The Value of Spousal Waivers

Generally, a creditor may not require the signature of an applicant’s spouse (or any other person other than a joint applicant) on any loan if the applicant qualifies for the credit requested under the lender’s standards of creditworthiness. If an applicant does not meet the lender’s standards of creditworthiness, then the lender may (among other things) condition approval of the credit upon the applicant furnishing the signature of another person (e.g., guarantor), but the creditor may not require that person to be the applicant’s spouse. If a creditor routinely requires spousal guarantees, for example, without first ascertaining whether an applicant is creditworthy, then the conditioning of the loan on the spousal guarantee violates Federal Reserve Board Regulation B.

Of course, there are exceptions to this rule. Regulation B expressly permits a spousal guaranty when the spouse’s guaranty is necessary to make property available as collateral to satisfy the debt in the event of a default. Understand that potential borrowers tend to push back on requests for spousal guaranties and waivers, but there are reasons why they are necessary. We will look at a recent case from the Second Circuit Court of Appeals which addressed a fraudulent conveyance action where the spouse transferred her interests in jointly owned property to her daughter.

In May 2015, Husband and Wife conveyed their respective interests in valuable real property to their daughter. Their apparent goal in this conveyance, as in two prior transactions, was to shelter the property from enforcement of a $45 million default judgment entered days earlier against the Husband. In 2017, the U.S. District Court for the Eastern District of New York (EDNY) voided the transfer as fraudulent under New York law. Then in 2020, the EDNY issued an order extinguishing Wife’s right of survivorship in the property, determining that Wife had acted in bad faith by participating in the conveyance to the daughter.

The EDNY analyzed the text of the fraudulent conveyance provisions of the New York Debtor and Creditor Law which provided for two remedies for creditors whose claim has matured:

[h]ave the conveyance set aside or obligation annulled to the extent necessary to satisfy his claim,

or to

[d]isregard the conveyance and attach or levy execution upon the property conveyed.

The judgment creditor and the EDNY recognized that the Debtor and Creditor Law does not state generally that a creditor may seek equitable remedies, much less the specific equitable remedy awarded here: termination of a non-debtor’s right of survivorship to a fraudulently conveyed property.

In considering the issue, the Second Circuit noted:

The New York Court of Appeals has not ruled directly on this question. Our task therefore is ‘carefully to predict how the [state’s] highest court’ would interpret the statute.

Note, that unlike the Second Circuit decision addressed in yesterday’s issue of WurstCaseScenario, the Second Circuit did not certify the question to the New York Court of Appeals but, instead, predicted how it would interpret the statute.

… case law strongly suggests that the New York Court of Appeals would follow [the decision of a New York intermediate appellate court] and find that the remedy the [EDNY] Court ordered is impermissible [under the statute]. The [EDNY]’s first order, voiding the conveyance from [Husband] and [Wife] to [the daughter] as fraudulent, restored the “status quo ante” in this case: under that order, [Judgment Creditor] retains its preexisting lien over [Husband]’s interest in the property, and [Wife] retains her share of the tenancy by the entirety for the [p]roperty, including her right of survivorship. Extinguishing [Wife]’s right of survivorship expands [Judgement Creditor]’s’ rights relative to the status quo ante….

The Second Circuit concluded:

…we predict with confidence that were the New York Court of Appeals to address this issue, it would conclude that the remedy ordered by the District Court was not available under New York’s [Debtor Creditor Law]. Because we conclude that the District Court could not terminate [Wife]’s right of survivorship under that statute, we vacate the District Court’s order and remand for proceedings consistent with the interpretation of New York law described in this Order.

So what does this mean? It means that despite Wife’s dirty hands, she retains her right of survivorship and, assuming Husband predeceases her, she will take the property free and clear of the Judgment Creditor’s judgment lien. It also means that the existence of the joint tenancy will prevent the Judgment Creditor from executing on the property. Understand that there is a 20-year statute of limitations in which an action may be brought on a judgment. The joint tenancy makes it more possible to retain the property until after the statute of limitations has run.

Now – what does all of this mean to you? It means that if you intend to rely on property that is subject to a joint tenancy, you very much need to have a spousal guaranty or spousal waiver. Without it, your judgment will very likely remain in limbo hoping that your judgment creditor’s spouse predeceases him or her prior to the expiration of the applicable statute of limitations.

We recognize that it is unpleasant to require a spousal guaranty or waiver, and many lenders just hope that they won’t need it. But when they do, they will be pleased they have it. Or they will be disappointed that they failed to get it when they should have.

Deerbrook Insurance Company v Mirvis, 2021 WL 4256845 (2d Cir. September 20, 2021)

Investment or Loan? Beware of Usury

New York has the harshest[1] usury laws in the country. Unlike many other jurisdictions where the penalty for making a usurious loan is the loss of interest, New York penalizes a usurious lender by forgiving the principal as well. However, because New York recognizes that sophisticated commercial borrowers may have good reason to obtain loans at usurious rates, New York usury laws only apply to loans of less than $2.5 million, so most commercial lenders need not worry.

The New York Court of Appeals (the highest court in New York) recently addressed an interesting usury matter. Keep in mind that federal courts ruling on state law must be guided by state court rulings. When questions arise for which there is no authoritative guidance the question is referred to the state’s highest court.

The underlying action was brought by Adar Bays, LLC, against GeneSYS ID, Inc. (publicly traded on the OTC) to collect on a Convertible Redeemable Note (Note) issued in connection with a $35,000 loan from Adar Bays to GeneSYS which had defaulted. The Note permitted Adar Bays to convert any outstanding loan balance into GeneSYS common stock at a 35% discount from the stock’s market price. The primary issue presented was whether this conversion option meant that the Note’s interest rate exceeded the 25% cap set by New York’s criminal usury law.

The United States District Court for the Southern District of New York granted summary judgment in favor of Adar, ruling that under New York law, the Note’s conversion option did not result in a criminally usurious interest rate. GeneSYS appealed to the Second Circuit.

Because the resolution of the issues before it turned on questions of state law for which no controlling decisions of the New York Court of Appeals exist, The Second Circuit certified two questions to the New York Court of Appeals:

    1. Whether a stock conversion option that permits a lender, in its sole discretion, to convert any outstanding balance to shares of stock at a fixed discount should be treated as interest for the purpose of determining whether the transaction violates … the criminal usury law.
    2. If the interest charged on a loan is determined to be criminally usurious …, whether the contract is void ab initio …

In considering the matter, the Second Circuit noted that

[w]hen a note is not usurious on its face, usury is not presumed and the debtor must prove all the elements of usury, including usurious intent.

The Second Circuit went on to recognize that

New York courts … have generally rejected the view that a conversion option with a discounted rate should be treated as interest.

The New York Court of Appeals started with an extensive history of New York’s usury laws dating back to colonial times and continued through the present.

When determining whether a transaction is a loan, substance—not form—controls… Several factors help distinguish loans from equity purchases and joint ventures, which are not subject to the usury laws. First, parties who are not directly exposed to market risk in the value of the underlying assets are likely to be lenders, not investors… Additionally, context, such as whether a party applied to the other for a loan or had outstanding, separate transactions, helps to distinguish between intent to borrow and intent to engage in a joint transaction or exchange money for some other reason.

The Court noted that Adar Bays was a lender; GeneSYS executed a note where it promised to repay the loaned principal plus interest by the maturity date. It further noted that by having a floating-price conversion option, the lender avoided any share-price risk that an equity investor or joint venturer would bear. Specifically, Adar Bays would always receive more stock than the converted principal could have purchased on the open market at the then current trading price.

From colonial times to present, the legislature has defined interest to include the value of all goods and promises exchanged in consideration for a loan in the usury analysis. The earliest usury prohibition in the colony of New York set out the modern and broad language prohibiting the “direct[] or indirect[]” taking of usurious interest.

In rendering its decision, the Court made it clear that it was not holding that convertible stock options are per se usurious.

We have not been asked how to determine the value of stock conversion options here and do not endorse any particular methodology. Nonetheless, we are confident that convertible options are not so speculative that, as a matter of law, they cannot be valued. The valuation of options is widespread and is the foundation on which hedge funds operate.

However, floating rate convertible options will be more closely scrutinized to assess whether the balancing of the risks associated render the transaction an investment or a loan.

One reading the decision should be sure to review the dissent, which expressed concerns with multiple examples of the dangers that might result from the Court’s ruling, to which the majority responded:

The dissent worries, essentially, that usurers making loans of less than $2.5 million with floating-price conversion options will move their operations to other states, and perhaps some legitimate lenders of such loans who are close to the edge will do likewise. If so, that result is in harmony with our legislature’s unbroken intent over many centuries: the strict protection of more vulnerable borrowers from extortionate rates. As it has done before, our legislature can freely adjust the usury laws if the dissent’s parade of horribles turns out to be something more than phantasm.

Inasmuch as much of today’s commercial lending is derived from non-bank and nontraditional lenders whose objectives are different from those of traditional banks, consideration must be given when structuring such transactions to mitigate the lender’s risks and better assure that its investment will be best protected.

Adar Bays, LLC v GeneSYS ID, Inc. (__ NY. 3d ____ October 14, 2021)

See also, Adar Bays, LLC v GeneSYS ID, Inc. (962 F3d 86, 2d Cir. 2020)

[1] ‘New York’s voiding of usurious contracts “can be harsh,” perhaps especially in comparison to other states’ laws, but the penalty reflects the legislature’s consistent condemnation of the ‘evils of usury’” (Seidel v 18 E. 17th St. Owners, 79 NY2d 735, 740-741 [1992]).

Third-Party Beneficiary Rights to Legal Fees? Not So Fast!

I am confident my readers will understand that one of the things near and dear to my heart is having lawyers get paid for their work. Those of us at the lenders’ bar often take solace in knowing that borrowers are obligated to pay our fees; and when they do not, the institutions we represent have both the wherewithal and desire to work with us in getting paid.

But not always.

We understand that at times the scope of the transaction exceeds initial expectations and fees may run up. We lawyers remain sensitive to that and work with our clients and their borrowers to reach a reasonable resolution when this occurs. But when a deal does not result in a closing, things may get difficult.

The United States District Court for the Southern District of New York recently issued a decision concerning a law firm’s attempt to recover over $800,000 in legal fees owed in connection with its representation of the agent lender in a deal that resulted in an executed loan agreement that did not fund.

The $167 million loan was intended to fund the development and construction of an 18,000-seat arena on the Virginia Beach waterfront. The City retained the right to approve the financing, and when it declined to grant its approval, the deal fell through.

The developer sued the City, which resulted in a finding that the City had not breached its agreement with the developer. The law firm brought its action against the borrower-developer and not its client, the lender.

The loan agreement provided that the borrower would pay all reasonable fees, charges and disbursements of counsel for the agent. The law firm, however, was not a party to the loan agreement and the law firm argued that it was an intended third-party beneficiary. The developer moved to dismiss the complaint claiming that the law firm did not have standing to sue because it was neither a party to the loan agreement nor an intended beneficiary.

The Court wrote:

Under New York law, non-parties can sue for breach only if they are an intended beneficiary of the contract. Those who qualify as mere incidental beneficiaries have no standing to sue on the contract.

The Court then focused on whether the contract provided that the law firm was intended to be a third-party beneficiary. The contract specifically stated:

… Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person … any legal or equitable right, remedy or claim under or by reason of this Agreement.

The Court noted that the contract did not specifically include the law firm or even counsel to the agent.

So, the question becomes: Is there anything in the contract that “expressly contemplates” that [the law firm] can bring a claim against [the developer] for payment of the fees it incurred in representing [the lender]? The answer is no. There is no such provision. There is no indication anywhere in the Credit Agreement that [the law firm] was either to receive payment directly from [the developer] or that it had any right to sue … for payment.

In fact, the Court stated:

the contract specifically indicates that [the lender] was to receive payment from the “Borrower” … for its counsel fees.

The Court went on:

The New York Court of Appeals has “sanctioned a third party’s right to enforce a contract in two situations: when the third party is the only one who could recover for the breach of contract or when it is otherwise clear from the language of the contract that there was “an intent to permit enforcement by the third party.”

The contract provided that the lender would receive payment, which excluded the law firm from directly suing to collect.

In dismissing the law firm’s complaint, the Court added:

This dismissal is of course without prejudice to [lender]’s ability to sue to recover any attorney’s fees that it pays to [law firm].

However, it would appear that if the lender was willing to sue to pursue its legal costs it would have at least authorized the firm to bring the action in the lender’s name. It is understandable that the lender might not have wanted to sue in its own name to recover legal fees – especially when a transaction does not close. That left the law firm out of pocket for a significant fee.

So, what is the takeaway?

Lawyers write the agreements. Protect yourself and make yourself a third-party beneficiary.

But consider that this case was very rare in that the loan agreements were executed but the deal still did not fund. Most deals that fail collapse before execution of the loan agreements. That certainly takes away a significant element – the executed loan agreements. Commitment letters – even nonbinding term sheet/proposal letters, provide for the lender recovering its legal costs and fees. Consider this a plea to add the lawyers as third-party beneficiaries to the proposal/commitment letters.

One can only imagine what might have occurred in the relationship between lender and its lawyers to leave the law firm strung out.

Caveat attornatus. (Lawyers beware.)

Winston & Strawn LLP v Mid-Atlantic Arena, LLC, ESG Enterprises, Inc., SDNY July 19, 2021, 2021 WL 3037478

The Emerging Use of Arbitration in Bankruptcy Matters

Readers of this blog (as well as my other published articles) should be familiar with my advocacy for use of arbitration in resolving commercial finance disputes. Certainly, in matters involving disputes between secured creditors (e.g., intercreditor disputes), I have long expressed my view that things like these should be resolved privately, not through a public forum. This is a great benefit of arbitration. I am also inclined to privately resolving disputes between lenders and borrowers through arbitration. In those rare instances when a lender may have crossed the line and is subject to liability, isn’t it better to keep that dispute under the cover of a confidential arbitration?

Over the past 30 years, the use of mediation has become common in bankruptcy disputes. But the question has long been raised whether arbitration clauses would be enforced in the context of a bankruptcy case. That issue was addressed in a recent decision from the Bankruptcy Court for the District of Maryland. While this decision may not be the first to address this question and enforce a prepetition arbitration private provision, the scholarship of this decision certainly makes it ripe to present.

The Maryland Bankruptcy Court wrote:

The filing of a chapter 11 bankruptcy case generally stops all matters affecting the debtor’s financial affairs and consolidates the resolution of those matters in one forum, the bankruptcy court. That collective process is intended to, among other things, allow a debtor to catch its financial breath and develop a cohesive reorganization plan; provide consistency and certainty in the resolution of matters potentially affecting the debtor’s reorganization; and ensure fair and equal treatment of the debtor’s creditors. …A frequent question…. is how these basic principles apply to an arbitration clause in a prepetition contract between the debtor and just one creditor.

Prior to the filing of his personal bankruptcy case, the debtor entered into a litigation funding agreement whereby the lender extended financing to fund the cost of the lawsuit in exchange for a percentage of the debtor’s interest in a whistleblower litigation. When the lender and borrower found themselves in a dispute, the lender invoked the arbitration clause contained in its agreement and the debtor filed a Chapter 11 case. The lender moved for relief from the automatic stay to allow the arbitration to proceed. The debtor objected.

The lender argued that the Bankruptcy Court was required to enforce the prepetition arbitration agreement, while the debtor argued that enforcement would conflict with the objectives of the Bankruptcy Code.

The [Federal Arbitration Act] and the [Bankruptcy] Code both are grounded in important policy considerations concerning efficiency and fairness. The FAA focuses on these notions in the context of, among other things, private contracts affecting commerce, creating a strong presumption in favor of the parties’ threshold agreement to arbitrate disputes. …The Code …  is not party- or contract-specific but seeks to balance the rights of many parties with many different contracts, rights, and interests involving a single debtor.

The Court turned to whether the dispute was a core proceeding:

If a claim is a constitutionally core proceeding, the bankruptcy court has the discretion to retain the proceeding and not enforce the terms of the parties’ arbitration agreement. …[T]his discretion arises from the inherent conflict in allowing an arbitrator to resolve proceedings that are grounded in the Code itself or that are integral to the debtor’s reorganization efforts…. A bankruptcy court’s discretion is far more limited with respect to nonconstitutionally core or non-core proceedings.

Some circuit courts have ruled that a bankruptcy court has no discretion to refuse arbitration of non-core claims. The Court quoted a New York case for the steps to follow in evaluating requests to compel arbitration:

[F]irst, it must determine whether the parties agree to arbitrate; second, it must determine the scope of that agreement; third, if federal statutory claims are asserted, it must consider whether Congress intended those claims to be nonarbitrable; and fourth, if the court concludes that some, but not all, of the claims in the case are arbitrable, it must then decide whether to stay the balance of the proceedings pending arbitration.

In doing its analysis, the Court determined that this was a hybrid case involving constitutionally core and non-core proceedings with the state law contract claims being subject to the prepetition arbitration agreement. The Court further noted that those claims could be separated from the bankruptcy and fair debt collection claims – “even if that may not be the most procedurally efficient approach….” In light of legal precedent in the Fourth Circuit Court of Appeals, the Bankruptcy Judge felt compelled to bifurcate the claims and allow the contract and nonbankruptcy claims to proceed to arbitration.

The Court acknowledges that, if the arbitrator resolves the Contract Claims or the Non-Bankruptcy Claims prior to this Court addressing the Bankruptcy Claims, the parties could face conflicting results, or one forum may be bound by the other’s decision under the doctrine of claim or issue preclusion. The Court is not prepared to rule on such matters at this time, but will by separate order issue a temporary stay of proceedings on the Debtor’s Complaint to monitor how these matters progress and to guard against undue delay or gamesmanship. The Court dislikes the element of uncertainty introduced by this approach but, absent clear authority under the Code or case law giving this Court more discretion to refuse arbitration in the context of non-constitutionally core or non-core claims, the Court finds this approach warranted and most appropriate under the circumstances.

The takeaway in this developing area of the law is, that while bankruptcy claims must be resolved in the Bankruptcy Court, nonbankruptcy claims that are the subject of an arbitration agreement may be compelled to be resolved by an arbitration tribunal. I will continue to keep an eye on this doctrine and continue to advocate the use of arbitration for the resolution of commercial finance disputes.


In re: John McDonnell McPherson v Camac Fund, L.P., Bankr. MD, June 1, 2021, 2021 WL 2232351

(Where) to Sue or Not to Sue? That Is the Question!

Two decisions issued a day apart, one from California and the other from Michigan, highlight the importance of bringing your action in a court where you can obtain jurisdiction over your defendant.

It’s My Seat, a ticketing vendor and concert promoter operating and organized in California, brought an action in the California state court system against Hartford Capital, a New York-based merchant cash advance company. Hartford removed the action to the Central District of California under diversity (actions between parties of different jurisdictions) and moved to dismiss the action for lack of personal jurisdiction.

The facts of the case involve It’s My Seat having sought a low-rate business loan by filing a loan application online. Hartford’s representative contacted It’s My Seat and promised that if It’s My Seat first took a $250,000, 30-day “bridge loan” with an interest rate of 15%, that it would then provide a $750,000 term loan with interest at 8.99%. The bridge loan provided for daily ACH payments in the amount of $3,600. The Hartford representative assured that the term loan would be made but did not document that assurance in any way. It’s My Seat signed and notarized the bridge loan documents and Hartford advanced the bridge loan, but for a previously undisclosed $22,000 “funding fee.” When It’s My Seat protested the funding fee, Hartford’s representative promised to credit the amount. It’s My Seat made the daily payments for the required 30-day period, but the $750,000 line of credit was not issued. The Hartford representative claimed that he was “doing everything I can to get this pushed through.” It’s My Seat continued to make the $3,600 daily payments for 70 days (40 more than originally required) having to obtain third-party emergency loans in order to do so. Ultimately, Hartford refused to provide the term loan on the basis that the third-party loans violated the bridge loan agreements, and It’s My Seat brought the action against Hartford and its representatives.

The court dismissed the action against Hartford and one representative because the complaint was not timely served. The other representative, Stein, moved to dismiss for lack of personal jurisdiction. The question of personal jurisdiction turned on whether Stein’s relevant contacts with It’s My Seat subjected Stein to specific personal jurisdiction.

Where a defendant’s contacts are “not so pervasive as to subject him to general jurisdiction,” the Ninth Circuit applies a three-part specific jurisdiction test: “(1) The nonresident defendant must do some act or consummate some transaction with the forum or perform some act by which he purposefully avails himself of the privilege of conducting activities in the forum, thereby invoking the benefits and protections of its laws. (2) The claim must be one which arises out of or results from the defendant’s forum-related activities. (3) Exercise of jurisdiction must be reasonable.” (citations omitted)

Stein admitted that he called It’s My Seat in California to solicit and conduct business in the form of the bridge and term loans. The court determined that Stein’s contacts with California are therefore integral and essential parts of the claims made in the case and that It’s My Seat made a prima facie showing of the first two prongs. The burden then shifted to Stein to set forth a compelling reason why the exercise of jurisdiction would not be reasonable.

The court then cited the factors in determining reasonableness:

(1) the extent of the defendants’ purposeful injection into the forum state’s affairs; (2) the burden on the defendant of defending in the forum; (3) the extent of conflict with the sovereignty of the defendant’s state; (4) the forum state’s interest in adjudicating the dispute; (5) the most efficient judicial resolution of the controversy; (6) the importance of the forum to the plaintiff’s interest in convenient and effective relief; and (7) the existence of an alternative forum. (citations omitted)

The California court then weighed each of the factors and concluded that Stein failed to make a compelling case that the exercise of jurisdiction in California would not be reasonable and declined to dismiss the action as against Stein.

The Michigan case concerned a dispute between two lenders and their priority in the collateral of a mutual borrower organized and operating in Ohio. The underlying claim is one of great interest although not decided in the case. Plaintiff and its predecessor provided financing to borrower under a revenue purchase agreement and perfected an all-asset Uniform Commercial Code (UCC) filing on Dec. 12, 2019. Defendant provided one or more merchant cash advances and perfected an all-asset UCC filing on Jan. 23, 2020. Defendant also secured ACH payments from the borrower’s bank account.

Plaintiff brought an action in Michigan state court against Defendant for (1) declaratory judgment as to priority in collateral, (2) tortious interference with a contractual relationship, (3) tortious interference with future business expectations, (4) conversion, and (5) temporary, preliminary and permanent injunctive and declaratory relief. Defendant removed the case to the Federal District Court in Eastern Michigan under diversity and moved to dismiss the complaint for lack of personal jurisdiction.

Michigan law recognizes two bases for personal jurisdiction over a corporation: (1) general, and (2) specific (called limited personal jurisdiction). A court has general jurisdiction over a corporation where the defendant’s contacts within the forum are so continuous and systematic as to render it essentially at home in the forum state. As to specific jurisdiction, the inquiry focuses on the relationship among the defendant, the forum and the litigation. For a court to exercise specific jurisdiction, the defendant’s suit-related conduct must create a substantial connection with the forum state. The plaintiff has the burden of proof to establish that a defendant’s contacts are sufficient to subject it to jurisdiction.

Plaintiff argued that the Michigan Court had general jurisdiction over Defendant because Defendant solicited business from Michigan residents through its website and established “long-term lending relationships with Michigan residents” as evidenced by UCC filings in favor of Defendant, and litigation within Michigan courts. The Court found that evidence to be insufficient to establish general jurisdiction over Defendant as it failed to demonstrate continuous and systematic contacts.

Plaintiff further argued that Defendant had utilized its website to solicit business from Michigan residents and establishes general jurisdiction. The Court found no authority to support that proposition and indicated that case law states the opposite. The Court held:

Plaintiff has offered no evidence to support a finding that this is “an exceptional case,” or any authority to support the proposition that Defendant[]’s contacts are sufficient to establish it was “at home” in Michigan. There is no evidence that Defendant [] has physical locations, employees, or officers in Michigan. There is no evidence that Defendant [] has bank accounts or conducts daily corporate activities in Michigan. While Plaintiff offers proof that Defendant has filed multiple UCC debtor financing statements and has brought one case within Michigan courts, this evidence merely confirms that Defendant [] has done some in-state business in Michigan. This is insufficient for purposes of establishing general jurisdiction.

The Court then focused on whether “specific jurisdiction” would apply. Under specific jurisdiction, a plaintiff may sue a defendant “only on claims that arise out of the defendant’s activities in the forum state.” The Court cited the standard for specific jurisdiction as determined by the Sixth Circuit Court of Appeals:

First, the defendant must purposefully avail himself of the privilege of acting in the forum state or causing a consequence in the forum state. Second, the cause of action must arise from the defendant’s activities there. Finally, the acts of the defendant or consequences caused by the defendant must have a substantial enough connection with the forum state to make the exercise of jurisdiction over the defendant reasonable.

Plaintiff alleged that the second prong was met because Defendant’s “actions had consequences in Michigan resulting in harm to [Plaintiff], a Michigan resident.” However, the Court noted that both the U.S. Supreme Court and Michigan courts have rejected this theory of specific jurisdiction.

When assessing specific jurisdiction, “[t]he proper question is not where the plaintiff experienced a particular injury or effect but whether the defendant’s conduct connects him to the forum in a meaningful way.”


…it is clear that Defendant[]’s conduct—entering into a contract with a company in Ohio to purchase revenue and withdrawing funds from that company’s bank account in Ohio—may not form the basis for Defendant to be sued in a Michigan court. …. Plaintiff does not allege that any of Defendant[]’s challenged conduct took place in Michigan.

The dismissal of the action does not bar Plaintiff from pursuing its claims in a proper jurisdiction; it certainly does not appear that any statute of limitations is at risk. However, the cost and time incurred takes its toll on Plaintiff.

Each of the California and Michigan cases rests on nonphysical presence of the parties—email and websites.  The Michigan case concerned a loan made into Ohio, while the contacts in the California case concerned a loan made into California. That is not to say that had the Michigan plaintiff brought its case in Ohio that an Ohio court would have ruled differently.

The takeaway is to make a careful analysis when bringing an action against a party of a different jurisdiction, and assure that jurisdiction is proper in the venue where the action is brought.

One final thought: Commercial lenders and factors have long expressed concerns about egregious conduct engaged in by certain merchant cash advance providers. Each of these cases highlights questionable conduct that commercial lenders and factors will want to monitor.

It’s My Seat, Inc. v Hartford Capital LLC, et al. (CD CA, 3/30/21) 2021 WL 1200042
Franklin Capital Funding, LLC v Ace Funding Source, LLC (ED MI, 3/31/21) 2021 WL 1224917