The New Jersey Attorney General recently announced a settlement in its lawsuit against Yellowstone Capital LLC, its parent company, and various 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 (MCAs).  The settlement amount is approximately $27,375,000, comprised of the forgiveness of all outstanding balances of New Jersey customers who entered into MCAs with the defendant which is estimated to be approximately $21.75 million, and $5.625 million to  be paid to the New Jersey Division of Consumer Affairs (Division) for purposes that may include restitution, civil penalties, attorneys’ fees, and costs.

The AG’s complaint alleged that 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 customers who did not default or otherwise breach the merchant agreements;
  • Misrepresenting or concealing from customers the true nature of the transactions as usurious loans;
  • Misrepresenting the amount of the Purchase Price customers would receive, the amount of fees the defendants would debit from customers’ bank accounts, and the amount of upfront fees; and
  • 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 AG alleged 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 the Consent Order, the defendants represent that they have not issued or originated MCAs with New Jersey customers since May 2021 and agree to notify the Division before resuming  such activity.  The Consent Order sets forth specific requirements for the terms of any future MCAs that the defendants enter into that are intended to address the practices that were the subject of the AG’s complaint.  Those requirements include:

  • An MCA may not include terms providing that (1) customers only have a specified number of business days after the end of the month to request reconciliation and provide all supporting documents, or (2) there is no grace period while a reconciliation is pending.
  • If an MCA includes terms providing for a specified number of missed payments to be an event of default, the defendants must agree to provide notice of missed payments to the customer via electronic mail or text message within 24 hours of a missed payment and include a reference to the customer’s right to seek a reconciliation.
  • The MCA must be subject to an internal review and notice process set forth in the Consent Order (Review and Notice Process) that specifies the events that must occur before an MCA is submitted to a collections vendor, a UCC Article 9 Section 406 notice is sent, any rights are exercised under a power of attorney clause, or a legal proceeding is initiated through the filing of a complaint.  The Notice and Review Process requires the MCA to be evaluated by designated reviewer who must memorialize a decision to approve a default request in writing.
  • An MCA can only reach a guarantor’s personal assets if there is an event of default where there is a good faith basis to infer fraud, intentional misrepresentation, and/or willful circumvention of the MCA.
  • An MCA shall not include terms requiring customers to treat the transaction as a sale of future receipts for accounting purposes, and shall not include any terms requiring the customer to “waive any rights of privacy, confidentiality, or taxpayer privilege” if the customer claims the transaction is a loan.
  • The MCA must contain certain provisions dealing with reconciliation (Reconciliation Provisions) that include requirements for (1) reconciliation requests to take into account the entire life of the MCA and not be limited to a one month look back period, and (2) elimination of the possibility that a reconciliation can result in amounts owed by the customer.  The Reconciliation Provisions also prohibit the debiting of payments, filing of complaints, or the issuance of UCC notices during the pendency of a reconciliation request where the necessary supporting documents and information has been provided.
  • Enhanced disclosures regarding up-front deductions from the purchase price as specified in the Consent Order must be provided in a customer introduction email, in a summary worksheet signed by the customer vial clickwrap, on the first page of the MCA, and in a pre-funding email.

The Consent Order also includes requirements for existing MCAs for which there has not been an event of default that include compliance with the Review and Notice Process and the Reconciliation Provisions.  The defendants must also cease filing confessions of judgment against any customer and in the event of default, reasonable attorney’s fees must be itemized and state ethics rules for fee-splitting with non-lawyers and charging for internal counsel must be followed.  In addition, when originating any future MCAs and in connection with the ongoing servicing of MCAs for which there has not been an event of default, the defendants must take certain steps to ensure that “independent funding organizations” (IFOs) and “independent sales organizations” (ISOs) deal fairly with customers.  IFOs are third parties that have contracted with a defendant to service an MCA and entered into a master services agreement with a defendant.  ISOs are third parties that receive a commission or referral fee from the defendants for referring a potential customer for an MCA or that assist one or more of the defendants in brokering MCAs by interfacing with ISOs.

Yellowstone and its parent company were also named defendants in a lawsuit filed by the FTC for alleged unfair and deceptive acts or practices in violation of the FTC Act in connection with the same activities.  That lawsuit resulted in a settlement requiring the defendants to pay $9,837,000 to the FTC to be used in providing refunds to the impacted businesses.

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 may be afforded protections traditionally viewed as consumer protections under the FTC Act and state laws.