Origins of the Case
In the early 2000s, Kenneth Hatzenbeller and two other principal investors began a business venture called Shoot the Moon (STM). The venture eventually grew to encompass 19 different LLCs that owned and operated 16 restaurants throughout Montana, Idaho, and Washington.
The STM restaurants eventually began to suffer severe financial pressures, including declining revenue in light of the Great Recession and improvements demanded by some of the restaurants’ franchisors. After exhausting all additional financing options Hatzenbeller turned to several Merchant Cash Advance (MCA) companies, one of which was CapCall, LLC.
Breaking down MCAs
The economic core of transactions like these are that the MCA company provides the loan recipient with immediate cash upon closing. In exchange, the MCA company receives a portion of future receivables generated through the restaurant operations. Retail and restaurant operations that have strong credit card sales, like STM, are most likely to fall prey to these predatory types of loans.
In these agreements, the MCA company takes a daily cut until the cash advance is repaid plus an additional amount. The additional cut can be anywhere from 25% to more than 100% more than the initial cash advance. As an example, CapCall would advance STM with cash of $200,000 in exchange for CapCall’s “purchase” of $299,800 in future receivables, to be paid back within 75 business days.
The Role of CapCall in Shoot the Moon’s Downfall
For STM, the weight of their MCA loans was staggering, with some interest rates as high as 175%, in a state where the legal interest rate limit is 15%. Once the MCA companies began collecting the daily automatic withdrawals, STM bank accounts were quickly depleted, and in 2015 the business was forced to file Chapter 11 bankruptcy. Jeremiah Foster of Resolute was appointed Chapter 11 Trustee and then as Trustee of the STM Liquidating Trust under the approved Chapter 11 Plan.
In 2017 CapCall sought declaratory relief for certain post-petition funds deposited in segregated account and a judgment against the Trustee for converting post-petition receipts. The Trustee counterclaimed seeking declaratory relief as to which state’s law applied to the MCA transactions and that the transactions were disguised loans rather than sales. The Trustee also sought unencumbered title to the segregated account, avoidance and recovery of preferential transfers, and state law remedies arising from CapCall charging usurious interest. Bench trial under Judge Whitman L. Holt was held in June 2021 in Great Falls Montana.
Trial and the Court’s Findings
Loan or Sale?
The first area of dispute was the nature of the cash advance. The Trustee argued that the transactions were disguised loans, not true sales of future receivables, like CapCall claimed.
Judge Holt founded that the transactions were indeed disguised loans, not true sales of receivables relying on the following criteria:
Location is Everything
The next area of dispute was proper venue for the case, and which state law should be considered in the case. The Trustee argued that the case belonged in Montana, while CapCall sought the use of New York State law, a jurisdiction that has been historically friendly to MCA companies.
Judge Holt concluded that Montana law was to be applied for the following reasons:
Since Judge Holt determined that the transactions were indeed loans and Montana law applied to the matter, the transactions violated Montana Code Annotated 31-1-107(1). The effective interest rates for the transactions were calculated between 82% and 175% – all greatly in excess of the maximum of 15%.
Judge Holt awarded the Trustee $1.2MM on its usury claim.
Resolving the Preference Claim
Due to the Court’s decision that the CapCall MCA structure was a disguised loan and also on the conclusion CapCall received more than it would have in a Chapter 7 bankruptcy, Judge Holt determined that the Trustee was entitled to avoid and recover challenged transfers made to CapCall for $1.1MM
The court ordered that a reduction dollar-for-dollar equal to any imputed interest included in the preferential payments was appropriate, but only to the extent that CapCall satisfies its full liability to the Trustee under the Montana usury statute.
Judge Holt further held that CapCall lacked an ownership or enforceable security interest in the receivables held in the segregated account since the onset of bankruptcy. Therefore, the Trustee was entitled to the funds in the account, amounting to $228,000. The Court also found that because CapCall is obligated to the bankruptcy estate on the preference claim, it is not entitled to payment on its proof of claim until it has satisfied its judgement in full.
Short Term and Long Term Consequences
This ruling gives the Trustee over $2.5MM in funds directly back to the Liquidating Trust. The greed of the MCA companies who leeched off STM put many Montanans in a difficult place. At its height, STM employed over 700 people. The closure of the business hurt these individuals, along with local investors and businesses. The recovery of these funds allows the Trustee to provide additional returns to these creditors. This is especially key to raising returns for general unsecured claimants, a creditor class that often receives marginal or no returns.
Even more importantly, this ruling provides powerful legal precedents against the MCA industry. These companies wreak havoc on business owners – Bloomberg describes them as the “debt-collection machine that’s chewing up small businesses across America.” Thanks to the efforts of the Trustee, the fight for justice continues.
In re Shoot the Moon LLC; CapCall LLC v. Foster; 2:15-bk-60979,9/10/21.
Legal Team: David Cotner & Kyle Ryan of Cotner Ryan Law Resolute Team: Jeremiah Foster, Trustee & Nicole Manos, Preference and Usury Analysis.
About the AuthorCece Roeder is Director of Marketing at Resolute. She graduated from Indiana University with a Bachelor of Arts in Communications, with a focus on Journalism. Prior to joining Resolute, she spent several years working at non-profits in Phoenix where she implemented comprehensive marketing and communication plans. As Director of Marketing at Resolute, she manages marketing initiatives and activities, develops strategic plans and partnerships, and oversees communications and messaging.