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AdvanceMe to Settle $23.4 MM—Not Licensed In California
A tentative order with final approval for May 9, 2011 was filed today, March 28, 2011 in US Central District Court of California regarding a class action suit against AdvanceMe, Inc. with a settlement of $23.4 million. It appears AdvanceMe, Inc. was not a licensed California Finance Lender.
“Defendant AdvanceMe, Inc. (“AMI”) offers to merchants a financial product known as Merchant Cash Advance (“MCA”). Class Plaintiffs filed this action on May 29, 2008, alleging that MCAs are not purchases of future credit card receivables, as claimed by Defendant, but rather disguised loans with interest rates that violate California’s usury laws (dkt. #1). The operative Second Amended Complaint asserts claims for violation of California’s usury laws and California Business & Professions Code Section 17200, et seq., on behalf of a putative class of persons owning or operating retail establishments in California who entered into MCAs with Defendant or executed personal guarantees relating to such MCAs (dkt. #99).”
“The Settlement Agreement provides for a total of approximately $23.4 million in monetary consideration to the Settlement Class to settle the claims in this action. See Settlement Agreement at 12 (dkt. #253-1). Of that total, $11.5 million will be paid in cash; after a deduction for settlement costs (any attorneys’ fees, costs or incentive awards awarded by the Court) and an initial cy pres donation of $500,000 to a non-profit organization for the benefit of Settlement Class members, the $11.5 million will be distributed to qualifying Settlement Class members on a pro rata basis pursuant to the Settlement Agreement. Id. at 12-13. The settlement also includes terms that require Defendant AMI to deem all outstanding balances on MCAs that have been nonperforming for at least 24 months to be fully satisfied and performed. Id. at 11-12. “
“The negotiations were conducted over the course of many months, and included conference calls, written correspondence and face-to-face discussions. Id. ¶ 6.
3. Strength of Plaintiffs’ Case and Risks of Further Litigation. The contested issues in this case caused the parties to have different views of the settlement value. These issues included: (1) whether California law or New York law governs plaintiffs’ usury claims; (2) whether AMI’s MCAs are functionally equivalent to loans; (3) if AMI’s MCAs are found to be loans, how to calculate the interest rate on these loans for the purpose of determining whether they comply with applicable usury laws...”
“Considering only the cash consideration, the proposed settlement represents 12.6% of the total aggregate damages of approximately $91,105,709.”
“Attorneys’ fees. Plaintiffs request that the Court award attorneys’ fees in the amount of $4 million, plus interest, which is 17.1% of the $23.4 million settlement consideration ($11.5 million in cash, and approximately $11.9 million in outstanding account balances that Defendant AMI will deem satisfied).”
It appears AdvanceMe, Inc. does not hold a California Lender's License nor its parent.
March 28 filing on Tentative Settlement (8 pages): PDF
Information about Class Action Suit: http://www.amisettlement.com/
Monday, March 27, 2011
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I have written a lot about how important taking proper residual values for leases where the lessor has a purchase option. Even with any residuals, 5% or 10% or “Fair Market Value,” you should not be casual about it.
The salesman or the final acceptance telephone call should have a questionnaire that is kept in the file on how the lessee says they intend to use the equipment. In leases where the residual is over $5,000 expected, it is smart to have a call or calls to the manufacturer to secondary markets and guide books to determine the estimated wholesale value at lease termination. This many be a mandatory procedure with the new FASB accounting rules, so if you are not doing it now, it is a good time to start, not just for better control, but for accounting purposes.
In addition, you look like a Lessor and not a lender, if you are concerned how “your” equipment is being used and if the use exceeds the stated use then the additional rent helps control the residual risk. More and more lessor’s are adding additional rent clauses.
An increase in term can lower rent requirements but it increases the risk. Try and see if the vendor or someone in the secondary market, with good financials, will guarantee your residual for a fee. This fee can be passed on to the lessee as part of the documentation fee.
Occasionally when dealing with non-for-profits creating a Purchase Upon Term (PUT) helps the rental stream while the PUT covers the residual risk. This lease fails the tax and legal test but it does get the payments that fit into the budget of the non-for-profit.
Remember that any fixed price purchase option must be for at least 20% higher than your residual or you may fall into the trap of losing your income tax capital recovery benefits. The federal income tax rules state that “if the rent and the purchase option equal what a lessee could have obtained a loan with a balloon payment then because it has the economics of a loan it is considered a loan”, and not a lease.
You must also remember that any residual lowers the payment which in turn lowers the speed of the return of the investment and increases the lease margin. I have reported before that residuals make you more money, as an example, if you add up the income from a $100,000 fully amortized loan @10% over 60 months with payments in arrears the total income would be $27,482.27. Income on a lease over the same arrangements with a 10% residual provides $29,734.04. The difference of $2,251.77 or 8.19% higher comes from the higher outstanding balance during the repayment period. The additional income from a 15% residual is $3,378.66. The additional income can be realized from a PUT also, but a true lease offers additional income if the lessee selects and pays the purchase option or extends the lease payments.
Residuals have not been used as much today as they have in the past because many new lessors have been afraid to place what they think is a large risk in returning assets. However if the skills learned to study credit are used to evaluate equipment values then the residual risk is less likely to provide a problem than the credit risk. In addition a gain or loss on a residual at termination is charged to a “gain or loss on a capital asset” and as long as there is a positive balance in this account at the end of the year some losses are sheltered by the gains and they never show up. Therefore if the residual is no larger than 50% to 75% of the estimated future wholesale and any small losses are covered by the gains and more money is earned over the term then residual assumptions are a smart investment!
Mr. Terry Winders, CLP, has been a teacher, consultant, expert witness for the leasing industry for thirty-five years and can be reached at firstname.lastname@example.org or 502-649-0448
He invites your questions and queries.
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