If your MCA payments are overwhelming you and taking too much of your daily or weekly revenues, you are not alone and there is more than one way to handle it. A 2021 decision from the bankruptcy court in Montana, In re Shoot the Moon, LLC, is a good place to start, because it shows what happened when one funder’s paperwork was tested in court.
The story starts in the early 2000s, when Kenneth Hatzenbeller and two other investors established a restaurant business. Over time, it expanded to nineteen separate limited liability companies (LLCs), which operated sixteen restaurants in Idaho, Montana, and Washington. Their credit card sales went to the company through a payment processor, Heartland. The 2007-2009 financial crisis resulted in financial pressure on the restaurants. The business first tried to find other forms of financing, including secured financing. When that funding dried up it turned to MCA companies such as CapCall. From October 2014 through September 2015, it made 18 transactions with CapCall. The documentation called the contracts “merchant agreements”, and UCC-1 financing statements were filed. It got immediate cash in exchange for some of its future receivables, and the amount it promised to pay back was significantly higher than the cash it received. That last part may sound familiar.
In October 2015, all 19 entities merged into one company, which filed for Chapter 11 the next day. A trustee was appointed. CapCall argued that it owned some of the receipts the card processor was holding. The trustee pushed back and argued that these contracts were really loans, not sales. The court agreed. It did not matter whether New York or Montana law governed this issue, it said. It looked at a bunch of factors, like whether the buyer has recourse against the seller, whether the seller continues to service the accounts and commingle the card receipts with the seller’s operating funds, whether the buyer independently investigates the account debtor, whether the seller has a right to excess collections, whether the seller can repurchase the accounts, whether the buyer can change the pricing on its own, whether the seller can alter or compromise the underlying asset, the language of the agreement and how the parties behave. Three of these factors weighed heavily in favor of loans: CapCall retained a right of recourse against the Shoot the Moon entities and several other parties; the receivables were commingled with Shoot the Moon’s operating funds, subject to CapCall’s approval; and the language of the agreements and the conduct of the parties indicated a debtor-creditor relationship rather than a seller-buyer one. The deals were loans, not true sales.
Calling the deals loans opened the door to a second fight: usury. Eleven of the agreements were with a Shoot the Moon company formed under Montana law, and the trustee claimed that they violated Montana’s usury law. CapCall argued New York law applied because the agreements chose New York law, and New York lacks a usury law like Montana. (CapCall is based in New York.) The court, generally, defers to the contract’s choice of law and determined that New York had a reasonable basis to be chosen. But, it ruled, New York law should not apply because, first, it would be contrary to the fundamental policy of Montana’s usury law, to protect vulnerable borrowers, and would circumvent the protections entirely; Montana had a materially greater interest, as the borrowers were formed under Montana law, owned by Montana citizens and run by a Montana citizen from a Montana office, while New York’s only connection was CapCall’s place of business; and Montana law would apply without a choice of law anyway, as the place of contracting, performance, subject matter and parties were largely concentrated in Montana. Finally, the interest rates effectively exceeded the usury limits, and the trustee won on that front.
The trustee was not done. Because the court classified the advances as loans, payments on such advances in the 90 days preceding the bankruptcy filing were transfers on account of antecedent debts. Everyone agreed the Shoot the Moon companies were insolvent. And the payments to CapCall gave it more than it would have received in a Chapter 7 liquidation: because senior secured lenders were not paid in full, CapCall would have had a worthless general unsecured claim. The trustee won a preference claim under section 547(b) of the Bankruptcy Code. Then came attorney’s fees. Montana has a reciprocal fee statute: If an attorney’s fees provision in a contract only lets one party recover its fees, it applies to both parties in an action on that contract. The eleven Montana agreements let CapCall recover its fees for enforcing its rights. The trustee prevailed on those claims, and the court awarded the trustee its attorney’s fees against CapCall.
So what does a restaurant case from Montana have to do with the debits coming out of your account? The court didn’t just take the contract’s label at face value. It had to see what was really going on with the deal and how the parties had conducted themselves. If you have signed a contract that calls itself a purchase of receivables, make sure you understand that the label does not guarantee it will be treated as a sale. State law can matter too. In this case, Montana law had a usury statute while New York did not have one like it. Just because that bankruptcy judge said so does not mean your advance is a loan. This was a single bankruptcy court’s interpretation of a single set of facts and you should seek the advice of a competent attorney regarding your contracts before relying on it.
It is also worth noticing where the funder ended up. CapCall drafted its agreements as purchases of receivables and once they were recharacterized as a loan, and since its security interests were deemed to be junior to the existing creditors, CapCall ended up with nothing and millions of dollars of liability to the estate. A “sale” structure is not risk-free for the funder either.
Delancey Street
So where can you go from here? How do you exit this incredibly stressful situation? Every case is different. At Delancey Street, a business debt settlement company, our advisors look at your agreements with an objective eye and negotiate with your MCA funders for less than the full amount. Delancey Street never sells another loan. We were founded by debt relief specialists and former MCA industry executives. Our fee is a single percentage of the enrolled debt, and it’s specified in writing before we begin any work. We can’t guarantee how much you’ll save or when, and we do not promise outcomes. We are not a law firm. If you’re not in a good place and bankruptcy is the right choice, we’ll introduce you to a vetted, independent bankruptcy attorney. Our advisors, after listening to you, may tell you they can’t win your case, or a better option is available. If so, they will say it on the first call. Remember, you can request a free, confidential consultation with Delancey Street.
