Merchant Cash Advance Loans As “Unlawful Debt” For RICO Liability? (Golden Foothill v. Spin Capital)

RICO

“It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity or through collection of an unlawful debt in which such person has participated as a principal . . . ”

From the “Racketeer Influenced and Corrupt Organizations Act” (“RICO”; 11 U.S.C. § 1962(a); emphasis added).

Merchant Cash Advance Loans

Merchant cash advance loans are described as “payday lending for businesses.”

Typically, a small business takes such loans in desperate circumstances, and the subsequent demise of that business is virtually assured. Such loans are a path to economic perdition.

An Illustration

A prime illustration of how merchant cash advance loans work, and of the potential for related RICO claims, is this opinion: Golden Foothill Insurance Services, LLC v. Spin Capital, LLC, Case No. 24-cv-8515, in U.S. District Court for Southern New York (decided August 19, 2025).

What follows is a summary of that opinion.

The Loans

In Golden Foothill v. Spin Capital, Small Business takes five merchant cash advance loans from Lender over the course of a single month.

on March 2, 2021, Small Business receives a $100,000 advance, with a requirement to repay $149,900 through daily payments of $4,996 each—which payments Small Business cannot make;
on March 10, 2021, Small Business receives a $220,000 advance, with a requirement to repay $329,978 through daily payments of $8,500 each—which payments Small Business cannot make;
on March 12, 2021, Small Business receives a $220,000 advance ($114,928 is deducted from this advance to pay off the first $100,000 advance), with a requirement to repay $329,780 through daily payments of $8,500 each—which payments Small Business cannot make;
on March 25, 2021, Small Business receives a $400,000 advance, with a requirement to repay $599,600 through daily payments of $25,000 each—which payments Small Business cannot make; and
also on March 25, 2021, Small Business receives another $400,000 advance, with a requirement to repay another $599,600 through additional daily payments of $20,000 each—which payments Small Business cannot make.

A couple months later (in May of 2021), since Small Business cannot repay those advances, Lender:

requires Small Business to sign a promissory note payable to Lender in the principal amount of $2,700,000, with an annual interest rate of 60%; and
requires Small Business’s affiliates to sign personal guarantees of that loan.

The State Court Lawsuit & Dismissal of Counterclaims

A few weeks later (in June of 2021), after Small Business defaults on the loan, Lender sues Small Business and its affiliates in state court, seeking more than $14,000,000 in damages. Small Business and its affiliates counterclaim, alleging RICO violations.

[Editorial Comment: The progression of the numbers highlighted above, within a few months, is astounding!]

The state court dismisses the RICO counterclaims, without prejudice, holding that the counterclaims fail to state a claim that Lender “engaged in a pattern of racketeering activity or collection of an unlawful debt” because:

the face amount of the promissory note is $2.7 million, which amount “exceeds the $2.5 million threshold to which New York’s usury laws apply”;
the merchant cash advances cannot be “recharacterized as loans”; and
there is no allegation that Small Business requested an “adjustment of the payments” or that the adjustment “was done improperly.”

Suing in Federal Court

Rather than reasserting the RICO counterclaims in state court, Small Business and its affiliates sue Lender and related persons in the U.S. District Court for the Southern District of New York.

Defendants’ Motion to Dismiss

Lender Defendants move to dismiss the Federal Court lawsuit on multiple grounds. The Federal Court denies such motion on all grounds, including the following.

–Claim and Issue Preclusion

Lender Defendants argue for dismissal under doctrines of claim preclusion (res judicata) and issue preclusion (collateral estoppel) because of the state court’s dismissal of the RICO claims.

The Federal Court holds that claim preclusion and issue preclusion do not apply here because:

the state court’s dismissal without prejudice “plainly intended” that Small Business would provide additional information in an amended filing; and
exhibits attached to the Federal Court Complaint provide information that was not available to the state court on how Lender’s merchant cash advance agreements qualify as disguised loans.

–Abstention

Lender Defendants ask the Federal Court to abstain. The Federal Court refuses to do so for the following reasons.

In a situation involving parallel proceedings in state and federal courts, the question of whether the federal court should abstain requires a two-step analysis.

First, the federal court must determine whether the cases are actually parallel—whether substantially the same parties are contemporaneously litigating substantially the same issue in another forum. Parallelism is achieved only where there is a substantial likelihood that the state litigation will dispose of all claims presented in the federal case.

Here, the state and federal cases are NOT in parallel because, (i) the state court dismissal of Small Business’s counterclaims was without prejudice, which under New York law is not a dismissal on the merits, and (ii) Small Business is not obligated to reassert its counterclaims in the state suit, since New York does not have a compulsory counterclaim rule.

Second, the federal court must balance various factors—which factors are to be heavily weighted in favor of the exercise of jurisdiction by the federal court.

Here, the balancing of such factors, does not weigh decisively in favor of abstention.

–“Unlawful Debt”

Lender Defendants argue that plaintiffs have failed to plead that the merchant cash advance loan agreements constitute “unlawful debt” under the RICO statute because, (i) the advances are not loans, and (ii) where there is no loan, there can be no usury.

On the fundamental question of whether the merchant cash loan agreements are loans, a court must look to substance—not form. And the hallmark of a loan is that the lender is absolutely entitled to repayment under all circumstances.

Here, Small Business and its affiliates have plausibly alleged:

the massive increase of the balance owed, within only a few months, is not tenable; and
the daily payment amounts are consistent with a loan to be repaid over a fixed period, not a purchase of receivables.

–RICO Claim Elements

Lender Defendants argue that Small Business and its affiliates have failed to plead a cognizable injury—which is an essential element of a RICO claim. They argue that there is no injury because Small Business and its affiliates have “gained on the transactions at issue”—i.e., they received far more than they repaid.

This argument fails because:

that Small Business ultimately made repayments to Lender by taking out new loans from Lender is irrelevant—the last of which new loans was the $2,700,000 promissory note; and
regardless of how Small Business got the money to do so, Small Business paid off the merchant cash agreements and fully paid what it alleges were usurious payments.

What damages are cognizable is a question for discovery and summary judgment.

Editorial Comment & Conclusion

Over the years, I’ve been surprised at the support given to the merchant cash advance loan industry by the New York state courts and by the New York state legislature, enabling the types of loan balance explosions and enforcement attempts illustrated in Golden Foothill v. Spin Capital.

So, it’s interesting to see a federal court in New York take control of the Golden Foothill v. Spin Capital case and its RICO claims against the merchant cash lender.

And it will, undoubtedly, be fascinating to see how the Golden Foothill v. Spin Capital case and its state court antecedent play out!

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