PR - Platinum Funding Receives Landmark Factoring Legal Ruling

Platinum Funding Group, a leading factoring company, announced a recent decision by Judge Shira A. Scheindlin of the Southern District of New York in Dessert Beauty, Inc. v. Platinum Funding Corp—a  landmark case with significant implications for factoring and asset-based lending sectors. The Southern District adopted the arguments raised by Platinum Funding Corp., upheld the shortfall fees in the factoring agreement of Platinum Funding Corp. and classified such fees as an alternative performance method.

An analysis of the decision by Platinum Funding Group was profiled in a New York Law Journal article titled “Shortfall Fees in Factoring Pact: Alternative Performance?” in the Outside Counsel column of the publication’s January 11, 2008 issue.

Dessert Beauty, Inc. was a distributor of Jessica Simpson’s line of edible cosmetics. The company entered into a factoring agreement with Platinum Funding Corp., which provided that Dessert Beauty, Inc. sell a minimum amount of accounts receivable to Platinum Funding Corp. during the course of a defined term.  When Dessert Beauty did not deliver the agreed upon minimum, Platinum imposed a shortfall fee and withheld funds in the amount of such fees. Dessert Beauty, Inc. commenced an action, claiming, among other things, that the contractual provision providing for the shortfall fees in question constituted either an unenforceable liquidated damages clause or served as a penalty, and as such, was unenforceable.

The Court ruled that the shortfall fee charged by Platinum Funding Corp. was enforceable pursuant to an alternative fee structure and rejected the arguments that the fee in question constituted either an unenforceable penalty or an unreasonable liquidated damages clause. The decision thus reinforced the rights of the parties to freely chart the method of performance in the event of a certain potential contingency, which may not rise to the level of a contractual breach.

The above legal decision carries significant implications to factors, secured lenders and the broader financial community as it assures protection of the more risky investments in the event of a client’s non-performance. The ruling gains additional weight in the current financial environment as tighter credit markets bring an increased number of companies to seek funding with non-traditional lenders and factors.

“Companies looking to sell their receivables should be well aware of this decision when negotiating the terms of a prospective factoring arrangement,” said Shlomit Ophir-Harel, Chief General Counsel of Platinum Funding Group. “Once committing to a minimum sales amount, the factored company must carefully calculate its steps and realize that as an alternative performance method, such commitment is enforceable and carries much weight.”

“This decision is a milestone event for Platinum Funding Group and other factoring companies,” added Eyal Levy, President and CEO of Platinum. “We are happy to be the first in the industry to set the precedent.”