Receivables Purchase Agreement Enforced Against Contractor and Personal Guarantor

WHAT HAPPENED

In Simply Funding LLC v. Clarkston Complete Renovation LLC, the funder paid the contractor $120,000, less an agreed origination fee, in exchange for $169,200 of future receivables. The contractor authorized weekly ACH withdrawals of $3,845.45, and its principal personally guaranteed performance. After remitting $49,990.85, the contractor blocked further withdrawals. The funder sued for $121,709.15.

THE DECISION

The court dismissed the contractor's affirmative defenses and granted summary judgment to the funder. It held that the agreement was not a loan - and therefore was not subject to New York's usury laws - because:

• it contained a reconciliation process allowing withdrawals to adjust based on actual receipts;
• it had no fixed repayment term; and
• bankruptcy alone was not an event of default.

The court also rejected defenses based on unconscionability, lack of a contract, statute of frauds, lack of standing, failure to mitigate, and unclean hands. The funder's business records established the funding, partial remittances, and blocked ACH transactions. Judgment could be entered for the amount demanded.

WHY THIS MATTERS

The decision does not make every receivables purchase agreement enforceable. Courts examine substance, not labels, and the result turns on the agreement's actual terms and operation. But when repayment is truly contingent and the agreement includes the three features above, a usury defense may fail. A personal guaranty can also expose the business owner directly.

Blocking ACH withdrawals is not a legal strategy. It may trigger default fees, attorneys' fees, and immediate liability while depriving the business of leverage.

THE BOTTOM LINE

Before signing, contractors should have counsel review the cash actually received versus the receivables sold, the reconciliation process, ACH and default provisions, personal guaranties, stacking and cross-default restrictions, attorneys' fees, and forum provisions. Merchant cash advances may provide fast cash, but the effective cost can be steep and the remedies aggressive. Review the agreement before signing - not after the withdrawals become unsustainable and the lawsuit arrives.

 

 

If you would like more information regarding this topic please contact Thomas S. Tripodianos at ttripodianos@wbgllp.com or call (914) 607-6440