NYAG vs Yellowstone Capital $1bn Legal Battle

New York Attorney General Letitia James has announced a landmark $1.065 billion settlement with Yellowstone Capital, a network of 25 lending companies accused of predatory practices against small businesses.

Key Details of the Settlement

• Total Judgment: $1.065 billion

• Debt Cancellation: $534 million in outstanding debts for over 18,000 small businesses will be canceled

• Restitution: $16.1 million to be paid to affected businesses

Predatory Lending Practices

The lawsuit revealed that Yellowstone:

• Targeted small businesses with illegal high-interest loans

• Disguised fraudulent loans as merchant cash advances

• Caused closure of successful companies and job losses

Consequences for Yellowstone

• Permanent ban from the merchant cash advance industry

• Must cease all debt collection attempts

• Required to vacate unsatisfied court judgments

• Terminate liens on small businesses' property

The lawsuit, initially filed in March 2024, continues against additional entities including Delta Bridge Funding, Cloudfund, and eight other individuals involved in the lending operation

Yellowstone Capital's Violations Specific Predatory Lending Practices

Yellowstone Capital's merchant cash advance (MCA) model was systematically designed to exploit small businesses through several key fraudulent mechanisms:

1. Deceptive Contract Structuring

• Disguised loans as "revenue purchases" to circumvent usury laws

• Used contracts that fraudulently described transactions as purchases of future revenues

• Claimed flexible payment terms while implementing fixed daily withdrawals

2. Manipulative Payment Extraction

• Collected fixed daily amounts directly from businesses' bank accounts

• Implemented short repayment periods (60-90 days)

• Daily collections had minimal correlation to actual business revenues

3. Refund Manipulation

• Promised to "reconcile" or refund daily payments

• Used fraudulent measures to ensure businesses almost never qualified for refunds

• Effectively creating ultra-high interest rates up to 820% annually

Underwriting Criteria Red Flags

• Ignored stated percentage of revenues when underwriting

• "Backed into" desired daily payment amounts

• Targeted businesses unable to secure traditional bank loans

• Implemented aggressive personal guarantee requirements

Aggressive Collection Tactics

• Continued withdrawing money after balances were satisfied

• Manipulated court systems to obtain fraudulent judgments

• Used personal guarantees to seize business owners' assets

• Forced businesses into additional loans to cover existing debt

Industry Implications

This settlement signals a critical turning point for alternative lending:

• Increased regulatory scrutiny of MCA products

• Mandatory review of lending structures

• Emphasis on transparent, fair lending practices

• Potential industry-wide compliance overhaul

Compliance Recommendations:

• Conduct comprehensive internal audit of lending practices

• Ensure transparent fee structures

• Implement robust reconciliation mechanisms

• Develop ethical underwriting criteria

• Create customer-friendly collection processes

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