Was your MCA company (predator) one of the ones who were sued by the New York Attorney General for issuing fraudulent loans with exorbitant rates?

On Tuesday March 5th, the NY State Attorney General filed a lawsuit against Yellowstone Capital and many of its subsidiaries in Manhattan seeking in the ballpark of 1.4 Billion in damages for exploiting small business owners with their Merchant Cash Advance businesses.

The team at Beacon has broken down the lawsuit and shared some of the implications.

By Thomas Tramaglini, Chief Operations Officer

Partner, The Center for MCA Research

thomas@beaconclientsolutions.com 

About Thomas Tramaglini

In recent years, Federal and State authorities have gone after bad MCA players such as PAR funding and Yellowstone Capital in an effort to hurt the ventures that MCA companies have partaken in which have hurt small business owners. In the current case filed in New York, the State Attorney General's press release said the following:

New York Attorney General Letitia James today filed a lawsuit against a major operation of over 30 companies and individuals for exploiting small businesses through fraudulent loans at sky-high interest rates disguised as merchant cash advances. The companies and individuals sued by Attorney General James include Yellowstone Capital and its founder David Glass, Delta Bridge Funding, and several other individuals who negotiated and serviced the illegal loans. Through this lawsuit, the Office of the Attorney General (OAG) is seeking at least $1.4 billion in interest and fraudulent fees that were collected from small businesses, and a court order for the companies to stop their illegal activities. Before filing the lawsuit, Attorney General James reached settlements with five individuals involved with the Yellowstone operation, which included $3.37 million for impacted small businesses and a ban from the merchant case advance industry.

A copy of the civil complaint can be found here

Companies Included in Lawsuit

• YELLOWSTONE CAPITAL LLC

• FUNDRY LLC

• DELTA BRIDGE FUNDING LLC

• CLOUDFUND LLC

• ABC MERCHANT SOLUTIONS, LLC

• ADVANCE MERCHANT SERVICES LLC

• BUSINESS ADVANCE TEAM LLC

• CAPITAL ADVANCE SERVICES LLC

• CAPITAL MERCHANT SERVICES, LLC

• CASH VILLAGE FUNDING LLC

• FAST CASH ADVANCE LLC

• FUNDZIO LLC

• GREEN CAPITAL FUNDING LLC

• HFH MERCHANT SERVICES LLC

• HIGH SPEED CAPITAL LLC

• MERCHANT CAPITAL PAY LLC

• MERCHANT FUNDING SERVICES LLC

• MIDNIGHT ADVANCE CAPITAL LLC

• MR. ADVANCE CAPITAL LLC

• OCEAN 1213 LLC

• SIMPLY EQUITIES LLC

• TVT CAP FUND LLC

• TVT CAPITAL HR, LLC

• THRYVE CAPITAL FUNDING LLC

• WCM FUNDING LLC

• WEST COAST BUSINESS CAPITAL, LLC (f.k.a. YELLOWSTONE CAPITAL WEST LLC)

• WORLD GLOBAL CAPITAL LLC

Individuals Included in Lawsuit

• DAVID GLASS (Yellowstone de facto officer, part owner, and co-founder (2015-present) Yellowstone CFO, part owner (2009-2014))

• YITZHAK (“Isaac”) STERN (Yellowstone CEO, part owner, and cofounder (2009-present)

• JEFFREY REECE (Yellowstone president and part owner (2015-present))

• BARTOSZ (“Bart”) MACZUGA (Delta Bridge CEO, majority owner, and co-founder (2021-present) Yellowstone Co-CEO and part owner (2019-2021) Yellowstone Funder (2012-2019))

• VADIM SEREBRO (Delta Bridge general counsel, part owner, and co-founder (2021-present) Yellowstone general counsel (2018-present)

• TSVI (“Steve”) DAVIS (joined Yellowstone at its inception in 2009, became a Yellowstone shareholder in 2011, worked at Yellowstone until at least 2018, and remains a part owner of the company to the present...highest-ranking Funder while working at Yellowstone...Davis funded $195.5 million in MCA deals, which was over five times what Yellowstone’s second highest Funder funded that year)

• AARON DAVIS (Yellowstone & Delta Bridge Funder (to present))

• MATTHEW MELNIKOFF (Yellowstone & Delta Bridge Funder (to present))

• MARK SANDERS (Yellowstone & Delta Bridge Funder (to present))

• DAVID SINGFER (Yellowstone & Delta Bridge Funder (to present))

Descriptions of each person are directly from the civil complaint filed by the Attorney General.

What is the claim from the NY Attorney General?

As per the Associated Press:

James filed the suit Tuesday against Yellowstone Capital, along with a network of related companies and people she says carried on its operations after Yellowstone purportedly shut up shop in 2021 while facing multiple investigations.

The operation, which allegedly rebranded as Delta Bridge, continued issuing illegal loans disguised as merchant cash advances, a form of short-term, high-interest funding for small businesses, the suit charges. One long-time Manhattan eatery, City Bakery, was forking over more than $2,000 a day and eventually shut down as a result, James’ office alleges.

“Yellowstone Capital, Delta Bridge, and the other companies pretended to offer a helping hand, but instead provided only illegal, ultra-high-interest loans,” said James in a statement. “Small businesses are the foundation of our economy, and they face severe challenges without also having predatory lenders taking advantage of them.”

Does the AG's lawsuit hold water?

Anytime that the NY AG files a lawsuit against someone for $1.4 Billion it should turn heads. There have been other settlements in NY and NJ which allegations were similar so this is an extension of those lawsuits.

According to the AP, in 2020, federal regulators sued Yellowstone and its owners, alleging the company withdrew money from its customers’ bank accounts without permission. In 2021, the company agreed to surrender more than $9.7 million in funds to the Federal Trade Commission, which was later redistributed to the harmed businesses.

In 2023, the company and its affiliates reached an approximately $27 million settlement with the state of New Jersey to resolve allegations similar to New York’s.

Before filing the New York lawsuit, James reached settlements with five individuals involved in the Yellowstone scheme, which included $3.37 million for impacted businesses, according to her office.

Why is this lawsuit significant?

Without a doubt, companies under the Yellowstone flag or associated with Yellowstone should be on notice. One action being sought is for David Glass, who is credited as one of those who invented the MCA. The AG is asking for Glass to be banned lifetime in the industry. The AG is also attempting to ban Yellowstone and the other affiliates from continuing their operations.

Implications.

There are a few immediate implications which this litigation may have on the industry.

For instance, the AG said in her press release:

The merchant cash advances issued by Yellowstone, Delta Bridge, and their affiliates are a form of short-term, high-interest funding for small businesses. Merchant cash advances have grown in popularity in recent years, particularly for businesses that cannot get small business loans from traditional banks. The perpetrators of this scheme provided contracts that fraudulently described each transaction as a purchase of a portion of a merchant’s future revenues, with flexible payment amounts and open-ended terms. In reality, the predatory lenders collected payments at fixed daily amounts, which they debited directly from merchants’ bank accounts over short repayment terms, such as 60 or 90 days. The lenders falsely promised to “reconcile” merchants’ daily payments to ensure they never rose above an agreed-upon percentage of the borrowers’ receipts, but the lenders used numerous fraudulent measures to ensure borrowers almost never qualified for payment refunds. As a result, the transactions were actually short-term loans with ultra-high interest rates of up to 820% per year.

Impacted small businesses include the City Bakery, a Manhattan eatery in Union Square, which was forced to close in 2019, largely as a result of its skyrocketing debts to Yellowstone. Before closing, the bakery, which employed 30-50 full-time staffers, had to pay more than $2,000 per day to Yellowstone due to the fraudulent, predatory loans.

This is a familiar question which has been litigated many times has been whether or not a Merchant Cash Advance falls under the regulations associated with loan regulations. Many times the State of New York judges have stated that the usury laws do not apply to Merchant Cash Advance companies.

That is, merchant Cash Advances are not loans and therefore do not fall under the regulations that loan companies and banks fall under. This seems like a difficult hurdle for the AG to overcome. From past litigation in NY, they are making an argument which has never had a ruling which supports their claim. Perhaps this is a political stunt. The same AG sued Donald Trump which the Trump defense has focused on the political nature of the lawsuit.

However, it does not mean that the MCA companies are complete predators and sought to rip off their clients. These claims hold much more water than their claims that the MCAs were illegal.

Schemes which should be added.

One area that is included in the lawsuit is the use of the courts to attain judgements against small business owners so they can recover the funds they lost. There are plenty of MCA companies who have used the courts to go after small business owners who have defaulted on their ridiculous terms and factor rates. The Attorney General should investigate not only this scheme which hurts our clients, but the collections companies and their attorneys who in many cases are just as bad as the ones being sued in this particular case.

Dr. Thomas Tramaglini is the Director of Operations and Negotiation for Beacon Client Solutions, a company that supports small businesses on a host of fronts, especially MCA debt. Thomas has been a small business owner for many years, as well as held leadership positions in several organizations and companies. Thomas holds a B.A. in History, as well as Masters and Doctorates in Organizational Leadership from Rutgers University, The State University of New Jersey.

Disclaimer: Beacon Client Solutions is not an accountancy, or a law firm. We are business consultants. While Beacon works with outstanding attorneys and accountants, we cannot and do not provide legal or tax advice. All of our work is connected to those who are legally certified to give such advice. Beacon does have a longstanding body of work in MCA resolution and understands what small business owners deal with, specific to MCA. Beacon Client Solutions serves clients in all 50 states, Puerto Rico, Mexico, and Canada.