Sunday, February 10, 2019

FYI: Fla Circuit Court Holds Factoring Agreement Not a Usurious Loan Under New York Law

The Circuit Court of the First Judicial Circuit in and for Santa Rosa County, Florida recently rejected a borrower's argument that a purchase and sale agreement for future receivables constituted a "loan" that was unenforceable under New York usury law, because payment to the creditor was not absolutely guaranteed, but instead contingent, and thus, not a loan subject to the law of usury.


A copy of the order is attached.


A business funding entity ("Creditor") entered into a Purchase and Sale Agreement ("Agreement") with a pharmaceutical clinic ("Borrower"), which agreed to sell its future receivables with a face value of $586,500.00 to Lender for an upfront discounted price of $425,000.00. 


The Agreement was backed by a security agreement and guaranty executed by the Borrower's principals. 


The Agreement was for an indefinite term, contained a Reconciliation Clause (permitting the Pharmacy to request that Creditor reconcile its payments with actual receipts), but did not guarantee absolute repayment under all circumstances, providing that bankruptcy or otherwise ceasing operations would not constitute a breach or default under the Agreement. 


However, the parties agreed that a transfer or sale of all or substantially all of the Borrower's assets would constitute a default, and entitle the Creditor to enforcement the personal guaranty and security agreements for the full purchase amount of $568,500.


The Borrower defaulted by transferring its assets in violation of the Agreement.  Accordingly, the Creditor filed suit to collect amounts recoverable under the Agreement.  The Creditor moved for summary judgment, arguing that no genuine issues of material fact existed, as the Borrower had defaulted under the Agreement by improperly transferring its assets. 


Although the Borrower did not dispute that it defaulted under the Agreement, it argued that the Agreement was unenforceable under New York law, because if the agreement were deemed a loan, the repayment schedule amounted to a as usurious interest rate of approximately 65%.


Under New York law, it is presumed that a transaction is not usurious.  The defense only applies if the agreement in question is a loan or forbearance of money.  NY Capital Asset Corp. v. F & B Fuel Oil Co., Inc., 55 Mis. 3d 1229(A) at *5 (N.Y. Sup. Ct. Mar. 8, 2018). 


The Court noted that, in determining whether a transaction is a loan, New York courts focus upon whether the plaintiff is entitled to absolute repayment under all circumstances or whether payment rests upon a contingency.  Id. If repayment is absolute, the agreement is a loan, and the defense of usury may be applicable; however, if payment rests upon a contingency, the agreement is not considered a loan and is otherwise enforceable despite providing a return above the legal rate of interest.  Id.; Colonial Funding Network, Inc. v. Epazz, Inc., 252 F. Supp. 3d 274, 281 (S.D.N.Y. 2017)(internal citations omitted).


Here, the Court noted that the Creditor was not absolutely entitled to repayment under the Agreement, due to the aforementioned terms that: (i) the Borrower would not owe anything to Creditor and would not be in breach or default under this Agreement if it filed bankruptcy or otherwise ceased operations in the ordinary course of business; (ii) the Borrower agreed to sell future receipts "without recourse [except] upon an Event of Default," and; (iii) the Agreement contains a Reconciliation Clause, is for an indefinite term, and does not consider bankruptcy a default. 


Accordingly, the Court held, the Agreement was not a loan under New York law and, as such, was not subject to the law of usury.


The Court further rejected the Borrower's argument that the Agreement was a loan subject to the defense of usury due to the security and guaranty agreements ensured Creditor's entitlement to because the Creditor's right to absolute repayment was still contingent upon an Event of Default as defined in Section 3.1 of the Agreement such as the transfer of all or substantially all of the assets of the business, as took place here. 


Significantly, a default under the Agreement did not include the Borrower 's failure to remit payments because it "ceases operations in the ordinary course of business" under which Creditor would be entitled to nothing. Thus, the security and guaranty agreements did not guarantee the Creditor absolute repayment and do not convert the Agreement into a loan.


Accordingly, summary judgment was granted in favor of the Creditor, and against the Borrower, and the Court also held that Creditor was entitled to a sum of $122,423.00 plus fees and costs due under the Agreement.




Ralph T. Wutscher
Maurice Wutscher LLP
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