On March 5, 2024, Letitia James, Attorney General of the State of New York, filed a 289-page Verified Complaint in New York County [Manhattan] of the Supreme Court of the State of New York [the trial level] against the largest MCA operator, Yellowstone Capital, LLC, and its successors, subsidiaries, and affiliated companies, as well as its owners, [“Yellowstone”], claiming that Yellowstone engaged in repeated fraudulent, deceptive, and illegal conduct, including civil and criminal usury. The State based its allegations on the following:

(i) the MCA agreement at issue was a merchant cash loan,

(ii) the MCA company was a RICO enterprise engaged in collecting upon an unlawful debt that charged more than twice the interest rate permitted by state law and

(iii) the owner of the MCA company was liable to the merchant under RICO. The case is under appeal by the MCA, but it is a significant case as, it not only found the MCA contract to be a usurious loan but, it is the first case to find an MCA liable under RICO.

(i) the MCA agreement was a loan

(ii) the MCA company was a RICO enterprise engaged in wire fraud and collection of an unlawful debt and

((iii) its owner was potentially liable to the merchant as a RICO person.

(i) the agreement was a merchant cash loan

(ii) the MCA company was a RICO enterprise engaged in wire fraud and collection of an unlawful debt and

(iii) its owner was potentially liable to the merchant as a RICO person.

Prior to retention of new counsel, a default judgment was entered against the merchant for its failure to timely respond to the complaint. Upon new counsel’s application to vacate the judgment, the court initially found that the MCA agreement was a receivable purchase agreement and therefore a usury defense was inapplicable because the contract was not a loan. On further review of the Fleetwood, Haymount, and Queen decisions, the court granted counsel’s request for reconsideration and found that the district court’s analysis in the other cases was compelling, and vacated the default judgment to permit a usury defense.

(i) the MCA agreement was a loan,

(ii) the MCA company was a RICO enterprise engaged in wire fraud and collection of an unlawful debt and

(iii) its owner was potentially liable to the merchant as a RICO person. This decision is important because the Judge had previously dismissed a similar action brought against an MCA company in Womack v. Capital Stack LLC, 1:18-cv-04192 (ALC), U.S. District Court for the Southern District of New York.