New Jersey Attorney General Sues Merchant Cash Advance Providers | Ballard Spahr LLP

The New Jersey Attorney General recently filed a complaint in New Jersey state court against Yellowstone Capital LLC, its parent Fundry.US LLC, and various Yellowstone subsidiaries and affiliates, alleging that the defendants violated the New Jersey Consumer Fraud Act (CFA ) and the New Jersey Regulations Governing General Advertising (Advertising Regulations) in relation to marketing and the provision of merchant cash advances. Yellowstone and Fundry were also named as defendants in a lawsuit recently filed by the FTC for alleged unfair and deceptive acts or practices in violation of FTC law in connection with the same activities.

The CFA prohibits the use of:

any unreasonable business practice, deceit, fraud, pretense, false promise, misrepresentation, or the knowing concealment, deletion or omission of any material fact with the intention that others rely on such concealment, deletion or omission , in connection with the sale or advertisement of any merchandise or real estate…whether or not any person has been misled, deceived or damaged thereby….

The Advertising Regulations make various practices regarding all advertising illegal, including:

Making false or misleading representations of facts regarding the reasons, existence or amounts of price reductions, the nature of an offer or the quantity of advertised goods available for sale.

The NJ AG complaint refers to small businesses and their owners who obtained cash advances from defendants as “consumers,” perhaps to emphasize that the “consumers” protected by the CFA include businesses. According to the complaint, the defendants violated the CFA through conduct that included:

  • Imposing usurious interest rates on small business loans disguised as debt purchases
  • Withdraw money from customers’ bank accounts in excess of authorized amounts by continuing to withdraw money after a customer has fully refunded the “purchased amount” and then failing to make timely refunds
  • Filing admissions to judgment and obtaining judgments against consumers who have not defaulted or otherwise violated agreements with merchants
  • Misrepresent or conceal from consumers the true nature of transactions as usurious loans
  • Misrepresenting the amount of the purchase price that consumers would receive, the amount of fees that defendants would debit consumers’ bank accounts, and the amount of upfront fees
  • Representing in advertisements that they did not require personal guarantees from business owners when in reality they required business owners to sign personal guarantees of the full amount financed in the event of default by the business

The NJ AG alleges that the defendants violated the Advertising Policy through conduct that included the misrepresentations regarding personal guarantees as well as their representations in the advertisements that they did not require guarantees from business owners when ‘in reality, they required business owners to sign security agreements. provide guarantees to defendants in the event of default.

In addition to a permanent injunction to prevent future violations of the CFA and the Advertising Rules, the remedy sought by NJ AG includes the maximum civil legal penalty for each violation of the CFA, restitution of illegally acquired profits, termination of all trade agreements and orders requiring defendants to set aside all judgments unlawfully obtained in their favor against consumers and to file sufficient documents to terminate all liens or security interests unlawfully obtained in connection with merchant cash advances.

The FTC and NJ AG lawsuits serve as a reminder that the FTC and state AGs have enforcement authority with respect to business-to-business activities and that small business loans and other forms of small business financing are often treated the same as consumer loans for purposes of FTC law as well as state laws.

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