San Antonio-based G-Core Construction, a commercial and residential builder, is suing a merchant cash advance company over about $2.5 million in financing. The construction company says W Funding Group LLC never provided legally required disclosures.
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A San Antonio construction company is using a new Texas commercial financing law to challenge a merchant cash advance company that provided roughly $2.5 million through a series of financing transactions.
G-Core Construction LLC has sued Virginia-based W Funding Group LLC, alleging the company failed to provide legally required disclosures, including the total financing amount and finance charge, the total repayment amount and payoff terms.
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The lawsuit comes less than a year after Gov. Greg Abbott signed legislation creating Chapter 398 of the Texas Finance Code, which regulates merchant cash advances and other “sales-based financing” products offered to Texas businesses.
The law requires certain disclosures, mandates registration for merchant cash advance providers and brokers, and grants enforcement authority to the Texas Office of Consumer Credit Commissioner.
Merchant cash advance firms have drawn increasing scrutiny from regulators and bankruptcy courts over allegations that some transactions function as high-interest loans disguised as purchases of future receivables.
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Former Chief U.S. Bankruptcy Judge Craig Gargotta, who recently retired from the bench in San Antonio, has said merchant cash advance firms are known to employ “Draconian terms.”
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Brian Linnekens, a Los Angeles lawyer representing G-Core, said he couldn’t comment on specifics of the case and whether it could be a test of the new law.
“That said, we do believe you have identified a significant issue affecting the business community involving Merchant Cash Advances,” he said in an email. “In our view, regulators work diligently to prevent predatory lending practices and prohibit bad actors from operating in the marketplace; however, the widespread nature of these transactions continues to result in abusive lending practices and predatory conduct in many instances.”
G-Core, a commercial and residential building firm, alleges W Funding structured or facilitated “multiple stacked financing transactions” that dramatically increased the company’s repayment obligations.
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According to the lawsuit, W Funding advanced about $2.5 million through five transactions from Oct. 1 to April 1, while imposing $122,750 in origination fees and nearly $1.1 million in “cost of funds” charges.
The lawsuit says W Funding now claims G-Core owes about $3.5 million or more through the alleged stacked transactions, renewals, extensions, default charges, accelerated obligations and related fees.
Attempts to reach W Funding for comment were unsuccessful. The company does not appear to maintain a public-facing website or readily identifiable contact information. The state consumer credit agency didn’t immediately respond to a request for information on W Funding.
Merchant cash advance firms argue they are not making loans because they purchase a percentage of a business’ future receivables.
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For example, a business may receive $100,000 upfront in exchange for a merchant cash advance company purchasing $140,000 of future receivables and collecting payments until the full amount is repaid.
But G-Core alleges in its complaint that the transactions may have been illegal, “raising substantial questions regarding usury, unconscionability, statutory compliance, and the true legal character of the Agreements.”
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The lawsuit also alleges W Funding contacted G-Core’s vendors, customers and other business partners, claiming rights to the construction company’s receivables and assets, while also making damaging statements that interfered with G-Core’s business relationships and operations.
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W Funding’s “conduct threatens to destroy” G-Core’s business, the lawsuit says.
G-Core is seeking a temporary restraining order and temporary injunction “to preserve the status quo” pending the outcome of the case, which was filed May 12 in state District Court in San Antonio.
The company also wants the court to determine whether the agreements constituted “disguised loan transactions subject to Texas lending and usury laws.”
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The new Texas law requires merchant cash advance providers to disclose key financing terms — including finance charges, repayment amounts and payment schedules — before completing covered transactions.
Four of the five transactions identified in G-Core’s lawsuit were for less than $1 million and therefore would fall within Chapter 398’s disclosure requirements.