KAREN K. BROWN, Bankruptcy Judge.
Before the Court are Debtor's Objection to Proof of Claim No. 7 of Everest Business Funding Partners, LLC. (Docket No. 95), and Objection to Proof of Claim No. 8 of Accord Business Funding, LLC. (Docket No. 96).
Debtor is a home healthcare agency that offers personal assistance services. Debtor's sole source of income is Medicaid payments received from the Texas Department of Aging and Disability Services to protect Debtor's clients. Debtor raises two objections to Claim Nos. 7 and 8: 1) the transactions are usurious loans disguised as sales of accounts receivable; and 2) Debtor's receivables are Medicaid payments Debtor receives for patient care which cannot by law be purchased. Debtor requests this Court disallow the claims. (Docket Nos. 95 and 96)
Claimants assert they are factors in the business of purchasing accounts receivable. They contend their contracts with Debtor are factoring agreements which give them security in all Debtor's property, including all future receivables. Claimants assert that since their contracts are for factoring, their transactions with Debtor cannot be considered loans, usurious or not.
Florida law governs Debtor's contract with Everest Business Funding Partners, LLC ("EBF"), while Texas law governs its contract with Accord Business Funding, LLC ("Accord"). Florida and Texas treat both the characterization as a loan or a sale and the penalty for usurious loans differently. The Court allows both claims as filed. Both claims are wholly unsecured.
This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 1334 and 157(A). This is a core proceeding under 28 U.S.C. § 157(b)(2).
Debtor and EBF entered into three separate contracts.
EBF states that Debtor made 80 daily payments of $2,246.15, totaling $179,692.00, to EBF before the parties executed the third contract. EBF states that Debtor owed EBF $119,046.45 on the second contract as of December 23, 2015. EBF states that the parties agreed that $6,738.45 Debtor paid under the second contract would be applied to the third contract.
(Docket No. 110).
The third contract dated December 23, 2015 purports to reflect EBF's purchase of $300,000 in Debtor's future accounts receivable for $200,000, with Debtor to repay the $300,000 in daily payments of $2,307.70. (Debtor's Exhibit 1).
EBF applied the $200,000 Debtor was to receive on the third contract to the $119,046.45 it asserts remained owing from the second contract, plus $2,630.00 in fees, and paid the net proceeds of $78,323.55 to Debtor on or about December 23, 2015. Debtor made 34 daily payments of $2,307.70, totaling $78,461.80, to EBF before it filed the petition in this Chapter 11 case. (Docket No. 110).
The third contract between Debtor and EBF requires Debtor to deposit all money received in the future into one bank account. It authorizes EBF to debit the "daily payment amount" (in the third contract, $2,307.70) from Debtor's bank account on each business day until Debtor has paid the "purchased amount" (in the third contract, $300,000) to EBF. The third contract states that the parties contemplated that the daily payment amount would equal 15 percent of the money Debtor received. (Debtor's Exhibit 1).
The third contract between Debtor and EBF identifies the following events of Debtor's default:
(Debtor's Exhibit 1).
EBF's remedies on default under the third contract include its right to enforce a personal guaranty of Debtor's obligations by Debtor's president, Ruth Briggs, and its right to increase the daily payment amount to 100 percent of the money Debtor receives. (Debtor's Exhibit 1).
The third contract contains the following provisions which EBF contends save it from being a usurious loan:
(Debtor's Exhibit 1, Docket No. 110).
Paragraph 4.5 of the third contract between Debtor and EBF applies Florida law to the contract. (Debtor's Exhibit 1).
EBF filed a proof of claim, in the amount of $222,439.75. The proof of claim asserts security in all Debtor's accounts, future receipts, cash, and deposit accounts. (Claim No. 7-1).
EBF calculates its claim by adding the $592,000 in purportedly purchased accounts receivable ($292,000 under the second contract plus $300,000 under the third contract) plus $7,640.00 in fees, less the $179,692 Debtor paid under the second contract, the $78,461 Debtor paid under the third contract, and the $119,046.45 EBF applied to pay off the second contract. (Docket No. 110).
Florida law looks to the substance of the transaction rather than to the form to determine usury. The intent of the parties controls in determining whether there has been a sale, or a loan subject to usury laws. Indian Lake Estates, Inc. v. Special Investments, Inc., 154 So.2d 883 (Fla. Dist. Ct. App. 1963), citing Griffin v. Kelly, 92 So.2d 515 (Fla. 1957). All of the negotiations, circumstances and conduct of the parties surrounding and connected with their contracts may be material in determining whether there was an intent to violate the usury law or to evade usury law by disguising the transaction as a sale. Indian Lake Estates, Inc. v. Special Investments, Inc., 154 So.2d 883 (Fla. Dist. Ct. App. 1963), citing Milana v. Credit Discount Co., 163 P.2d 869 (Cal. 1945).
The third contract between Debtor and EBF unambiguously identifies the transaction as a sale of accounts receivable and disclaims the possibility of construing the sale as a loan. This transaction was the third such transaction between Debtor and EBF, and no issue arose as to usury until Debtor amended its objection to EBF's claim. There is insufficient evidence to shift the burden of proof as to the circumstances leading to the third contract. The Court finds that the third contract is a sale of accounts receivable, rather than a loan.
The contract between Debtor and Accord
The contract between Debtor and Accord requires Debtor to deposit all money received in the future into one bank account. It authorizes Accord to debit the "daily payment amount" of $446.88 from Debtor's bank account on each business day until Debtor has paid the "purchased amount" of $36,750 to Accord. The contract states that the parties contemplated that the daily payment amount would equal 7 percent of the money Debtor received. (Accord Exhibit 2).
The contract between Debtor and Accord identifies the following events of Debtor's default:
(Accord Exhibit 2).
Accord's remedies on default under the contract include its right to enforce a guaranty by Briggs and its right to increase the daily payment amount to 100 percent of the money Debtor receives.
Accord asserts that the following provision of the contract conclusively establishes that the transaction is a sale rather than a usurious loan:
(Accord Exhibit 2, Docket No. 121).
Paragraph 4.5 of the contract between Debtor and Accord applies Texas law to the contract. (Accord Exhibit 2).
Accord filed a proof of claim, in the amount of $30,737.36. The proof of claim asserts security in all Debtor's accounts, future receipts, cash, and deposit accounts. (Claim No. 8-1).
Accord's proof of claim does not itemize how its claim was calculated. Accord's response to Debtor's original claim objection reflects that the claim, in the amount of $30,737.36 includes a $5,000 "Default fee" and a $2,500 "block on account fee."
Prior to 1979, Texas law recognized the totality of circumstances test for determining whether a transaction is a sale or a loan. See, e.g. Griffith v. Gadberry, 182 S.W.2d 739 (Tex. Civ. App.-El Paso 1944).
In 1979, the Texas Legislature adopted Texas Finance Code § 306.103. That section provides in part: "For the purposes of this chapter, the parties' characterization of an account purchase transaction as a purchase is conclusive that the account purchase transaction is not a transaction for the use, forbearance, or detention of money." Tex. Fin. Code § 306.103(b).
Usury can arise only from a loan or forbearance of money. Express Working Capital, LLC v. Starving Students, Inc., 28 F.Supp.3d 660 (N.D. Tex. 2014). Future receivables are "accounts" for the purpose of Section 306.103(b). Id.
The contract between Debtor and Accord expressly provides that it is a sale of accounts. Under Section 306.103(b), it is a sale of accounts and not a loan.
The assignment of Medicaid reimbursements is governed by 42 U.S.C. § 1396a(a)(32).
That section provides:
42 U.S.C. § 1396a(a)(32).
The exceptions in Section 1396a(a)(32) do not include factoring agreements. See In re Missionary Baptist Foundation of America, Inc., 796 F.2d 752, 757 n. 6. (5th Cir. 1986) ("An examination of the legislative history of this provision reveals that its purpose was to prevent `factoring' agencies from purchasing medicare and medicaid accounts receivable at a discount and then serving as the collection agency for the accounts.").
Section 1396a(a)(32) requires that the Texas Medicaid plan provide that funds Debtor receives from the Texas Department of Aging and Disability Services cannot be assigned to a third party such as EBF or Accord. Consequently neither EBF nor Accord can be secured in Debtor's future receivables as a result of the factoring agreements in this case. The claims are wholly unsecured.
