NY AG against Yellowstone: Refund $1.4B and Potential Shutdown

March 7, 2024
2 Minutes
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In the wake of New York Attorney General Letitia James's comprehensive legal action against Yellowstone Capital, Delta Bridge Funding, and associated parties, the alternative finance sector is facing potentially transformative scrutiny. The legal case alleges that these entities orchestrated loans with excessively high interest rates masquerading as merchant cash advances (MCAs), with percentages well into the triple digits and in direct violation of New York's usury laws, which implicates them in criminal usury.

The gravity of these imputations and the distress experienced by small business owners ensnared by these alleged predatory lending tactics. The incident of the distressed plumber contemplating suicide poignantly illustrates the weight of the burden that must be shouldered by those in the field of alternative finance.

Nevertheless, we should approach the Attorney General's disclosures, dotted with charged terms such as "illegal," "fraudulent," and "scheme," with a degree of circumspection. The presumption of innocence is a cornerstone of legal due process, and it is imperative to wait for the complete array of facts to surface during the judicial process before forming final opinions.

In response to these developments, it is incumbent upon the industry to self-regulate proactively. This includes not only establishing meticulous monitoring protocols and consistent reconciliation practices—tailoring daily payment demands to align with a business's incoming receipts—but also revisiting and possibly revitalizing credit card split funding and lockbox configurations to heighten transparency and reduce the likelihood of legal complications.

Moreover, attention must be given to the security of sensitive deal information and the potential implications of white labeling arrangements for the reputation of involved parties.

With an expectation of increased regulatory focus on the horizon, Alternative Business Funders must call for an earnest dialogue with regulatory bodies. This initiative should aim to educate about the critical role alternative financing plays in bolstering small businesses while also working to dispel any generalized negative perceptions that risk unjustly casting all industry participants in the shadow of unfavorable actions.

The path forward for the industry hinges on its capacity to offer equitable, explicit, and reciprocally advantageous financial options. Through this episode, it is crucial for industry professionals to renew their commitment to ethical conduct, compliance rigor, and the loftiest professionalism standards.

Below is the link of the lawsuit filed by New York Attorney General Letitia James against Yellowstone Capital et al.

Important points from the filed lawsuit document include:

  1. The respondents engaged in a scheme where purported merchant cash advances (MCAs) were illegal, usurious, and fraudulent loans, often with interest rates in the triple digits, much higher than the maximum interest rates allowed under New York usury laws
  2. These transactions were dressed up as "Purchase and Sale of Future Receivables" agreements; however, they required fixed daily payments from merchants' bank accounts, disconnected from the merchants' actual revenues
  3. The respondents promised merchants the ability to reconcile payments if their revenue declined, but this was largely unattainable due to the structuring of the transactions
  4. The respondents secured these agreements with personal guarantees and claimed a priority status as secured creditors under UCC Article 9, which would enable them to collect full repayment even in the event of merchant bankruptcy
  5. When merchants could not cover the daily debits, they were declared in default, and the respondents would pursue legal actions against them
  6. The respondents conducted their operations under multiple corporate names and concealed their associations with convicted white-collar criminal David Glass
  7. The respondents fraudulently obtained judgments from New York courts to enforce these illegal agreements and have, since 2013, collected an estimated $4.5 billion from merchants, including around $1.38 billion in interest
  8. The petition seeks extensive relief, including injunctions against future operations in the MCA and loan industry for the respondents, voiding of the illegal agreements, repayment of ill-gotten gains to merchants, and civil penalties among other remedies

It's important to remember that everyone is presumed innocent until proven guilty. We need to wait for the full facts of the case to emerge before making final judgments.

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