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:
- New York law prohibits usurious loans when masquerading as purchases of revenue.
- Yellowstone contracts have fixed durations, and payment amounts that do not approximate a specified percentage of revenue
- During the repayment period, Yellowstone did not change the fixed durations and payment amounts based on the specified percentage.
- The contract reconciliation clause is discretionary and not in tune with the specified percentage.
- The specified percentage is irrelevant insofar as it relates to the reconciliation clause.
- Yellowstone claimed the right to repayment in the event of bankruptcy or the merchant’s lack of revenue.
- Yellowstone contracts used “interest rates” that significantly exceeded the legal limit.
- Yellowstone misrepresented its business operations and transactions to the courts in prior litigation.
- Yellowstone engaged in fraudulent conduct in its dealings with merchants.
- Yellowstone’s primary successor-in-interest, Delta Bridge Funding LLC, was nothing more than a name change with Yellowstone just operating under a different name.
- The individual defendants operated Yellowstone throughout its history knowing that their actions were contrary to the law of New York.
The State’s case rested on the premise that the Yellowstone contracts were loans at usurious rates of interest. The Complaint named Yellowstone, 26 affiliated companies, some of which operated as an additional 48 separate entities as DBAs, and the company owners as party-defendants. On December 2, 2024, less than 9 months following the filing of the action against Yellowstone, the State notified the court that the Yellowstone litigation had been settled by an overwhelming majority of the defendants. A Consent Order and Judgment was entered by the court resulting from the settlement. The pertinent terms of the Consent Order and Judgment were as follows:
- The settling defendants were permanently barred from engaging in the MCA business.
- All obligations owed by merchants or their guarantors, including but not limited to unpaid balances due, fees, attorney’s fees, settlement amount, and unsatisfied judgments were irrevocably cancelled.
- The settling defendants were barred from any attempt to recover any cancelled debts.
- The settling defendants could not assign, sell, or otherwise transfer to any other person or entity any claimed right to collect the cancelled debt.
- All unsatisfied court judgments issued against merchants and guarantors were vacated.
- All existing judgments were vacated.
- All pending litigation by the settling parties against merchant7. All pending litigation by the settling parties against merchants and guarantors were dismissed with prejudice.s and guarantors were dismissed with prejudice.
- All UCCs filed by the settling defendants were terminated.
- Yellowstone agreed to the entry of a judgment for $1.065 billion which amount was offset by $534.6 million, which represented cancelled debt of the merchants/guarantors, once Yellowstone vacated any judgments against the merchants/guarantors.
- Following application of the offset, the amount of the Judgment was reduced to $531.0 million.
- The Judgment required an immediate payment to the State of $3.4 million from Yellowstone and $12.7 million from owners Stern and Reece, which reduced the Judgment amount to $514.0 million following offset.
- The State had the right to collect the remaining $514.0 million from Yellowstone.