A proposed class-action lawsuit has been filed against Penn Capital Funding, MapCap Funding, and other merchant cash advance (MCA) companies that used a loophole in Connecticut law to collect unlawful debts and otherwise fraudulently obtain money.
According to the complaint, filed in Manhattan Federal Court, a loophole in Connecticut law allows MCA providers to freeze out-of-state bank accounts of out-of-state businesses that have taken an MCA simply by serving process on a bank with a branch in that state.
The MCA providers say the account freezes are justified because the small businesses attest under oath they owe the debt and are unaware of defenses to any claims. However, New York banned out-of-state confessions of judgment in 2019.
The complaint claims that the defendants used the apparent loophole more than 180 times in 2021 against businesses that operate in New York, freezing their accounts without notice and using duress to obtain repayment.
The class-action lawsuit also alleges that the defendants collected unlawful interest and then went dark after over-collecting money from these businesses, including lead plaintiff Avant Gard Senior Living, a California-based assisted living facility.
The lawsuit is seeking certification of a class of persons in the United States who, on or after February 25, 2018, paid money to any of the defendants under a merchant cash advance agreement with an effective interest rate of excess of 25 percent.
Why This Matters
Whether the court will certify the class remains to be seen. However, this case highlights the longstanding abuses in the merchant cash advance industry. MCAs serve as alternative funding for small businesses that lack access to traditional bank loans and lines of credit.
A merchant cash advance is not a loan but rather the purchase and sale of future sales receivables in exchange for a lump sum of cash that businesses can use for working capital. However, MCA agreements contain onerous terms like confessions of judgment and personal guarantees that jeopardize the business owner’s assets should they default on the agreement.
Because MCAs are not loans, they are not strictly regulated at the state or federal level. However, New York has attempted to rein in the abuses of MCA providers by banning the use of confessions of judgment by MCA providers not domiciled in the state. The apparent loophole in Connecticut’s law has enabled the defendants to circumvent New York’s prohibition on confessions of judgment.
The outcome of this case remains unclear, but it is part of an ongoing trend of litigation and enforcement actions by the Federal Trade Commission against MCA providers. Meanwhile, you have options if your business is struggling under the terms of an MCA agreement.
A properly structured agreement will include a reconciliation clause that requires the funder to restructure the repayment terms if the business experiences a receivables shortfall. The best way to protect the business you worked so hard to build is to contact an experienced debt relief specialist.