A Surprising Show of Hands: The Impact of MCAs
Written By: Jason M. Medley, Esq., Partner, Spencer Fane LLP
Earlier this month, I had the honor of speaking on a panel for the American Bankruptcy Institute (“ABI”) in Vail, Colorado (tough gig, I know). I was asked to speak on the impact of the Merchant Cash Advance (“MCA”) industry. Specifically, I was asked to address the history and development of the MCA industry, true sale issues, and how to deal with their infamous practice of unauthorized stacking, the tortuous interference with account debtors and their seemingly predatory “lending” practice. This is a topic we are familiar with in the factoring industry, and anyone from the IFA could have shared their own war stories(1). But what happened during the panel presentation was surprising and indicative, and I wanted to report back and share my experience with you.
There were about 60 people in attendance, including bankruptcy judges and bankruptcy lawyers from the mountain region. At the beginning of my presentation, I asked the group to raise their hands if they had ever dealt with an MCA. There was nearly a unanimous show of hands. Almost everyone in attendance had dealt with an MCA (shocking, I know). Importantly, the bankruptcy attorneys that represent debtors all felt that their clients were “forced” into bankruptcy because of the seemingly usurious MCA “loan”. In short, they blamed the MCA for the bankruptcy. Some of the judges had been close to ruling on lien priority, usurious loan vs. true sale classification, and other issues presented by the presence of an MCA, but they all reported that settlements were reached before any written opinions were issued. Nonetheless, the judges reported that they were being briefed on the issues and took note of the comments and feedback shared during the panel.
You will be proud to know that we properly educated the group on the nuances and troubles (my opinion, and not the opinion of the ABI or IFA) with the MCA industry. It was indicative, from the large show of hands, that many businesses dig deeper holes when they get an advance from an MCA. Right before the panel presentation, I settled an MCA dispute on behalf of a borrower, where the effective yield was in excess of 60%. That seems low compared to some horror stories IFA members have shared with me.
It was made obvious from the feedback of both judges and lawyers that the tide is changing, and the political landscape is becoming unfavorable to the MCA industry. Recently, the New York Attorney General sued a bunch of MCA’s for “predatory lending”. The complaint is a scathing indictment(2). The law professor on our panel opined that the practices exhibited by MCA’s could give rise to a racketeering violation under the Racketeer Influenced Corrupt Organizations Act (“RICO”); a recent second circuit court opinion seemed to agree(3). I can report that our firm has a few cases pending and that are about to be filed against MCA’s for tortuous interference. I think the tide is about to change. If you find yourself dealing with these issues, do not give up. You are not alone in your battle.
This is a good opportunity to remind you to include the negative pledge/tortuous interference warning notice on your UCC1 financing statements (this goes a long way towards supporting a claim of tortuous interference), and to routinely reverify or renotify account debtors, as well as run periodic lien searches on your existing clients (I call that the due diligence family reunion; it is good to do every 4-6 months if possible), and to remind your clients on the frontend (as opposed to just leaving it in the fine print of your factoring agreement) that they are prohibited from taking on junior secured debt. If your client asks for an increase in their line or if they ask you to advance funds on their purchase orders or inventory, be mindful that should you decline, they are likely to seek funds from an MCA in desperation. Keep all of these things on your radar.
The panel discussion ended with this question: what do you think the future holds for the MCA industry? I am curious to hear your thoughts on this question.
(1) I am compiling war stories, so if you have one to share in confidence, please feel free to email me.
(2) Press Release: Attorney General James Sues Large-Scale Predatory Lending Operation Targeting Small Businesses (2024). Available at: https://ag.ny.gov/press-release/2024/attorney-general-james-sues-large-scale-predatory-lending-operation-targeting#:~:text=March%205%2C%202024,disguised%20 as%20merchant%20 cash%20 advances.
(3) See Fleetwood Servs., LLC v. Richmond Cap. Grp. LLC, No. 22-1885-CV, 2023 WL 3882697 (2d Cir. June 8, 2023).
The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.