Yellowstone Capital, a defunct cash-advance company that was assumed by Delta Bridge Funding and Cloudfund, agreed to wipe out the debt of its small-business clients as part of a combined $1 billion settlement with the office of New York Attorney General Letitia James, which announced the consent agreement on Wednesday.
The settlement canceled more than $534.5 million in debts of more than 1,100 small businesses in New York, and more than 18,000 nationwide, James said.
Through the $1.07 settlement, the parties made an immediate $16 million restitution payment, but the companies remain liable for an unsatisfied $514.3 million portion of the judgment.
The settlement, which states that it is not to be construed as an admission of liability or wrongdoing, resolves the attorney general’s state lawsuit filed in March that alleged Yellowstone Capital, Delta Bridge and more than two dozen subsidiary companies ran a predatory lending operation that targeted the small businesses.
The Attorney General’s Office conducted an investigation that determined the defendants exploited small businesses through fraudulent loans with “astronomical” interest rates.
James, whose office will continue its state lawsuit against Delta Bridge and Cloudfund, along with eight officers, said the loans were disguised as merchant cash advances that target owners who cannot get loans from traditional banks.
Yellowstone Capital and the other defendants used contracts that James’ office said fraudulently described each transaction as a purchase of a portion of a small business’s future revenues, known as receivables. The arrangement purported to offer flexible payment amounts and open-ended terms.
James said the reality was that the cash-advance companies collected fixed amounts from the small businesses’ bank accounts on a daily basis during repayment periods that were often 60 or 90 days long.
These daily collections had little connection to the portion of the businesses’ revenues the lenders purchased, and ultimately resulted in the transactions functioning as short-term loans with interest rates as high as 820% per year, which is more than 50 times the legal interest rate, James said.
In a statement, James said: “Targeting small businesses with predatory loans and outrageous interest rates threatens the livelihoods of hardworking business owners and their employees. Yellowstone and its executives lined their pockets at the expense of vulnerable small businesses who turned to them for help. Their predatory loans forced successful companies to close and put New Yorkers out of work.”
Eric Kanefsky, who represented Yellowstone Capital and is a senior partner with Calcagni & Kanefsky in Newark, New Jersey, said: “We are pleased to have resolved this matter with the New York Attorney General.”
James said one of the affected businesses in Manhattan, City Bakery in Union Square, was forced to close after it became trapped in a cycle of debt of more than $2,000 daily repayments to Yellowstone Capital. The caterer had employed 30 to 50 full-time employees, according to James.
