In a landmark legal action, Yellowstone Capital and its network of affiliated companies have agreed to a $1.065 billion settlement with the New York Attorney General’s Office. This resolution addresses allegations that the firm engaged in predatory lending practices, targeting over 18,000 small businesses nationwide with high-interest loans disguised as merchant cash advances (MCAs).
Allegations of Deceptive Lending
The lawsuit, initiated in March 2024, accused Yellowstone Capital of misrepresenting their financial products. While marketed as MCAs—a financing option where businesses receive upfront funds in exchange for a percentage of future sales—these transactions allegedly functioned as short-term loans with exorbitant interest rates, sometimes reaching up to 820% annually. Such rates far exceed New York’s legal cap of 16%.
The Attorney General’s Office contended that Yellowstone’s practices included:
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Debiting fixed daily amounts from merchants’ bank accounts, irrespective of actual sales.
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Employing deceptive tactics to prevent merchants from qualifying for promised payment adjustments.
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Utilizing aggressive collection methods, including lawsuits and liens, to recover funds.
These actions purportedly led many small businesses into cycles of debt, with some forced to close their doors. Notably, City Bakery, a Manhattan-based establishment, ceased operations after nearly three decades, attributing its closure to the financial strain imposed by Yellowstone’s lending terms.
Settlement Terms and Relief Measures
Under the settlement terms:
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Debt Cancellation: Yellowstone agreed to cancel $534 million in outstanding debts owed by affected small businesses, including over $36 million for more than 1,100 businesses in New York.
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Restitution Payments: The company and its executives will pay $16.1 million in restitution to impacted businesses, with the amount increasing to $30 million if they fail to comply with settlement terms.
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Industry Ban: Yellowstone and its affiliates are permanently barred from engaging in the MCA industry.
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Legal Remedies: The company must vacate unsatisfied court judgments and terminate certain liens against merchants’ properties.
This settlement represents the largest single-state consumer restitution in New York’s history. Attorney General Letitia James emphasized the significance of the resolution, stating, “Targeting small businesses with predatory loans and outrageous interest rates threatens the livelihoods of hardworking business owners and their employees.”
Ongoing Legal Actions
While the settlement addresses claims against Yellowstone Capital and its executives, legal proceedings continue against entities that assumed Yellowstone’s operations in 2021, namely Delta Bridge Funding and Cloudfund, as well as co-founder David Glass. These parties are accused of perpetuating similar predatory lending practices.
Previous Regulatory Actions
Prior to this settlement, Yellowstone Capital faced regulatory scrutiny:
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In 2022, the Federal Trade Commission (FTC) secured a $9.8 million settlement from Yellowstone over allegations of unauthorized bank withdrawals and deceptive practices.
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In 2023, the company agreed to a $27 million settlement with the New Jersey Attorney General’s Office, addressing similar claims of predatory lending.
These actions underscore a pattern of regulatory concerns surrounding Yellowstone’s business practices.
Implications for Small Businesses
The settlement offers significant relief to small businesses burdened by Yellowstone’s lending practices. Affected merchants are encouraged to review the terms of the settlement and take necessary steps to ensure judgments are vacated and liens are terminated. For more information, businesses can visit the New York Attorney General’s official website.
This case highlights the importance of regulatory oversight in protecting small businesses from predatory financial practices and reinforces the commitment of legal authorities to uphold fair lending standards.
Matthew Galluzzo is a former Manhattan prosecutor who represents whistleblowers in qui tam lawsuits. He and his team of experienced former government investigators has experience pursuing qui tam lawsuits against financial institutions engaged in predatory lending, including cases involving Merchant Cash Accounts (MCAs). If you have information about institutions engaged in predatory lending or fraud against the government, you should consider engaging Mr. Galluzzo to represent you. Successful qui tam lawsuits can result in significant payouts for the relator.
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