Federal Court Usury Claim Against MCA Dismissed and Court Declined to Compel Arbitration

Readers will recognize a few recurring themes in WurstCaseScenario: Merchant Cash Advance (highlighting both abuse and where MCAs are responsible high-risk financing sources) and promoting the use of arbitration in commercial finance disputes. A recent decision from the New Jersey Federal Court brings these two topics together. Note that the law, when applied to a specific set of facts, may not result in a fair treatment, despite the fact that the law itself is fair. Here, the judge apparently regretted making a correct decision.

Gold Lion Steel LLC (Gold Lion) and its guarantors (the plaintiffs) brought an action alleging that Global Merchant Cash, Inc., d/b/a Wall Street Funding (Global Merchant), willfully entered into two usurious loan agreements in violation of the criminal usury statutes well as the New Jersey Consumer Fraud Act. Global Merchant moved to dismiss and compel arbitration.

The financing was structured as a merchant cash advance pursuant to which Gold Lion agreed to repay the loans within 180 days at a 143% interest rate (for the first of two financings) and within 164 days at a 164% interest rate for the second. The loans were to be repaid in fixed daily payments of $270.28.

The individuals gave “validity guaranties” whereby they guarantied against the breach of any “representation, warranty, and/or covenant” under the loan agreements. This apparently included any breach of a covenant to make payments. (Sounds more like a full unconditional guaranty, doesn’t it?)

The agreement also included a broad binding arbitration clause for the resolution of any disputes. It also included a choice of law provision where the parties agreed that New York law would apply and that the arbitration would be held in New York. Notwithstanding, the plaintiffs argued that New Jersey law should apply, and the court addressed that first:

[A] district court must apply the choice of law rules of the forum state to determine what law will govern each of the issues of a case. . . . . Under New Jersey’s choice-of-law rules, effect is given to contracting parties’ private choice of law clauses unless they conflict with New Jersey public policy.

The Court recognized that New Jersey and New York each has a strong public policy against usury but that the cases presented by the plaintiffs did not support overruling the parties’ choice of New York law. It also noted that New York’s anti-usury policy was so strong that it made usury violations criminal.

The Court then turned to the enforceability of the arbitration clause, finding:

. . . the [Federal Arbitration Act] requires courts to compel arbitration in accordance with the terms of an arbitration agreement, upon the motion of either party to the agreement, provided that there is no issue regarding its creation. . . . . To that end, courts must determine: (i) whether the parties have executed a valid agreement to arbitrate and, if so (ii) whether the dispute at issue falls within the scope of the agreement.

The Court reasoned that the parties agreed that the dispute fell within the scope of the agreement and went on to find that the parties had agreed to arbitrate the dispute in New York. However, citing significant case law, the New Jersey Federal Court determined that it could not compel parties to arbitration outside of its jurisdiction, in what it described as a “perplexing dilemma”:

When faced with this dilemma, courts in this Circuit have denied the motions to compel arbitration and either dismissed or transferred to the appropriate district.

While recognizing its decision to be “somewhat paradoxical,” it held that it was required to follow this practice and deny Global Merchant’s motion to compel and grant its motion to dismiss.

So what does this all mean?

First, it does not mean that the MCA won the war, albeit it won the battle. The plaintiffs had an expensive lesson and should have followed the jurisdiction provisions of the contract. That difference would mean that the New York court, had there been one, could have compelled arbitration in New York, as provided for in the agreement, or better (albeit unlikely), could have determined that the strong anti-usury public policy required it to rule that the agreement was not subject to arbitration and that the MCA was subject to penalties.

It should be noted that in the event the matter proceeds to arbitration and the arbitrator rules that the MCA agreement was not usurious (as many New York courts have ruled in similar situations), it is unlikely that a court would vacate such an award on public policy grounds.

So, here is the takeaway: in addition to the confidentiality assurances of the process, arbitration remains a strong tool to protect lenders – whether right or wrong.

Gold Lion Steel LLC v. Global Merchant Cash, Inc., 2022 WL 596997

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