Merchant Cash Advance Providers Decline to Dismiss FTC Lawsuit | Ballard Spahr srl


The defendants in the complaint filed by the FTC in August 2020 in New York Federal District court against two merchant cash advance providers and their CEO and president for allegedly unfair and deceptive conduct in violation of Section 5 of the FTC Act filed a motion to dismiss. The FTC filed his opposition to the motion and the defendants responded to the opposition of the FTC. The lawsuit recalls that the FTC law applies to business-to-business (“B to B”) activities, including the financing of small businesses, and not just to business-to-consumer transactions. Such B2B financing is often treated the same as consumer financing for the purposes of other federal laws as well as state laws.

The defendants advance the following main arguments in support of the dismissal:

  • The FTC does not have the legal authority to bring legal action because Section 13 (b) of the FTC Act does not allow the FTC to bring an action in federal court to prohibit acts or practices only if the FTC has reason to believe that a defendant “violates, or is about to violate” a provision of the law. Thus, section 13 (b) only applies to imminent conduct or continuous, not past conduct The FTC cannot (and does not plausibly allege) imminent or continuing unlawful conduct on the part of the defendants.
  • The FTC alleged in its complaint that the defendants engaged in deceptive acts or practices by stating in advertisements that they did not need any personal guarantees or guarantees from business owners while in effect, they required business owners to give a so-called security or lien on all business property they owned, including accounts, equipment, inventory and other assets, and to sign personal guarantees of the entire amount financed in the event of business failure. In making this claim, the FTC has isolated “three to twelve words from each advertisement it challenges and fails to plead sufficient context to assess one of the advertisements from a reasonable merchant’s perspective.”
  • The FTC alleged that the Defendants also engaged in deceptive acts or practices by stating in contracts that the Defendants would provide a certain amount of financing (called the “purchase price”) when in fact the amount supplied was significantly lower than the purchase price. as a result of withholding costs which are mentioned “several pages in the contract without any indication that they are deducted from the” Purchase price “- funds promised to [small business] consumers. In making this allegation, the FTC[s] language of a discontinued version of [the defendants’] MCA Agreement, while omitting any mention of plain and visible language in the same document which expressly discloses these charges.
  • The FTC alleged that the defendants engaged in unfair acts or practices by withdrawing money from customers’ accounts in excess of authorized amounts by continuing to withdraw money after a customer had fully refunded the “amount purchased”. These continued withdrawals were the result of a latency period in ACH processing and were expressly permitted by the MCA Agreement.
  • The FTC did not bring an individual liability claim against the individual defendants because it did not sufficiently allege that the individual defendants participated in or had authority over the alleged illegal acts.

In its opposition to the motion to dismiss, the FTC says it plausibly alleged that the defendants were violating or were about to violate FTC law at the time it filed the lawsuit, facts alleged sufficient to make a claim of deception and injustice under the FTC Act, and alleged facts sufficient for individual liability.

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