Courts hold that properly structured receivables purchases are not usurious loans

January 27, 2017

A New York court held on two separate occasions that purchases of receivables at discounted prices were not usurious loans under New York law. Platinum Rapid Funding Group v. VIP Limousine Services, No. 604163-15 (N.Y. Sup. Ct. July 10, 2016); and Merchant Cash & Capital v. G&E Asian American Enterprise, No. 605800-15 (N.Y. Sup. Ct. Aug. 2, 2016).

Chuck Gall of Dreher Tomkies LLP in Columbus, Ohio, analyzed these decision and others in a recent article for Commercial Lending Litigation News.

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Gall says the courts found the transactions were not subject to New York’s civil usury limit because New York prohibits corporate merchants and their individual guarantors from asserting the defense of civil usury.

The rulings also said the transactions were not subject to New York’s criminal usury limit because they did not involve loans or forbearances of money. The courts refused to recharacterize the purchases as loans, because the purchasers retained the risk of loss in the event that the merchants failed to generate sufficient receivables to support the agreed upon payments.

Courts have come to similar conclusions when analyzing the laws of other states, Gall notes.

In 2016, In re Burm, 554 B.R. 5 (Bankr. D. Mass. 2016), held that purchases of invoices were not usurious loans under Massachusetts law because the purchaser retained a risk of loss in the event that the invoices were not paid.

But some courts have been willing to recharacterize a purchase of receivables as a usurious loan under certain circumstances, as in Pearl Capital Rivis Ventures, LLC v. RDN Construction Inc., No. 70590/15, 2016 WL 6245103 (N.Y. Sup. Ct. Oct. 25, 2016).

This ruling said a purchase of receipts was a criminally usurious loan under New York law because the agreement between the parties did not expressly provide that the purchaser assumed any risk of loss and permitted the purchaser to seek repayment on a personal guarantee in the event that the merchant failed to pay.

In Koch v. Boxicon, LLC, No. 05‑14‑01424, 2016 WL 1254048 (Tex. Ct. App. March 30, 2016), the court said a purchase of future business income was a usurious loan under Texas law because the agreement provided for a specific and fixed payment obligation that was not contingent on the existence or amount of cash flow.

Gall concludes that the above cases should provide receivables purchasers operating in these states with comfort that they are not violating state usury laws if their transactions are appropriately structured as purchases and sales of receivables and not loans.

To decrease the risk of challenge, the purchase agreement should clearly document the purchaser’s risk of loss in the event that the merchant goes out of business or bankrupt without otherwise violating the agreement and not attempt to insulate the purchaser from all risk of loss through overbroad personal guarantees.

Moreover, the purchaser’s representatives should not expressly state or imply during servicing or collections that the transaction is an absolutely repayable “loan.”  If these steps are taken, a purchaser should be able to avoid a usury violation, but continual monitoring of legal developments in this area is a must, Gall says.