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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 company’s argument that a purchase and sale agreement for the company’s future receivables constituted a “loan” that was unenforceable under New York usury law, because payment to the purchaser of the future receivables was not absolutely guaranteed, but instead contingent, and thus, not a loan subject to the law of usury.

A copy of the order in EBF Partners v. Burlow Pharmacy is available at:  Link to Order.

A business funding entity (“purchaser”) entered into a purchase and sale agreement with a pharmaceutical clinic (“seller”), which agreed to sell its future receivables with a face value of $586,500 to the purchaser for an upfront discounted price of $425,000.

The agreement was backed by a security agreement and guaranty executed by the seller’s principals.

The agreement was for an indefinite term, contained a reconciliation clause (permitting the seller to request that the purchaser 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 seller’s assets would constitute a default, and entitle the purchaser to enforce the personal guaranty and security agreements for the full purchase amount of $568,500.

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

Although the seller 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 usurious interest rate of approximately 65 percent.

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 purchaser was not absolutely entitled to repayment under the agreement, due to the aforementioned terms that: (i) the seller would not owe anything to the purchaser 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 seller 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 seller’s argument that the agreement was a loan subject to the defense of usury due to the security and guaranty agreements ensuring the purchaser’s right to absolute repayment as it 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 seller’s failure to remit payments because it “ceases operations in the ordinary course of business” under which the purchaser would be entitled to nothing. Thus, the security and guaranty agreements did not guarantee the purchaser absolute repayment and did not convert the agreement into a loan.

Accordingly, summary judgment was granted in favor of the purchaser, and against the seller, and the Court also held that the purchaser was entitled to a sum of $122,423 plus fees and costs due under the agreement.

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Christopher P. Hahn practices in Maurice Wutscher’s Commercial Litigation, Consumer Credit Litigation and Insurance Recovery and Advisory groups. Prior to joining Maurice Wutscher LLP, he served under the General Counsel at the Florida Office of Financial Regulation. He also obtained extensive experience litigating property insurance claims through all phases of discovery, motion practice and other pre-trial activities. Christopher obtained his Bachelor of Science degree in Business Administration from the University of Southern California, followed by his Juris Doctorate degree from the University of Miami School of Law. He is also a graduate of the University of Miami’s Masters of Business Administration program, completing his degree with an emphasis on finance and mergers and acquisitions.

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