Home Jersey finance news Florida Court Confirms Merchant Cash Advance Product Not Subject to Usury Law | Bradley Arant Boult Cummings LLP

Florida Court Confirms Merchant Cash Advance Product Not Subject to Usury Law | Bradley Arant Boult Cummings LLP


[co-author: Shelby Lomax]

This month, a Florida appeals court ruled that a merchant cash advance (MCA) purchase and sale agreement was not a “disguised loan” and, therefore, was not subject to Florida’s criminal usury law. MCA Purchase and Sale Agreements, which provide merchants with a quick and efficient way to obtain financing for their operations, are not loans. Rather, these agreements constitute the purchase of a merchant’s future revenue by the MCA Company. However, some merchants have claimed that MCAs are “disguised loans” subject to the usury law of their respective states. While several states have well-developed case law differentiating loans from the purchase and sale of receivables, Florida suffers from a relative lack of authority on the matter. Fortunately, in Craton Entertainment, LLC v Merchant Capital Group, LLC, the Florida Third District Court of Appeals issued a reasoned opinion that an MCA purchase and sale agreement was not a loan and therefore not subject to the criminal usury law of the Florida. This decision sets a good precedent for MCAs facing requalification requests in Florida and welcome guidance for MCA companies doing business with Florida merchants.

In 2016, Merchant Capital sued Craton for failing an MCA transaction. Craton responded with a 12-count counterclaim. In a nutshell, Craton argued that the buy-and-sell agreement was a disguised loan and that Merchant Capital violated Florida criminal usury law. The parties have filed competing motions for summary judgment on their respective claims and counterclaims. Ultimately, the trial court ruled in favor of Merchant Capital, finding that the underlying transaction was the sale of future receivables subject to a reconciliation clause, not a loan subject to usury laws. Florida.

Craton appealed to the Florida Third District Court of Appeals, arguing that the trial court erred considering that the contract of purchase and sale was not a loan. Specifically, Craton claimed that the agreement contained all the hallmarks of a loan. For example, Craton cited the common practice of subjecting the company to a credit check, the absence of a provision in the agreement allowing the “forgiveness” or “cancellation” of the “debt”, the security Merchant Capital has taken over the assets of Craton, and the personal guarantee signed by the owner of Craton.

In response, Merchant Capital argued that the clear wording of the agreement indicated that the parties were considering a buy-sell agreement. Perhaps more importantly, the agreement itself did not bear the hallmark of a loan: the absolute right of the party advancing the funds to demand repayment. Instead, Merchant Capital’s ability to obtain funds from Craton was expressly conditioned on Craton’s ability to generate revenue. In addition, and contrary to Craton’s assertions during the litigation, the owner’s personal guarantee did not guarantee reimbursement. Rather, Craton’s owner has guaranteed Craton’s performance under the purchase and sale agreement. Merchant Capital also referenced the reconciliation provision, which was designed to calibrate drawdowns on Craton’s bank accounts based on the ebbs and flows of Craton’s business.

Ultimately, the Third District Court of Appeals upheld the trial court’s judgment, finding that the purchase and sale agreement was not a loan. Even better, the court’s one-page order served as the basis for its decision by citing several favorable Florida decisions. As such, this decision sets a good legal precedent for MCA companies litigating similar claims. Notably, the court cited case law for the proposition that an MCA arrangement is not a loan where “the obligation to repay is not absolute, but rather contingent upon or dependent on the success of the underlying business.” . The court also cites an authority acknowledging that a transaction is not a loan when “part of the investment is at speculative risk”.


the Merchant capital decision is very good news for MCA companies doing business with Florida merchants. The underlying lawsuit involved several commonly contentious issues in the MCA space, and the court ruled unambiguously on the side of MCA. This case also illustrates the importance of a carefully structured purchase and sale contract. Keep in mind, however, that a well-designed agreement alone will not fully protect MCA companies against successful requalification claims. Courts in states other than Florida have recharacterized MCA’s purchase and sale agreements as loans based on the parties’ business dealings, publicity and other factors. Although useful, the Merchant capital the decision does not deal with practices outside of the agreement which could present a risk of requalification. Companies should invest time and resources to conduct internal and external audits of all business processes, including marketing, websites and social media, as well as internal policies and procedures to monitor compliance with the various laws of the States differentiating loans from MCAs.