The Federal Trade Commission recently prevailed on summary judgment in a case against Jonathan Braun and his company RCG Advances, LLC. The product at issue, merchant cash advances, generally provide small businesses with critical and timely financing, and there was no dispute that the defendants gave these businesses upfront lump-sums of money in exchange for the right to collect future receivables. But the Court found the defendants engaged in three sets of deceptive acts and practices, and importantly, found Mr. Braun individually liable as well.
The Court first found defendants withdrew more money from the customers’ bank accounts than was agreed upon under the merchant cash advance agreements (“MCA Agreements”). The MCA Agreements specified the total amount customers would need to repay, and defendants were authorized to make daily debits from the customers’ bank accounts until the amount owed was repaid. Rather than stopping the debits upon repayment, defendants routinely withdrew more than the total amount owed and only stopped when customers asked them to halt the debits.
Next, the Court found defendants required customers to sign a “Security Agreement and Guaranty” obligating business owners to personally guarantee their businesses MCA Agreements. Furthermore, some business owners were required to sign certificates of judgment in which they confessed to judgment “individually and personally”. Importantly, defendants enforced these personal guaranties despite stating on their website “no personal guaranty of collateral” and that there were “[n]o [c]redit or [c]ollateral [r]equirements.” As a result, the Court concluded the statements on the website were false.
Third, the Court concluded defendants mislead customers into thinking there were no upfront fees and miscalculated the upfront sum the customers would receive. Again, the Court focused on the defendants’ website, which stated “No Upfront Costs”. But the business practice was to deduct fees from the upfront sum the customers would have otherwise received, resulting in the customers receiving less than the total sum specified in the MCA Agreements. Accordingly, the Court concluded the statement on the website was false.
The takeaway from this case is that companies need to ensure the statements they make to consumers (in this case on their website) are consistent with their agreements and business practices. In addition, the business practices should be consistent with their agreements with customers. Failure to ensure business practices align with agreements and prior representations to customers could invite action from the FTC. While a trial is scheduled to determine any monetary relief, the Court has already issued a permanent injunction: (1) banning Mr. Braun from any involvement in the merchant cash advance industry; (2) banning him from the debt collection industry; (3) requiring Mr. Braun to contact credit reporting agencies to remove any negative reporting with respect to his customers; and (4) prohibiting Mr. Braun from engaging in similar conduct deceiving consumers or charging them without authorization. This relief highlights the legal risks businesses and individuals face as the FTC shows no signs of stopping such enforcement actions.
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