Fifth Circuit rules finance agreements lacking total amount financed and cost of financing are unenforceable as a matter of law

In a decision that has significance to small-ticket financing companies everywhere, on July 30, 2024, the Fifth Circuit Court of Appeals unanimously affirmed the ruling of U.S. District Judge Barbara Lynn in favor of 16 physicians – FBFK Law clients – who were victims of a Ponzi scheme, holding Balboa Capital Corporation’s payment agreements unenforceable as a matter of law.

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Dana Campbell, FBFK Shareholder/Attorney, FBFK Law (Photo: Business Wire)

The physicians, who practice in Arkansas, Georgia, Maryland, Nevada, and Texas, were represented by FBFK Shareholders Dana Campbell (Dallas) and George Hampton (Orange County), along with Shareholder J.W. Beverly (Houston), Shareholder Alyson Dudkowski (Orange County), and Associate Stephanie Pittaluga (Orange County).

Judge Lynn granted summary judgment against Balboa in March 2023 finding that the $11.5 million in debt claimed by Balboa was unenforceable. Headquartered in Costa Mesa, Calif., Balboa is one of the largest equipment financing companies in the U.S. and was acquired by Ameris Bank Corp in 2021.

FBFK’s Dana Campbell emphasized the impact of this ruling for an entire industry. “In opening his argument, counsel for Balboa acknowledged that ‘this case has significance not only to the parties to this lawsuit, but also to an entire industry of small ticket finance companies.’ Specifically, this ruling calls into question all financing agreements that set forth only the payment schedule and the amount of the individual payments. In my decades of practicing law, I’ve never been part of a case that has done more to prevent predatory practices.”

The cases were originally filed by Balboa in 2017 in California and Nevada and pitted victims of a Ponzi scheme against one another. The Ponzi scheme was perpetrated by America’s Medical Home Team (MHT) and financed by Balboa. Pursuant to the scheme, MHT agreed to provide FBFK’s clients with licenses for medical records software, hardware, and support services. Balboa agreed to finance the licenses by making payments to MHT without disclosing to the physicians the essential terms that it contended were included on an exhibit to the Payment Agreements – “Exhibit A1” – and which the Fifth Circuit noted failed to include the total amount financed or the cost of the financing.

As the Fifth Circuit recognized, MHT never delivered anything of value to the physicians and instead used Balboa's money to pay off its debts to its prior financer and perpetuate the Ponzi scheme. All the while, MHT kept both Balboa and the physicians in the dark by serving as middleman and weaving a complicated web of obfuscations.

According to FBFK’s George Hampton, “Balboa Capital Corporation has literally entered into thousands of similar transactions. In light of the Court’s ruling, all of these transactions must now be reviewed to make sure that they all comply with California law.”

Affirming Judge Lynn’s summary judgment ruling, the Fifth Circuit held that under California law, “essential terms" of a loan agreement include "the amount of the loan, the rate of interest, the terms of repayment, and applicable loan fees and charges," so "a contract involving a loan must include its amount and the terms for repayment.” Thus, the Fifth Circuit found “the Payment Agreements, standing alone, are unenforceable due to the absence of material terms and the corresponding lack of mutual assent, just as the district court concluded.”

In a separate ruling, on July 29, 2024, Judge Barbara Lynn awarded in excess of $1 million in fees and costs incurred by the physicians in defending the claims of Balboa Capital Corporation.

About FBFK

With more than 20 years of legal expertise and success across Texas and the U.S., Dallas-based FBFK is an entrepreneurial-minded, full-service business law firm with offices in Plano, Houston and Austin, Texas, as well as in Orange County, Calif. Driven by a commitment to creating lasting client relationships grounded in high-quality representation and client service, FBFK represents clients nationwide in 40 practice areas related to business structures and transactions, intellectual property protection and dispute resolution. www.fbfk.law.

Melissa Flynn, Melissa@melissaflynnpr.com, 843.817.7653