Offers to Cancel Over $534M in Outstanding Debts, Will Pay Back Businesses $16.1M
By Hank Russell
New York Attorney General Letitia James announced a $1 billion settlement with a network of 25 lending companies controlled by Yellowstone Capital and its officers in which the New Jersey-based lender will agree to compensate its small business clients.
The settlement includes a $1.065 billion judgment against Yellowstone, with over $534 million of that paid by canceling all outstanding debts owed by small businesses, including over 1,100 across New York state and over 18,000 nationwide. The companies and the officers also immediately paid $16.1 million to be distributed to impacted small businesses. The Yellowstone companies will be liable for the remaining $514 million of the judgment.
Attorney General James filed a lawsuit against Yellowstone CEO Isaac Stern, President Jeffrey Reece, and the Yellowstone entities in March 2024 after an Office of the Attorney General (OAG) investigation found that they exploited small businesses through fraudulent loans with astronomical interest rates. These loans were disguised as merchant cash advances, an increasingly prevalent form of short-term, high-interest funding for small businesses, particularly those that cannot get loans from traditional banks.
In a typical merchant cash advance, a business will receive a lump sum in exchange for a share of its revenue over time. In this case, according to the AG’s Office, Yellowstone and the other entities used contracts that fraudulently described each transaction as a purchase of a portion of a small business’s future revenues, with flexible payment amounts and open-ended terms. In reality, the predatory lenders collected fixed amounts directly from small businesses’ bank accounts every day during short repayment periods that often lasted just 60 or 90 days. These daily collections had little connection to the portion of the businesses’ revenues the lenders supposedly purchased.
While the lenders promised to “reconcile” or refund small businesses’ daily payments to ensure they never rose above an agreed-upon percentage of their revenue, they were alleged to use numerous fraudulent measures to ensure borrowers almost never qualified for these payment refunds. As a result, the transactions actually functioned as short-term loans with ultra-high interest rates of up to 820 percent per year – more than 50 times the legal interest rate.
Over 1,100 small businesses across New York were affected by Yellowstone’s predatory loans and will receive debt relief. One of these businesses includes a Long Island tailoring shop.
“Targeting small businesses with predatory loans and outrageous interest rates threatens the livelihoods of hardworking business owners and their employees,” James said. “Yellowstone and its executives lined their pockets at the expense of vulnerable small businesses who turned to them for help. Their predatory loans forced successful companies to close and put New Yorkers out of work.”
Long Island Life & Politics reached out to Ellis’ attorney, Eric Kanefsy of Calcagni Kanefsky of Newark, New Jersey. ““We are pleased to have resolved this matter with the New York Attorney General,” Kanefsky said in a statement.
The OAG will continue its lawsuit against the companies that took over Yellowstone’s operations in 2021, Delta Bridge Funding and Cloudfund, as well as eight other individuals involved in the scam lending operation, including Yellowstone’s co-founder David Glass. Before filing the lawsuit, Attorney General James reached settlements with five other individuals in which they paid $3.37 million to OAG to be distributed to impacted small businesses and were banned from the merchant cash advance industry.
Business owners with questions about the settlement can find more information on OAG’s website.