A merchant cash advance (“MCA”) is a fancy way of saying that a business — called a “funder” — will give a business some cash and the funder will get a cut of the business’ sales. Usually, the funder will just take money out of the business’ bank account on a daily or weekly basis.
MCA contracts are usually prepared by the funder who is based in New York and are controlled by New York law. So if you have a defaulted MCA, in Kansas, the legal action probably starts in a state the Kansas business owner has never visited. And is a little bit of a bind.
Here’s the one tip for the question: What kind of lawyer does a Kansas business owner need?
Kansas is now a commercial financing disclosure state. A bill, Senate Bill 345, became law when it was signed by Governor Laura Kelly on April 12, 2024. The law takes effect July 1, 2024 and includes loans, lines of credit, and buying future receivables for a business of up to $500,000. Including an MCA.
If the entity is in the business of doing more than five transactions per year with any Kansas business, then that entity must provide a written disclosure at or prior to closing that includes the amount of the advance, the total amount repaid, the total dollar cost and the payment frequency.
No private right of action by lender’s customer. Only the KS AG has a right of action under the KS disclosure statute. – Penalties: $500 per violation, up to $20,000. – Penalties: If prior written notice given, $1,000 per violation, up to $50,000. – I.e. business can’t sue under statute. – Statute doesn’t provide MCA is void if not executed with disclosure. – Lack of disclosure could be a good reason to bitch at AG or use as leverage.
Suppose someone does a usurious transaction. What do you do with it?
“Usury” is the taking of a greater rate of interest for money loaned, than the law allows. The usury rate of written loans in Kansas is set at 15% per year. K.S.A. 16-207(a). This law does not apply to business or agricultural transactions for money loaned other than for personal use. In addition, the Kansas usury law cannot be used as a defense to an action for enforcement of an obligation of a corporation. K.S.A. 17-7105. Thus, if an MCA is a loan, there is probably little defense to a claim against our business customer under the Kansas usury law.
New York’s usury rules usually matter more, because most contracts choose New York law. New York caps loan interest at 16% a year under civil law and 25% under criminal law. New York’s leading MCA test came from a Kansas company. In LG Funding, LLC v. United Senior Properties of Olathe, LLC, 181 A.D.3d 664 (2d Dept 2020), an Olathe business sold receivables for $100,990. The funder could take 15% of daily revenue, up to $2,499 a week, until it collected $129,267.20. The court let the usury defenses go forward but dismissed the merchant’s usury counterclaim.
According to LG Funding, the distinction between a ‘true sale’ and a loan was in the contract. Namely, if the payments were ‘adjustable to sales’, had a ‘finite duration of the transaction’, and if the funders could ‘still receive payment’ if the merchant declared bankruptcy. In Fleetwood Services v. Richmond Capital Group the Second Circuit ruled on June 8, 2023, that an MCA was in fact a ‘usurious loan’. This was based on the fact that the payments were at the discretion of the funders and that the guarantors were liable in the case of a bankruptcy filing from the merchant. This was a summary order and was not binding precedent in the second circuit.
(A) They are: MCA funders themselves are being sued by the NY Attorney General.
Order for judgment for over $77,298,631 was signed by New York County Supreme Court Justice Andrew Borrok on February 8th 2024.
The court has ruled against Richmond Capital Group, Ram Capital Funding, and Viceroy Capital Funding. These groups were found to have been issuing illegal usurious loans in the guise of merchant cash advances. The ruling, which came in September 2023, saw the debts owed by the business set aside. Any Kansas merchants with similar contracts should see these rulings as a bargaining chip in negotiations and lawsuits.
A “confession of judgment” is a document you sign which allows a funder to be able to place a judgment against you without actually having to take legal action against you. For the state of Kansas they are voided for consumer credit transactions only. K.S.A. 16a-3-306.
In New York State, the Legislature has made a change to CPLR 3218 as of August 30, 2019. The CPLR 3218 will read as follows (among other things): “A confession of judgment shall be filed in the county in which the defendant resides at the time such defendant signed the confession of judgment or the county in which the defendant resides at the time of filing of the confession of judgment. A business shall reside in any county in which it has a place of business.” A business whose headquarters are in Kansas and who does not have an office in New York should not generally have a confession of judgment entered against it by the clerk of a New York Court.
There is a loophole in the new amendment to the law, passed in 2019 in New York. A New York appellate court recently ruled that the amendment only applied to entries of judgment without an action. A funder can sue the Kansas company in New York and use the signed confession to enter judgment on the lawsuit.
A “forum clause” is a provision in a contract that specifies in which court any lawsuit can be filed. The most common forum clause in MCA agreements stipulates that any lawsuit would be filed in a New York state court, for example in the county of Kings or New York.
A funder can file a suit against a Kansas business in a Kansas district court (the Kansas trial court equivalent).
The United States District Court for the District of Kansas has offices located in Kansas City, Topeka, and Wichita.
The United States Court of Appeals for the Tenth Circuit is the U.S. federal appeals court that hears appeals from the United States District Court for the District of Kansas.
The United States Bankruptcy Court, District of Kansas, serves the entire state of Kansas with offices located in Kansas City, Topeka, and Wichita. So if a Kansas company, or the owner of a Kansas business is in bankruptcy, then MCA claims are filed here in Kansas. A bankruptcy judge could do the same loan vs. sale analysis as the New York courts.
Judgment Enforcement The process to enforce the judgment of another jurisdiction is known as judgment enforcement. A certified copy of the judgment of the New York state court may be filed with the clerk of the District Court in Kansas under K.S.A. 60-3002. The judgment must be filed by a licensed Kansas attorney. The judgment may be enforced in Kansas as if it was entered in the state of Kansas. Under K.S.A. 60-3003, the judgment creditor files with the clerk of the court an affidavit “stating the last known address of the person to be charged, and [gives] notice of the domestication promptly by mail.” Under K.S.A. 60-3004, “A court shall stay enforcement of a judgment while an appeal is pending, providing that the debtor posts a bond or other security as required by the New York law.”
After the funder domesticates the award the funder may go to any court of record in Kansas to file a “Petition for Garnishment.” A garnishment is the process where the funder has the right to attach the money or property of the debtor that is in the possession of a third party. It includes bank accounts or accounts receivable. The debtor must be served and notice of the right to claim exemptions and a right to a hearing. 160 acres of farmland or 1 acre of city land is exempt as a homestead. No dollar limit. Exemption of tools of the trade up to $7,500. One car up to $20,000 exempt. Kansas has opted out of federal exemptions for bankruptcy and the same exemptions apply in bankruptcy.
The answer: it depends. Let’s say the funder already sued the business or already has a judgment against the business in New York. The best lawyer is a New York lawyer. The lawyer who can appear on a New York deadline and try to vacate the judgment or argue the LG Funding factors. Let’s say the New York judgment is docketed in Kansas. The best lawyer is a Kansas lawyer. The lawyer who can try to stay the judgment or argue exemptions at a garnishment hearing. A Kansas lawyer can try to save your personal assets. Let’s say the advance has not been sued on yet. The best lawyer may be a great settlement negotiator. Let’s say the stacked advances are about to push the business over the cliff. The best lawyer may be a Kansas bankruptcy lawyer. Let’s be brutally honest for a minute. Many business owners in Kansas may need a New York lawyer more than they need a Kansas lawyer.
