‘A National Epidemic’: Yellowstone Capital Hit with RICO Lawsuit Over Alleged Usurious Loan Agreements

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A proposed class action accuses cash advance group Yellowstone Capital, LLC of engaging in predatory lending practices that have financially injured small business owners and their families.

The 40-page case claims Yellowstone, a subsidiary and several investors have charged business loan borrowers “grotesque” interest rates of over 500 percent and illegal and excessive “ACH Program Fees” that, though purporting to cover the costs of Yellowstone’s “labor intensive” ACH program, were in fact “sham fees” charged for an automated process that “required no labor at all.”

Moreover, the lawsuit alleges that although Yellowstone has attempted to avoid state usury laws by characterizing the transactions at issue as “merchant cash advances” (MCA), they were, “in economic reality, loans that are absolutely repayable.” In order to collect payment, the defendants have included within their borrower contracts confessions of judgment—i.e., agreements to forfeit any right to dispute a claim in the future—to ensure the company will be able to collect any unpaid loan amounts in court without having to notify the alleged debtor, the suit attests. The case claims that the defendants have, since 2012, filed more than 6,000 confessions of judgment against small businesses who supposedly failed to make their required daily payments. 

According to the suit, the defendants’ conduct has led to “a national epidemic” that has captured the attention of New York Governor Andrew Cuomo, the New York State Legislature, the New York Attorney General, the Manhattan District Attorney, the New Jersey Attorney General, the Federal Trade Commission and the United States Congress. 

The lawsuit says the plaintiff, the owner of a Virginia plumbing business who allegedly paid the defendants “a staggering $347,075 in interest” in less than a year and an additional $68,494 in ACH program fees, is a prime example of “both the destruction of small businesses and the devastation to their individual owners and families.” Per the case, the man’s story was “so compelling” that he was featured in a Bloomberg article detailing Yellowstone’s alleged predatory practices, and invited to testify before Congress.

The plaintiff says he has filed this action “in order to stop the [defendants’] unlawful predatory lending and to remunerate the many hundreds of victims that have been preyed upon by Defendants through the New York Court System.”

The merchant cash advance (MCA) industry, according to the lawsuit, is “essentially payday lending for businesses” and targets struggling business owners with bad credit ratings who may not be able to obtain a traditional loan. According to the suit, a merchant cash advance allows a business to borrow a sum of money and repay the advanced amount—plus interest—through daily withdrawals from the merchant’s checking account in a fixed rate supposedly based on the business’s daily revenues.

MCA companies such as Yellowstone, the suit continues, “receive the bulk of their revenues from the origination process,” not the performance of the loan, and thus “only care about whether they can collect upon default.” According to the suit, the defendants and other MCA companies use high-pressure sales tactics to trap borrowers in “a never-ending spiral of debt” that requires them to take out additional loans to pay off the older ones.

Yellowstone, the lawsuit says, has “expanded its umbrella” to include other MCA companies such as Advance Merchant, LLC; Arch; Capital Advance Services, LLC; Capital Merchant Services, LLC; HSC; World Global Capital, LLC; Green Capital Funding, LLC; Merchant Funding Services, LLC; and YCW. Per the case, Yellowstone’s stable of companies all operate out of New Jersey but were “strategically organized” under the laws of New York to take advantage of the state’s confession of judgment statute and “post-judgment collection devices.”

The lawsuit claims that while the defendants have attempted to distinguish MCAs from loans, Yellowstone’s advertising consistently represents the transactions as loans for small businesses. Regardless of the defendants’ representations, however, the MCA agreements are “substantively and procedurally unconscionable” contracts that are not negotiated at arms-length and “prey upon the desperation of small businesses and their individual owners,” the filing alleges. Included in the agreements, the case says, are a number of one-sided terms that purport to grant the defendants a shocking amount of power and falsely represent the nature of the transaction. As a result, the suit states, merchants end up paying triple-digit interest rates and egregious ACH fees, which the lawsuit contends are unlawful given the execution of ACH transactions is automatic and requires no labor on Yellowstone’s part.

According to the suit, the defendants’ MCA agreements were “designed to fail,” causing merchants to default in the event of a decrease in sales. Upon a default, Yellowstone accelerates the entire debt and many times files the business’s confession of judgment in New York court in order to seize its assets, the case says. The merchant is then required to turn over 100 percent of its receivables “if it misses just one fixed daily payment,” according to the filing. In reality, however, the agreements contain “the hallmarks of a loan” and are therefore subject to state usury laws that prohibit the defendants from charging as much as they do.

The lawsuit alleges violations of the Racketeer Influenced and Corrupt Organizations (RICO) Act and looks to permanently stop the defendants from collecting on usurious loan agreements while awarding damages to those affected.

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