By: Donald L Swanson
The opinion is Samson v. The LCF Group, Inc. (In re Bridger Steele, Inc.), Adv. No. 2:24-ap-2003 in the Montana Bankruptcy Court (decided September 30, 2024; Doc. 10).
Background
Debtor is a fabricator and seller of metal roofing and siding products.
Debtor files its voluntary Chapter 11 bankruptcy petition on February 24, 2023, because of what it describes as a “liquidity crisis” (i.e., because Debtor runs out of cash and can’t pay its 57 employees or operate its business).
Less than four months later, Debtor’s case converts to Chapter 7 (on June 13, 2023). Samson is appointed Chapter 7 Trustee for Debtor’s case.
Defendant files a proof of claim in Debtor’s bankruptcy (Claim No. 237-1) in the amount of $549,214.29 for “Purchase of Future Receivables, Contract Breach, Collateral.” In other words, Defendant is a merchant cash advance (“MCA”) lender.
Adversary Claims
Trustee files a Complaint against Defendant in the Bankruptcy Court (Adv. No. 2:24-ap-2003) on various claims, including:
- recovering preference payments of $173,833.45;
- avoiding Defendant’s lien;
- recovering a forfeiture of $371,860;
- recovering a sum double the amount of interest paid pre-petition;
- disallowing Defendant’s proof of claim;
- awarding pre- and post-judgment interest, including interest on each transfer from the date of transfer until paid; and
- awarding Trustee’s attorney fees.
Defendant’s MCA Loan
Here are the details of Defendant’s MCA loan to Debtor, which details are highlighted in bold-face font on the first page of the loan documents attached to Defendant’s proof of claim:
- “Purchase Price: $350,000.00”
- “Specific Daily Amount: $4,966.67”
- “Specified Percentage: 12.00%”
- “Purchased Amount: $521,500.00”
The date of Defendant’s MCA loan to Debtor is December 19, 2022. That’s 67 days before Debtor runs out of cash and files bankruptcy.
–MCA Interest Rate: >100% Per Annum?!!
Here’s how the details of Defendant’s loan to Debtor might translate into an interest rate calculation.
- Interest Amount. Debtor is to repay $521,500 on a $350,000 loan—that’s a $171,500 (or 49%) return of interest.
- Installment Payments. Repayment of the $521,500 is to be in installments of $4,966.67 each business day, by automatic sweeps out of Debtor’s checking account.
- Payments Period. At that rate, the entire $521,500 amount would be repaid in 105 business days—that’s less than half a year, even when the non-business days are added in.
- Interest Rate. So, an interest rate of 49% for less than a half year, when translated into a per annum interest rate, would have to be >100% per annum, right?!!
- Deception? Defendant’s purpose for the highlighted “Specified Percentage: 12.00%” on the first page of the documents attached to Defendant’s proof of claim is intended to do what? To deceive a borrow, who desperately needs cash, that the actual interest rate is 12.00%? I don’t know . . . but it looks that way.
Arbitration–Trying to Run Away
The In re Bridger Steel opinion is actually about arbitration. It’s about Defendant’s motion to compel arbitration:
- the documents attached to Defendant’s proof of claim contain an arbitration requirement for disputes arising therefrom.
–Good Reason for Defendant Wanting Out of Bankruptcy Court
And there’s good reason for Defendant to want out of the Montana Bankruptcy Court. In a prior opinion from that same Court, an MCA lender faired badly. That prior opinion is discussed in this linked article.
So, Defendant moves in the Adversary Proceeding to compel arbitration (Doc. 5)
Remaining in Bankruptcy Court
The Bankruptcy Court denies Defendant’s arbitration motion, with an interesting, informative and instructive opinion.
I’ll attempt to summarize, in a subsequent article, the essence of the Bankruptcy Court’s analysis for denying Defendant’s motion to compel arbitration.
Conclusion
I’ve always said that an MCA loan is a death knell for any debtor taking such a loan. That loan is the beginning of the end for the debtor.
Here’s why: merchant cash advance loans are made to businesses in desperate need of cash, and such loans (i) are easy to get, but (ii) come with the price tag of an exorbitant rate of interest.
In re Bridger Steel, Inc., is one more death knell example.
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