Background
NewCo Capital Group entered into a revenue purchase agreement (RPA) with SPE Trading, Inc. and related entity defendants (collectively, the Merchant). Under the agreement, NewCo advanced a lump sum to the Merchant in exchange for the right to receive 7% of the Merchant’s future revenues until a “purchased amount”—a sum greater than the advance—was paid back. A weekly remittance amount served as a “good faith estimate” of NewCo’s share. Defendant Jaime Rafael Soto personally guaranteed the Merchant’s performance.
On January 4, 2024, the Merchant’s bank returned a payment with an “R01—Insufficient Funds” code. Because the Merchant failed to request a reconciliation or adjustment within one business day as required by the agreement, an event of default occurred. NewCo moved for summary judgment on breach of contract and the personal guarantee; the trial court awarded damages and attorneys’ fees. The Merchant and Soto appealed, arguing the RPA was actually a criminally usurious loan and, alternatively, unconscionable.
The Court’s Holding
The Fourth Department unanimously affirmed. On the usury claim, the court applied the well-settled rule that usury laws apply only to loans—if the principal sum is not repayable in all circumstances, the transaction is not a loan. To determine whether repayment was absolute or contingent, the court weighed three factors: (1) the existence of a reconciliation provision, (2) whether the agreement had a finite term, and (3) whether plaintiff had recourse if the Merchant declared bankruptcy.
All three factors favored NewCo. The RPA contained two reconciliation provisions that allowed the Merchant to adjust the weekly remittance to reflect actual receipts—and the court rejected defendants’ argument that those provisions were illusory or gave NewCo sole discretion to reconcile. The agreement had no finite term or fixed payment schedule, because the weekly remittance could vary under the reconciliation mechanism. And the agreement expressly stated that the Merchant going bankrupt or experiencing a business slowdown “in and of itself does not constitute a breach,” meaning NewCo had no recourse in insolvency. The transaction was therefore a genuine revenue purchase, not a disguised usurious loan.
On unconscionability, the court noted that a showing of both procedural and substantive unconscionability is required. The Merchant submitted no evidence in opposition and made no allegation in the answer that it lacked meaningful choice in entering the agreement. Summary judgment on the merits was properly granted.
Key Takeaways
- A merchant cash advance or revenue purchase agreement avoids usury classification under New York law if: (a) it includes genuine reconciliation provisions that adjust payments to actual revenue, (b) it lacks a finite repayment term, and (c) it explicitly forgives default in the event of bankruptcy—making repayment contingent rather than absolute.
- Reconciliation provisions are not illusory solely because they require the Merchant to request adjustments within a specified time; the option to reconcile must be real, not solely within the funder’s discretion.
- Asserting unconscionability without evidentiary support—particularly failing to allege lack of meaningful choice—will not survive summary judgment in a commercial context.
Why It Matters
The merchant cash advance industry has generated a wave of litigation in New York as merchants challenge advances as usurious loans. This decision adds Fourth Department authority to an increasingly settled line of cases—joining recent decisions from the First and Second Departments—that validates the three-factor test for distinguishing RPAs from loans. For NY commercial finance attorneys, funders, and their borrowers, the ruling confirms that careful drafting of reconciliation provisions, term language, and bankruptcy covenants remains the core of a defensible MCA structure.
At the same time, the court’s scrutiny of whether reconciliation provisions are genuine (and not illusory or solely in the funder’s control) signals that courts will look past the contractual label. Funders who draft one-sided reconciliation provisions that the merchant cannot realistically invoke risk having those provisions deemed illusory—which could shift the analysis toward a loan characterization under cases like Oakshire Props., LLC v. Argus Capital Funding.