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Education

MCA – collections dates and amounts need to be changed for each case. The
same is true for drafting discovery motions and motions
and disclosure for judgment – default or otherwise.

Passage of Senate Bill 1235
requirements On Jan. 1, 2019, California Senate Bill 1235 went into

effect. The bill targets nonbank small business financers,
specifically mandating that they disclose the total cost
of financing expressed as an annualized rate (instead of
APR). The bill states, in pertinent part:

"This bill would require a provider who facilitates
commercial financing to a recipient, as defined, to
disclose specified information relating to that transaction
to the recipient at the time of extending a specific offer
Lauren Hanley-Brady of commercial financing, and to obtain the recipient's
Global Legal Law Firm signature on that disclosure before consummating the
commercial financing transaction.
eaders in the merchant cash advance (MCA)
industry take calculated risks to fund small "The bill would require that disclosure to include specified
businesses with the expectation of receiving information, including the total amount of funds provided,
L future receivables. But, sometimes, even if a information related to the payments to be made, and the
company works with a merchant to reduce daily, weekly total dollar cost of the financing. "The bill would, until
or monthly payments to help ensure the company doesn't January 1, 2024, additionally require a provider to disclose
go bankrupt, the merchant defaults and appears to drop the total cost of financing expressed as an annualized rate.
off the face of the earth.
"The bill would authorize a provider who offers financing
Sometimes, the debt outstanding isn't worth pursuing that is factoring or asset-based lending to, in lieu of those
with full-blown litigation, so payment process seizure is disclosure requirements, provide an alternative disclosure
a strong avenue to take, assuming you know where the that meets specified requirements, including that the
merchant banks (that is, the merchant hasn't moved banks disclosure may be based on an example of a transaction
in breach of the MCA agreement). However, learning the that could occur under the general agreement for a given
procedure for seizing payment processing and developing amount of accounts receivables.
relationships and contacts with all associated processors
and banks takes significant time and perseverance, as the "The bill would require the commissioner to adopt
information is typically not publicly available, and such regulations governing these disclosure requirements,
entities often resist disclosure. and would require those regulations to include specified
information and determinations. The bill would provide
Other times, the debts are sizable enough to warrant suing that a provider is not subject to these provisions until
merchants, but doing so would likely eat up significant those regulations become effective."
time for in-house counsel, as the litigation process is
expensive to maintain without templated procedures Concerns were stated by the opposition to the bill (http://
automating deadlines and case flow to keep track of src.bna.com/AUp), citing, among other issues, that:
numerous cases that will accumulate.
"The Estimated Annualized Cost of Capital ("ACC")
Each case will need a complaint filed, most likely in the calculation is an untested metric that fails to recognize the
county/state in which the merchants are located, although difference between a loan, which is absolutely repayable,
one can try to enforce a forum selection clause in an and an accounts receivable purchase transaction. Because
MCA agreement, but that carries the risk of wasted time this disclosure is not consistently used in any business
in disputes regarding removal to courts deemed "more finance transactions, it will confuse small business
convenient" or "reasonable." owners and increase the risk of litigation." While there are
exceptions and exemptions listed in the bill's language,
Merchants must be served after a case is filed. If they the above will likely require frequent checks to confirm
have purposefully fallen off the grid, it takes legwork to continued compliance with the fast-changing landscape of
track them down or obtain court permission to serve by legal compliance.
publication in a newspaper. Discovery, if reached, should Lauren Hanley-Brady is an attorney with Global Legal Law Firm, whose
be brief and tailored to maximize the ability to submit attorneys are well recognized as top payments industry experts. Contact
a motion for summary judgment (which would end the
case), but general enough so only the defendants' names, her at Ihanley-brady@attorneygl.com.

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