On March 5, 2024, New York State Attorney General Letitia James filed a lawsuit against Yellowstone Capital, a merchant cash advance company, for orchestrating a predatory lending scheme. The lawsuit also names Yellowstone’s founders individually, and 30 other subsidiaries and officers.
The petition alleges Yellowstone exploits small businesses through fraudulent loans at “sky-high interest rates” disguised as merchant cash advances. Additionally, Yellowstone and its subsidiaries and officers allegedly collected billions of dollars illegally from struggling small businesses both in and outside of New York through MCA agreements.
The named lenders and officers have utilized New York courts to do their dirty work. Enforcing the agreements to obtain judgments from the courts and driving merchants even further into debt or financial ruin.
On its face, an MCA agreement appears to help businesses by offering quick access to funding, flexible repayment options, a fast application process, and approval despite past credit problems. MCAs can seem like a financial lifeline, but in reality, the fees amount to usurious loans.
Now, AG Leticia James is pursuing Yellowstone alleging just the same.
The agreements from Yellowstone are fraudulent loans with illegally high interest rates set to fixed payment amounts that Yellowstone debits from the Merchant’s bank account each business day. Yellowstone calls these “purchase and sale of future receivables.”
The petition alleges that Yellowstone’s agreements state that they are buying a portion of the merchant’s future receipts of revenue, and set each merchant’s payments to a fixed, recurring amount that they fraudulently state reflects a specified percentage of the merchant’s future revenue. They claim that if the merchant’s revenue declines in the future, the merchant can “reconcile” their past payment amounts accordingly, obtaining refunds for past payments. Ensuring merchants are never paying more than a set percentage of their revenue. However, the petition alleges that this is all a sham to lure small business owners to sign the loan agreements and to evade New York’s law on high interest rates. The petition states that the transactions are usurious loans (loans with exceedingly high interest rates), not purchases of revenue.
The petition alleges that interest rates for merchants are regularly in the triple digits, reaching as high as 820%. Far beyond both the maximum civil usury rate of 16% and the criminal usury rate of 25%.
The AG alleges that the agreements require a personal guarantee of the owner, as is often the case with an MCA, meaning that when the small business owner eventually defaults simply by not having enough funds to cover a single payment, Yellowstone can sue both the small business and the owner personally for not just the missed payment but the entire remaining balance. Once a Judgment is obtained, the Yellowstone can then levy against the assets of both the small business and its owner.
The AG’s office is seeking to permanently enjoin Yellowstone and its owners from engaging in providing MCAs or profiting from them, as well as ordering Yellowstone to cease collection of payments on MCAs pending the hearing of the petition. The AG will also seek to have the courts declare all usurious, fraudulent, and illegal MCAs issued by Yellowstone as void, have Yellowstone vacate all judgments obtained related to its MCAs, staying execution of such judgments, and dismiss all pending court cases Yellowstone has outstanding with payment of restitution and damages to merchants. All in all, the AG’s office is seeking the return of $1.4 billion from the lenders, money that was collected from small businesses through interest and fees.
Time will tell if the AG’s office will be successful in its pursuit of Yellowstone Capital and associated companies.
If you have a matter involving a merchant cash advance that you need assistance with, contact Frank, Frank, Goldstein and Nager.
