practice Group and the Real Estate Practice Group. Lauren divides her time between transactional and litigation matters and regularly handles both commercial lending transactions and financial services litigation. This hybrid practice has…

Lauren Raines is a member of the Banking and Financial Services Practice Group and the Real Estate Practice Group. Lauren divides her time between transactional and litigation matters and regularly handles both commercial lending transactions and financial services litigation. This hybrid practice has allowed Lauren to better serve her transactional clients by advising them on the potential areas of conflict that could arise later in litigation, and to effectively advocate for her litigation clients due to her broad understanding of real estate principles.

Lauren has successfully handled countless contested commercial and consumer mortgage foreclosure trials for banks and mortgage servicers across the state of Florida. Lauren also has experience handling lender liability claims, usury actions, lien priority claims, fraudulent transfer claims, and violations of federal and Florida consumer protection statutes. Lauren also regularly represents merchant cash advance companies in enforcement actions, bankruptcy litigation and defending against usury, RICO, preference and lien avoidance claims.

Photo of Christopher K. Friedman Christopher K. Friedman

Chris Friedman is a regulatory compliance attorney and litigator who focuses on helping consumer finance companies and small business lenders, as well as banks, fintech companies, and other participants in the financial services industry, address the challenges of operating in a highly regulated…

Chris Friedman is a regulatory compliance attorney and litigator who focuses on helping consumer finance companies and small business lenders, as well as banks, fintech companies, and other participants in the financial services industry, address the challenges of operating in a highly regulated sector. Chris focuses on both small business lenders and alternative business finance products and has helped non-bank small business lenders, banks who make small business loans, commercial credit counselors, lead generators, and others in the industry. He helps clients launch new products, conduct due diligence, engage in compliance reviews, evaluate litigation risk, and solve some of the unique legal problems faced by companies who work with small businesses. In that vein, Chris has written extensively about the upcoming rulemaking related to Dodd-Frank 1071, which will require data collection and reporting by companies making loans to certain small businesses.

Photo of Brian R. Epling Brian R. Epling

Brian Epling assists financial services clients, including small dollar lenders, auto finance companies, and mortgage servicers, with navigating regulatory compliance and litigation issues.

On the regulatory compliance side, Brian has assisted financial services clients with policies and procedures to comply with state and…

Brian Epling assists financial services clients, including small dollar lenders, auto finance companies, and mortgage servicers, with navigating regulatory compliance and litigation issues.

On the regulatory compliance side, Brian has assisted financial services clients with policies and procedures to comply with state and federal law and investor requirements. With respect to litigation, practicing in both Tennessee and Kentucky, Brian has successfully argued dispositive motions and appeals involving alleged violations of the Truth in Lending Act, Real Estate Procedures Act, and Fair Debt Collection Practices Act. Additionally, he has represented auto finance companies in administrative matters against the state. View articles by Brian.

Photo of Shelby D. Lomax Shelby D. Lomax

Shelby Lomax is an associate in Bradley’s Banking and Financial Services Practice Group.

Shelby received her J.D. from Belmont University College of Law, where she served as associate editor for the Belmont Law Review, treasurer of the Student Bar Association, and president…

Shelby Lomax is an associate in Bradley’s Banking and Financial Services Practice Group.

Shelby received her J.D. from Belmont University College of Law, where she served as associate editor for the Belmont Law Review, treasurer of the Student Bar Association, and president of the Women’s Law Organization. Shelby earned a B.S. in Sport Management from Florida State University.