By Andrew Kerr
From national banks deferring mortgage payments to CEOs giving up their pay in solidarity for furloughed workers, there have been many examples of American industries stepping up to the plate as federal, state, and local governments have adopted wartime-like responses to combat the coronavirus crisis.
But one industry, which offers an obscure form of financing to small businesses called Merchant Cash Advances (MCA), has seemingly taken a different approach.
“There’s lots of talk about helping small businesses. But in the last few days, lawyers running lawsuit mills are suing small businesses to extract cash,” Federal Trade Commission member Rohit Chopra tweeted on March 19 about the MCA industry. “The lawyers work for lenders that offer pricey payday-style loans using sketchy contract terms to restaurants and businesses.”
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MCAs are a form of financing typically leveraged by small businesses that don’t have access to traditional loan options. MCAs are not loans; rather, they’re the sale of a portion of a business’s future income at a discount. Typical MCA agreements require businesses to make payments every business day of a set dollar amount until the agreement is settled.
MCA agreements often include “confessions of judgment,” clauses that force businesses to plead liable if the MCA provider alleges that the agreement has been breached, which can occur if the business misses just one or two of their daily payments. The agreements typically grant providers the immediate right to the outstanding balance from the business in the event of a breach.
“This is robosigning on steroids,” Chopra said of confessions of judgment clauses.
Shane Heskin, a trial attorney who testified before Congress in 2019 about small businesses that have been sued by MCA companies, told the Daily Caller News Foundation that he has seen an increase in litigation actions brought forth by MCA companies since the coronavirus crisis hit the United States.
“I haven’t seen a decrease at all. Instead I’ve seen an increase in filings and even more aggressive behavior than prior to this,” Heskin said.
One prolific filer was Itria Ventures, an MCA provider that filed lawsuits against 15 businesses in New York during the week of March 16. In one of its recent lawsuits, Itria accused its client of failing to make its daily payments beginning “on or about March 18.”
Itria filed its lawsuit against that client on March 19 in a New York court for $282,000. The complaint was signed by Jonathan Gitlin, the general counsel of Biz2Credit, a small business lender of which Itria is a subsidiary.
As Itria filed actions against small businesses in New York courts in March, Biz2Credit presented itself in multiple press releases as a partner to small businesses trying to navigate the coronavirus crisis.
“Biz2Credit stands with business owners during difficult times to get them the funding their businesses need to grow and thrive again,” the company wrote in its recently-launched resource hub for small businesses seeking help from the Small Business administration and other government initiatives.
Itria filed motions to discontinue many of its recently-filed lawsuits in New York hours after the DCNF began contacting some of the businesses it sued.
‘They Didn’t Care’
Paul Hansen, Jr. operates a Missouri-based heating and air conditioning repair business that he said has suffered an 85% decline in business in March because his customers are scared to let people in their homes due to the coronavirus. His was one of the 15 businesses sued by Itria the week of March 16, according to records obtained from the New York State Unified Court System.
“With the Corona virus [sic] we are seeing a slow in our residential work,” Hansen wrote in an email to his Itria account representative on March 18. “We only owe $19k between the two loans. Why would your company not be willing to work out payment with us rather than stopping altogether and trying to collect through a lawsuit?”
“All you will do is cause us to go under,” Hansen told his Itria representative in the email, which he provided to the DCNF. “If we can make it through until April 15th somehow I can go back to full payments at that time and get this account paid in full.”
Unbeknownst at the time to Hansen, Itria had already filed two lawsuits against him for a combined $20,561 plus interest and attorney fees. Hansen told the DCNF he first received notice of the lawsuit on March 24.
Itria accused Hansen of breaking the terms of his agreement beginning “on or about March 9, 2020,” in one of the lawsuits it filed against the small business owner on March 17. Itria’s second lawsuit against Hansen, filed the same day, accused the small business owner of failing to make payments beginning “on or about March 10.”
“They didn’t care,” Hansen told the DCNF. “They placed a lien on our PayPal account and are basically trying to bankrupt our small family-owned business.”
“It’s frustrating because we had a year-long relationship with them,” Hansen said. “That didn’t seem to matter and we definitely feel like they took advantage of the downward spiral of the economy to file against when we wouldn’t be able to do much to defend ourselves.”
On the afternoon of March 25, the DCNF attempted to reach many of the other business owners Itria sued the week of March 16. By the evening of the 25th, Itria had filed motions to discontinue all but three of the matters it had brought forth that week, New York court records show.
Outside counsel for Itria, Albert Shemmy Mishaan, told the DCNF that for the majority of the businesses subject to a lawsuit that week, “Itria subsequently entered into payment arrangements with them and are on good terms with them and, and the complaints were dismissed.”
“For the handful of other unresolved matters filed recently, Itria voluntarily dismissed those complaints as the court system is now closed, and the merchants have not yet had to respond to the complaint,” Mishaan said. “It therefore served no purpose to keep these matters open. In the meantime, we continue to work to enter into agreements with these merchants as well.”
One of the small business owners contacted by the DCNF on March 25 was unaware that they had been sued for over $50,000 the week prior. The business owner, who did not agree to speak on the record, expressed shock upon learning from the DCNF of the lawsuit, saying they were under the impression they had worked out a payment plan with Itria.
Itria sued another business, an Arizona-based restaurant chain, for $282,000 on March 19 after failing to remit payments “beginning on or about March 18,” according to the lawsuit.
New York court records show that all of the lawsuits Itria filed that week were filed by Jonathan Gitlin, the general counsel of Biz2Credit, a small business lender of which Itria is a subsidiary.
Biz2Credit CEO Rohit Arora expressed concern in an unrelated press release Tuesday that vast swaths of small businesses are in danger of going bankrupt unless the Small Business Administration enlists the help of companies such as his.
“We need to act fast or else 75% of small businesses in America will go bankrupt if they don’t get access to credit in the next 60 days,” Arora said. “Small business owners need money in hand.”
According to press releases, Arora has been aware of the impact coronavirus would have on small businesses since at least March 3. He acknowledged in a March 3 press release that most small businesses in the United States are already taking a hit due to coronavirus and that most have no more than one month of working capital, a financial metric used to measure a business’s short-term financial health.
Itria Dismissed Lawsuits After The DCNF Contacted The Businesses Sued
The DCNF made attempts on March 25 to contact many of the 15 companies Itria filed actions against the week of March 16. Later that afternoon, the DCNF received an unsolicited phone call from a spokesman for Biz2Credit, John Mooney, who said he was made aware that the DCNF was contacting its clients.
Unaware at the time that Itria is a subsidiary of Biz2Credit, the DCNF told Mooney it was surprised to receive his phone call and informed him that it was looking into lawsuits filed by Itria specifically for the week of March 16.
Mooney did not disclose Biz2Credit’s ownership of Itria during March 25 afternoon conversation.
By that same evening, Biz2Credit’s general counsel had filed motions to discontinue complaints Itria had filed against 13 of the 15 clients it filed matters against the week of March 16.
Attorney Mishaan told the DCNF on Friday that Itria “voluntarily dismissed” many of its recently filed matters because of the recent closure of the New York court system and because the “merchants have not yet had to respond to the complaint.”
“It therefore served no purpose to keep these matters open,” Mishaan said.
Mishaan is an attorney with Kasowitz Benson Torres, whose founding partner, Marc Kasowitz, has worked with President Donald Trump for over 15 years and has a reputation for being one of the toughest lawyers on Wall Street, according to The New York Times.
Mishaan said that two of the matters from the week of March 16 that haven’t yet been discontinued have been resolved and will be dismissed when the courts reopen.
Speaking generally about the lawsuits Itria filed the week of March 15, Mishaan said that many of the companies it sued the week of March 16 “breached their funding agreements last year, and after Itria made numerous attempts to resolve the matters.”
But Itria’s own lawsuits seem to tell a different story. One of the lawsuits Itria filed the week of March 16 accused a California-based car dealership of failing to remit payments beginning on or about Dec. 18 of this year. Mishaan said the date in the lawsuit was a “typographical error” and that it should have stated Dec. 18, 2019.
None of the other companies Itria filed actions against in New York courts that week were accused in the lawsuits of breaching their agreements before early February.
Responding to this figure, Mishaan reiterated that many of the businesses Itria sued had entered default at least once prior to the date disclosed in their lawsuits and that the businesses defaulted again on the resolutions reached after the initial default.
Mishaan provided specific dates that the businesses originally entered defaults, which for some companies dated back to October 2019.
In the case of Hansen, the owner of the Missouri-based HVAC business, Mishaan told the DCNF he first defaulted on his agreements in December 2019. The two lawsuits Itria filed against Hansen each only mention one default apiece, alleging they occurred on or about March 9 and March 10, respectively.
“They did not tell us we had defaulted until March,” Hansen told the DCNF when asked if Itria ever informed him that he had defaulted on his agreements in December 2019.
The DCNF reviewed email communications Hansen had with his Itria account representative between December and March. The communications show that Hansen requested in January that Itria restructure his payment plans after his business began falling behind on business due to a seasonal lull, but the Itria representative never informed Hansen that he was in default at that time in the materials reviewed by the DCNF.
Mishaan did not respond when asked why Itria didn’t include information regarding earlier defaults by its clients in any of its lawsuits filed the week of March 16.
“The bulk of the defaults cited in the lawsuits occurred well before any coronavirus-related lockdowns began in the United States,” Mishaan said. “For example, New York did not close restaurants and bars until mid-March.”
‘These Guys Are Heartless’
Itria is able to sue companies soon after they fall behind on payments because the financing they offer — MCAs — isn’t technically a loan, nor are they subject to usury laws such as the Truth in Lending Act, according to Yahoo Finance.
For example, Hansen “sold” 5.98% of his business’s future receivables to Itria for $21,350, according to an agreement he signed with the company in October 2019. The agreement stipulates that Itria owns that percentage stake in his business until $30,375 is paid back. Hansen signed a second agreement with Itria in December signing over an additional 1.34% of his future account receivables until $10,400 is repaid.
The agreements, which Hansen shared with the DCNF, state that they’re a “sale and not a loan” and that Itria “assumed the risk that Future Receivables may not be available for remittance.”
After all, going by percentage alone, if Hansen’s business can’t make any money due to the coronavirus crisis, he wouldn’t owe Itria anything.
But there’s a kicker: Itria’s agreements with Hansen also stipulate that his business is obligated to pay Itria a combined $413 every business day, an estimation that was based on his business’s monthly income at the time the agreements were signed in October and December.
And the contracts state if Hansen fails to make his daily payments, he would be found in “Material Breach” of the agreement, thereby granting Itria the immediate right to the outstanding balance owed by his business, plus attorneys’ fees and interest.
Furthermore, as a guarantor of the agreements, Hansen is also held personally in the event of a contractual breach.
Confessions of judgment are often utilized by MCA companies such as Itria. Itiria’s attorney, Mishaan, told the DCNF on March 31 that neither of the suits filed against Hanson were enforcements of a confession of judgement but were instead “breach of contract” claims.
Nonetheless, confessions of judgments in favor of MCA companies in New York have exploded since 2014, according to Bloomberg News. Only 14 such cases were filed before 2014. By mid-2018, over 3,000 confessions of judgment were being filed in the state each quarter.
Hansen told the DCNF that, as the owner of an HVAC repair business, he typically sees a lull in business during the winter months, and it didn’t help that this past winter was one of the warmest in recorded history.
Put simply, $413 a day for Hansen’s business in February was a far greater percentage of his business’s pre-expense earnings than it was in October and December when the rates were set.
Emails Hansen shared with the DCNF show that Itria agreed to reduce his daily payments by nearly half in early February from a combined $413 a day to $225 a day. But the communications viewed by the DCNF show no apparent effort on Itria’s end to ensure Hansen’s payments constituted 7.32% of his business’s pre-expense income, the sum of the two figures stipulated in his two contracts with Itria.
Hansen said that Itria reached out to him Thursday evening with an offer to restart his payments on April 1 at the rate he was paying in February, but even then he’s looking at $4,950 in total payments to Itria for the month of April.
“I’ll likely have no choice but to agree,” Hansen told the DCNF on Friday. “Not sure what else we can do honestly.”
Hansen told the DCNF that he has seen his business drop by 75% to 85% in March from the same time in 2019 due to the coronavirus. Hansen said he has gone from running 15 to 20 jobs per day down to just one or two and that at best.
Hansen’s contracts grant him the right to request a “true-up,” or a refund, from Itria for any amount he overpaid at the end of every month, but he’s likely ineligible to make such a request as his contracts also prohibit him from requesting a true-up if he’s in breach of the agreements.
However, shortly after the publication of this article on Monday, Hansen told the DCNF that on Monday afternoon he was informed by Itria it would reduce his daily payments to $72 a day after he had requested a true-up review. Hansen added that Itria will also hold off until April 15 to restart his daily payments.
Shane Heskin, a trial attorney recognized as a leading expert defending small businesses sued by MCA companies, told the DCNF that the true-up provisions found in most MCA agreements are crafted in a way that makes it impossible for borrowers to actually use them.
“The contracts are so confusing,” he said. “You have to wait until after the month is over before you can reconcile. So what’s a small business supposed to do right now?”
In his testimony before Congress in 2019 about the alleged predatory practices of the MCA industry, Heskin told lawmakers that he’s represented more than 50 clients on MCA-related matters, and not one ever received money back under a true-up provision.
“The vast majority of my clients do not even know they have a right to ask for a refund,” Heskin said in his testimony, adding that “the vast majority of MCA agreements contain an addendum declaring a default if the business misses two or more daily payments.”
Heskin told the DCNF that the experiences Hansen has gone through with Itria is par for the course.
“Is this normal? Yeah, this is normal,” Heskin said generally of the MCA industry. “These guys are heartless, they’re ruthless.”
If you are a small business owner that has been sued by an MCA company and want to share your story, please contact Andrew securely at [email protected]
*UPDATE*: This article has been updated to include additional comments from Paul Hansen.
Correction: This article has been updated to show that Itria’s lawsuits against Hanson were based in a “breach of contract” and were not enforcements of a confession of judgement. Hansen also was not required to sign confessions of judgment in both agreements as previously reported. The Daily Caller News Foundation regrets the error.
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