Factoring Cases from the First Half of 2021
This is a short summary of five cases related to factoring that were issued by courts in the first half of 2021. I will post cases issued in the second half of 2021 in a later entry. These are not all of the cases that are relevant, but these are five cases directly involving factors that are worth considering. I have tried to condense these as much as possible and get to the point without losing too much content about what you need to know.
These cases are from around the nation, so they are not necessarily binding in your specific jurisdictions. I have found, however, that courts tend to be heavily influenced by cases in other jurisdictions since there are usually not an overabundance of factoring cases in any one jurisdiction. Also, it is possible some of these opinions may be reversed on appeal in the coming months. For now, however, the point is these are examples of how at least some courts are looking at your deals and ruling on various issues.
- DS-Concept Trade Invest, LLC. v. Atalanta Corp., 516 F. Supp. 3d 396 (D.N.J., January 29, 2021).
Question: Can a factor waive payment over notification liability for an account debtor by allowing payments to go directly to their client? This issue comes up a lot and is something we constantly warn you to be wary of allowing.
Answer: Yes. Although the court did not rule that the factor actually did waive payment over notification liability in this case, the court found that there was enough evidence to allow this issue to be tried to a jury. The factor allowed one large payment out of over 75 proper payments to be made to the client directly which created a fact issue over whether the factor waived payment over notification liability. Generally, more is required to prove waiver, but the point is this court allowed the case to move forward and for a jury to decide the issue rather than disposing of it as a matter of law.
- Quicksilver Capital v. All Around off. Installation, 2021 N.Y. Misc. LEXIS 3368 (Sup. Ct. N.Y., February 2, 2021).
Question: Is a merchant cash advance (“MCA”) where repayment is not absolute, the agreement is for an indefinite term, and the agreement has a reconciliation provision, a loan subjecting the entity providing the merchant cash advance to usury liability or a true purchase of receivables?
Answer: This is a true purchase. Because the agreement has all of the characteristics cited above, it is not a loan and does not subject the entity making the merchant cash advance to usury liability. This case highlights the three most-cited considerations in determining whether an MCA is a loan or true purchase which directly affects an MCA’s potential usury liability. The first is whether the MCA has a reconciliation provision that allows the entity receiving the money to adjust the daily or weekly cash sweeps to the seller of the accounts. The second is whether the agreement is for a definite or indefinite term. The third is whether the MCA has recourse if it does not fully collect what it is owed. The reconciliation provision seems to be the issue that causes the most problems for MCA entities.
- Advance Servs. Group, LLC. v. Acadian Props. Austin, LLC, 2021 N.Y. Misc. LEXIS 1138 (Sup. Ct. N.Y., May 12, 2021)
Question: Was a merchant cash advance a loan or true purchase of receivables where the MCA retained the sole ability to reconcile the weekly cash sweeps from the client’s bank accounts, and the agreement goes into default if the client declares bankruptcy?
Answer: The merchant cash advance was a loan. Unlike the Quicksilver case above, the MCA’s reconciliation provision was not structured properly and effectively only gave the ability to reconcile the weekly cash sweeps to the MCA entity, not the entity receiving the funds. This coupled with the recourse provision if the client files for bankruptcy or is involuntarily forced into bankruptcy, rendered the MCA a loan which is a problem given the returns that these agreements usually attempt to generate. Interestingly, the court also declined to enforce the agreement’s usury savings clause as a contractually agreed remedy for violating usury laws.
- Capstone Bus. Funding, LLC v. Shames Constr. Co., Ltd. 2021 N.Y. Misc. LEXIS 628 (Sup. Ct. N.Y., February 17, 2021)
Question: Is an estoppel letter enforceable against an account debtor if the underlying invoice is void as a matter of law since it was performed by someone not authorized to perform the work in the state where the work was performed?
Answer: No. An estoppel letter based on enforcement of a debt from a contract that is void renders the estoppel letter unenforceable. You have probably already heard about this case and other cases in recent years holding basically the same thing. In this case, the New York court held that since the work underlying the invoice was performed by an unlicensed plumber in California which makes the invoice unenforceable in California where the work was performed, then the estoppel letter is also unenforceable.
- Collins v. Benton, 2021 U.S. Dist. LEXIS 30116 (E.D. La. February 17, 2021)
Question: Is a factoring agreement for the purchase of medical receivables admissible in an underlying personal injury lawsuit even if the client remains liable to pay the full amount of the bill.
Answer: Yes. Case law on this issue is mixed throughout the nation. Typically, the primary issue in determining admissibility in these situations is whether the client remains liable for the full amount of the debt even after the factor purchases it. But here, the court admitted the factoring agreement into evidence not to simply show the amount paid by the factor for the invoices, but to show possible bias by treating doctors who have ongoing relationships with the factors since they would have an incentive to help patients and thereby continue their income streams.
Scot Pierce, Esq. is a trial lawyer and transactional attorney. Click on his picture for his profile page.
Disclaimer: This post contains general opinions and analysis, is solely for educational purposes, and should not be treated as advice for any specific case.