The New Jersey Attorney General recently filed a lawsuit in New Jersey state court against Yellowstone Capital LLC, its parent Fundry.US LLC, and various Yellowstone subsidiaries and affiliates alleging that the defendants violated the New Jersey Consumer Fraud Act (CFA) and the New Jersey Regulations Governing General Advertising (Advertising Regulations) in connection with marketing and providing merchant cash advances.  Yellowstone and Fundry were also named defendants in a lawsuit recently filed by the FTC for alleged unfair and deceptive acts or practices in violation of the FTC Act in connection with the same activities.

The CFA prohibits the use of:

any unconscionable commercial practice, deception, fraud, false pretense, false promise, misrepresentation, or the knowing concealment, suppression, or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale or advertisement of any merchandise or real estate…whether or not any person has in fact been misled, deceived or damaged thereby….

The Advertising Regulations make various practices unlawful with respect to all advertisements, including:

The making of false or misleading representations of facts concerning the reasons for, existence or amounts of price reductions, the nature of an offering or the quantity of advertised merchandise available for sale.

The NJ AG’s complaint refers to the small businesses and their owners who obtained merchant cash advances from the defendants as “consumers,” perhaps to underscore that the “consumers” protected by the CFA include businesses.  According to the complaint, the defendants violated the CFA through conduct that included:

  • Charging usurious interest rates on small business loans disguised as purchases of receivables
  • Withdrawing money from customers’ bank accounts in excess of the amounts authorized by continuing to withdraw money after a customer had fully repaid the “Purchased Amount” and then failing to make timely refunds
  • Filing confessions of judgment and obtaining judgments against consumers who did not default or otherwise breach the merchant agreements
  • Misrepresenting or concealing from consumers the true nature of the transactions as usurious loans
  • Misrepresenting the amount of the Purchase Price consumers would receive, the amount of fees the defendants would debit from consumers’ bank accounts, and the amount of upfront fees
  • Representing in advertisements that they did not require personal guarantees from business owners when, in reality, they did require business owners to sign personal guarantees of the entire amount funded should the business default

The NJ AG alleges that the defendants violated the Advertising Regulations through conduct that included the misrepresentations regarding personal guarantees as well as their representations in advertisements that they did not require collateral from business owners when, in reality, they did require business owners to execute security agreements providing collateral to the defendants in the event of a default.

In addition to a permanent injunction to prevent future violations of the CFA and Advertising Regulations, the relief sought by the NJ AG includes the maximum statutory civil penalty for each CFA violation, disgorgement of unlawfully acquired profits, rescission of all merchant agreements, and orders requiring the defendants to vacate all unlawfully obtained judgments in their favor against consumers and to file papers sufficient to terminate all unlawfully obtained liens or security interests related to the merchant cash advances.

The FTC and NJ AG lawsuits serve as a reminder that the FTC and state AGs have enforcement authority as to business-to-business activity and that small business loans and other forms of small business financing are often treated the same way as consumer loans for purposes of the FTC Act as well as state laws.