Criminal Usury and Merchant Cash Advances: What New York Business Owners Must Know

Key Legal Terms

Criminal Usury

Under New York law, criminal usury occurs when a lender knowingly charges interest that exceeds 25% per year on a loan. Unlike civil usury, a finding of criminal usury can make the underlying agreement unenforceable. It is also one of the few usury defenses that corporations and LLCs may raise in New York.

Merchant Cash Advance (MCA)

A merchant cash advance is marketed as the purchase of a business's future receivables rather than a loan. The funder provides an upfront payment in exchange for a percentage of future revenue.

Whether an agreement is truly a sale of receivables or a disguised loan depends on how it actually operates, not simply what the contract calls it.

Recharacterization

Recharacterization is the legal process of looking beyond the title of an agreement to determine its true substance.

If a court concludes that an MCA functions like a loan instead of a purchase of future receivables, New York's usury laws may apply.

That determination can completely change the outcome of an MCA collection case.

Key Takeaways

• Criminal usury may provide one of the strongest defenses available in an MCA collection case.

• New York courts look beyond the title of an agreement to determine whether it actually functions as a loan.

• LLCs and corporations generally cannot raise civil usury as a defense, but they can assert criminal usury under the right circumstances.

• A default judgment does not always end the case. In some situations, it may still be possible to challenge the judgment.

• Waiting too long to respond to an MCA lawsuit or collection action can significantly limit your legal options.

What Is Criminal Usury Under New York Law?

For many business owners, the words criminal usury sound like they belong in a criminal courtroom.

In reality, they can become one of the most important defenses in a merchant cash advance lawsuit.

Under New York law, charging more than 25% annual interest on a loan may constitute criminal usury.

If an MCA agreement is ultimately treated as a loan instead of a true purchase of receivables, that finding can have serious consequences for the company trying to collect the debt.

In some cases, it may prevent the funder from enforcing the agreement altogether.

That is why the first question is not whether the contract is labeled a merchant cash advance.

The real question is whether the agreement actually functions like a loan.

Before making any decisions about settling an MCA claim, business owners should understand whether the agreement may be subject to New York's criminal usury laws.

Businesses facing collection efforts can also learn more about merchant cash advance defense and the legal options that may be available before responding to a lawsuit or negotiating with a funder.

New York's 25% Criminal Usury Limit

New York law places a firm limit on the amount of interest that may be charged on a loan before it crosses into criminal usury.

That limit is 25% per year.

If a court determines that an MCA agreement is actually a loan and the effective annual interest rate exceeds that threshold, the consequences can be significant.

Unlike many legal disputes that focus on reducing the amount owed, a successful criminal usury defense challenges whether the agreement should be enforced at all.

For that reason, determining the agreement's true economic structure is often one of the first issues evaluated in an MCA defense.

Why Criminal Usury Is Different From Civil Usury

Many business owners have heard that corporations and LLCs cannot raise a usury defense.

That statement is only partly true.

New York law generally prevents business entities from relying on civil usury as a defense.

Criminal usury is different.

When the facts support it, corporations and LLCs may still assert criminal usury in response to an MCA collection action.

That distinction is frequently misunderstood, and it can dramatically affect how a case should be defended.

Rather than assuming no usury defense is available, business owners should first determine whether criminal usury may apply to their agreement.

What Happens If a Court Finds Criminal Usury?

A finding of criminal usury can change the entire case.

Instead of simply reducing the interest charged, the court may determine that the agreement cannot be enforced.

That possibility is what makes criminal usury one of the most powerful defenses available in merchant cash advance litigation.

Of course, every MCA agreement is different.

Whether the defense applies depends on the language of the contract, how the agreement operated in practice, and how New York courts interpret those facts.

That is why every case should begin with a careful review of the agreement before deciding whether to negotiate, defend the lawsuit, or pursue another legal strategy.

When Does a Merchant Cash Advance Become a Criminally Usurious Loan?

Not every merchant cash advance violates New York's usury laws.

Some are structured in a way that courts recognize as legitimate purchases of future receivables.

Others are not.

The difference comes down to how the agreement actually works.

New York courts do not stop at the title printed across the top of the contract. They examine whether the funder truly accepted the risk that the business's future revenue might rise or fall.

If the merchant is required to repay the advance no matter what happens to the business, a court may conclude that the agreement functions as a loan instead of a sale of receivables.

If that loan carries an implied annual interest rate above 25%, criminal usury may become a viable defense.

That analysis often determines whether an MCA company can continue enforcing the agreement.

The Three-Factor Test New York Courts Apply

New York courts have developed a framework for deciding whether a merchant cash advance is actually a loan.

Rather than relying on the contract's label, courts focus on three key questions.

• Does the agreement include a genuine reconciliation process that adjusts payments when revenue changes?

• Is there a fixed repayment schedule that resembles a traditional loan?

• Does the agreement treat the business filing for bankruptcy as an event of default?

No single factor decides the case by itself.

Instead, courts consider how all three work together to determine whether the funder truly accepted the risk of fluctuating business revenue.

Understanding this analysis is essential for anyone defending an MCA collection lawsuit.

Red Flag #1: No Genuine Reconciliation Process

One of the strongest indicators that an MCA may actually be a loan is the absence of a meaningful reconciliation process.

In a legitimate purchase of future receivables, payments should increase or decrease as the business's revenue changes.

Many MCA agreements contain reconciliation language.

The problem is that some of those provisions exist only on paper.

If the process is so restrictive that merchants cannot realistically use it, or if the funder never honors reconciliation requests, a court may conclude that the provision is not genuine.

When payments remain the same regardless of how the business performs, the agreement begins to look much more like a traditional loan.

Red Flag #2: A Fixed Repayment Schedule

A true purchase of receivables does not have a guaranteed payoff date.

The funder's recovery depends on the business generating future revenue.

When an agreement requires fixed daily or weekly payments that continue regardless of sales, courts may view the arrangement differently.

Likewise, a contract that effectively guarantees repayment within a certain period often resembles a loan more than the purchase of future receivables.

The more predictable the repayment schedule becomes, the more likely a court is to examine whether the agreement should be recharacterized.

Red Flag #3: Bankruptcy Is Treated as a Default

Another important issue is how the agreement handles bankruptcy.

If filing for bankruptcy automatically places the merchant in default, that provision may suggest the funder never accepted the business risk associated with purchasing future receivables.

A true purchaser assumes the possibility that revenue may decline or disappear.

Treating bankruptcy as a default can point in the opposite direction.

Because of that, bankruptcy-default provisions have become an important part of the recharacterization analysis in both state and federal courts.

Business owners considering restructuring may also want to learn more about Subchapter V bankruptcy, which can provide additional tools for addressing MCA obligations while keeping a business operating.

Why Economic Reality Matters More Than the Contract's Label

One of the most common misconceptions is that calling an agreement a "purchase of future receivables" settles the issue.

It does not.

New York courts consistently look at what the agreement actually requires the parties to do.

If the merchant bears all of the repayment risk while the funder is effectively guaranteed repayment, the contract may function like a loan regardless of the language used by the parties.

That is why an experienced legal review focuses on the substance of the agreement instead of relying on its title.

A careful contract analysis often identifies issues that are easy to overlook but may become critical during litigation.

Key New York Court Decisions on MCA Criminal Usury

The rules governing merchant cash advances have been shaped by a series of important New York court decisions.

Those cases illustrate when courts have treated an MCA as a legitimate purchase of receivables and when they have concluded that the agreement was actually a loan subject to New York's usury laws.

Understanding those decisions helps business owners evaluate the strengths and weaknesses of their own agreements before deciding how to respond to collection efforts.

Many MCA cases also involve confessions of judgment, which present a separate set of legal issues beyond criminal usury. Business owners facing both issues should understand that these defenses can often be raised together.

Pearl Capital Rivis Ventures v. RDN Construction: Looking Beyond the Contract

One of the most frequently discussed New York decisions involving merchant cash advances is Pearl Capital Rivis Ventures v. RDN Construction.

The case illustrates an important principle that continues to shape MCA litigation today.

The court did not simply accept the agreement because it was labeled a purchase of future receivables.

Instead, it examined how the transaction actually operated.

After reviewing the terms of the agreement, the court concluded that the arrangement functioned more like a loan than a true sale of receivables.

The court also found that the implied annual interest rate far exceeded New York's criminal usury threshold.

For business owners, the lesson is straightforward.

The title of the contract is only the starting point.

What matters most is whether the agreement transferred genuine business risk to the funder or guaranteed repayment regardless of the company's financial performance.

Why Pearl Capital Still Matters

Although every MCA agreement must be evaluated on its own facts, Pearl Capital remains an important example of how New York courts approach recharacterization.

The decision demonstrates that courts are willing to examine the substance of the transaction instead of relying on the language chosen by the funder.

For business owners facing collection actions, that distinction can make all the difference.

An agreement that appears enforceable at first glance may present significant legal defenses after a careful review.

That is why analyzing the contract before responding to a lawsuit or negotiating a settlement is so important.

Crystal Springs Capital: Default Judgments Are Not Always the End

Many business owners believe that once an MCA company obtains a default judgment, there is nothing left to do.

That is not always true.

In Crystal Springs Capital v. Big Thicket Coin, the Appellate Division recognized that criminal usury may provide grounds for asking the court to vacate a default judgment under the appropriate circumstances.

While every case depends on its own facts and procedural history, the decision serves as an important reminder that a default judgment does not automatically eliminate every available defense.

Business owners who discover a judgment has already been entered should act quickly.

The longer a judgment remains in place, the more difficult it may become to challenge it.

If an MCA company has already obtained a judgment, business owners should also review their options for vacating a confession of judgment, since procedural defects and criminal usury defenses may sometimes be raised together.

What Crystal Springs Means for Business Owners

The practical takeaway from Crystal Springs is that timing matters.

Ignoring court papers can make defending a case more difficult, but it does not necessarily eliminate every legal option.

In some situations, it may still be possible to challenge the judgment and present defenses that were never considered by the court.

That is why business owners should seek legal advice as soon as they learn that an MCA lawsuit has been filed or a judgment has been entered.

Waiting only narrows the available options.

Cases Where MCA Agreements Were Upheld

Not every merchant cash advance is treated as a loan.

New York courts have also upheld agreements that were properly structured as purchases of future receivables.

In cases such as Samson MCA LLC v. Russo and Principis Capital v. I Do, Inc., the courts concluded that the agreements contained the features expected in a legitimate receivables purchase.

Among other things, the contracts included meaningful reconciliation provisions, avoided fixed repayment terms, and did not treat bankruptcy as an automatic default.

Those decisions reinforce an important point.

A criminal usury defense is never automatic.

Each agreement must be evaluated on its own language, structure, and the way it operated in practice.

Every MCA Agreement Must Be Evaluated Individually

Business owners sometimes ask whether a recent court decision means their agreement is automatically unenforceable.

The answer is no.

New York courts evaluate each contract on its own merits.

Small differences in language or the way the agreement was administered can significantly affect the outcome.

That is why relying on another company's case is rarely enough.

A thorough legal review focuses on your agreement, your payment history, and the specific facts surrounding your transaction.

Only after that analysis can an attorney determine whether criminal usury, recharacterization, or another defense may apply.

How to Use Criminal Usury as a Defense Against MCA Collection

When criminal usury is available, it can become one of the strongest defenses in an MCA collection lawsuit.

The strategy does not begin with negotiating a settlement.

It begins with understanding exactly what was signed.

An experienced review looks at the agreement's structure, calculates the effective cost of the transaction, and evaluates whether New York courts are likely to treat the arrangement as a loan.

Only then can a business owner make an informed decision about the best path forward.

Businesses exploring their legal options before litigation escalates may also benefit from learning about commercial loan workout solutions, which may provide alternatives to continued collection activity in certain situations.

Using Criminal Usury as a Defense Against MCA Collection

If an MCA agreement may be criminally usurious, every decision that follows should be based on a careful legal review, not assumptions.

Many business owners feel pressured to settle as soon as they receive a demand letter or lawsuit.

That is often exactly what the MCA company wants.

Before agreeing to a payment plan, signing a settlement agreement, or making additional payments, it is important to determine whether the agreement is even enforceable under New York law.

A strong defense begins with understanding the contract, evaluating how it actually operated, and determining whether the transaction should be treated as a loan.

Criminal Usury Is a Defense, Not a Separate Lawsuit

One of the most common misunderstandings is that criminal usury automatically allows a business owner to sue the MCA company for damages.

That is generally not how New York law works.

Instead, criminal usury is typically raised as a defense when the MCA company attempts to enforce the agreement.

If the court concludes that the agreement is a criminally usurious loan, the business owner may be able to defeat the collection action altogether.

That distinction is important because the legal strategy often depends on the posture of the case.

Whether the MCA company has already filed suit, obtained a judgment, or simply begun collection efforts can affect how the defense is presented.

Challenging a Default Judgment

Some business owners do not realize an MCA lawsuit has been filed until after a default judgment has already been entered.

While acting early is always the best option, a default judgment does not necessarily end the analysis.

Depending on the facts of the case, New York law may allow a business owner to ask the court to reopen the matter and consider defenses that were never presented.

Whether that relief is available depends on several factors, including the circumstances surrounding the judgment and how quickly the business owner acts after learning about it.

If you have already received a judgment, learning more about vacating a confession of judgment can help you understand whether additional legal options may still exist.

Why Calculating the Effective Interest Rate Matters

Not every MCA agreement exceeds New York's criminal usury threshold.

That determination requires more than looking at the factor rate printed in the contract.

The transaction must be analyzed as a whole.

The advance amount, repayment amount, payment schedule, and expected repayment period all affect the calculation.

Only after reviewing those numbers can an attorney determine the agreement's effective annual cost and whether criminal usury may become part of the defense.

Because every agreement is different, online calculators and generalized estimates often produce misleading results.

Do Not Wait After Receiving Court Papers

Time matters in every MCA case.

Once a lawsuit has been filed, deadlines begin running almost immediately.

Ignoring court papers or assuming the problem will resolve itself often makes defending the case much more difficult.

In many situations, prompt action preserves legal options that may disappear after a judgment is entered or enforcement efforts begin.

Whether the strategy involves asserting criminal usury, challenging a confession of judgment, negotiating with creditors, or pursuing bankruptcy protection, the earlier the legal analysis begins, the more options are usually available.

Five Mistakes New York Business Owners Make When Facing MCA Collection

Many of the most serious problems in MCA cases are avoidable.

These are the mistakes we see most often.

Mistake #1: Believing the Contract Title Controls the Outcome

Many business owners assume that because the agreement is labeled a "purchase of future receivables," it cannot be challenged as a loan.

New York courts have repeatedly rejected that approach.

The focus is on how the agreement actually works, not what it is called.

That is why every MCA contract deserves a careful legal review before any conclusions are reached.

Mistake #2: Settling Before Evaluating Possible Defenses

The pressure to resolve an MCA dispute quickly can be overwhelming.

Business owners may receive repeated collection calls, threats of lawsuits, or offers to settle immediately.

Accepting a settlement before determining whether criminal usury or another defense applies may mean giving up valuable legal rights.

Understanding your position first allows you to negotiate from a place of strength rather than urgency.

Mistake #3: Assuming a Default Judgment Cannot Be Challenged

A judgment feels final.

In some cases, it is.

In others, New York law may still provide an opportunity to ask the court for relief.

Waiting too long makes that process more difficult, which is why business owners should seek legal advice as soon as they discover that a judgment has been entered.

Mistake #4: Confusing Civil Usury With Criminal Usury

Many business owners have heard that LLCs and corporations cannot raise a usury defense.

That misunderstanding causes some companies to overlook one of the strongest defenses available.

Although civil usury generally does not apply to business entities, criminal usury may.

Understanding the difference can significantly affect the strategy used in an MCA case.

Mistake #5: Waiting Too Long to Respond

Every day matters.

Whether responding to a lawsuit, challenging a judgment, or evaluating bankruptcy options, delay can reduce the number of legal tools available.

The best time to review an MCA agreement is before collection efforts gain momentum.

Business owners considering all available options may also want to review commercial debt restructuring solutions, particularly when preserving the business is a primary goal.

Bankruptcy and Criminal Usury: How They Work Together

Criminal usury is only one part of the analysis.

For some business owners, bankruptcy may provide another powerful tool for addressing merchant cash advance debt while protecting the business from continued collection efforts.

The right strategy depends on the company's financial condition, its long-term goals, and the specific terms of the MCA agreement.

Understanding how bankruptcy and MCA litigation interact is often an important part of developing a comprehensive defense strategy.

Merchant cash advance litigation and bankruptcy are often discussed as if they are completely separate issues.

They are not.

For many New York business owners, bankruptcy creates an opportunity to address MCA debt while stopping collection efforts and giving the business room to stabilize.

Whether bankruptcy is the right solution depends on the company's financial condition, its long-term goals, and the strength of any available defenses.

In some situations, criminal usury and bankruptcy work together as part of a broader strategy to resolve overwhelming business debt.

How Bankruptcy Can Change an MCA Dispute

Filing for bankruptcy immediately triggers the automatic stay, which generally stops collection lawsuits, bank restraints, collection calls, and many other creditor actions while the bankruptcy case is pending.

That breathing room gives business owners the opportunity to evaluate their legal options without the pressure of ongoing collection activity.

Once the MCA company files a claim in the bankruptcy case, that claim may be reviewed and, where appropriate, challenged.

If there are legitimate arguments that the agreement should be treated as a criminally usurious loan, those issues can become part of the bankruptcy process.

For many businesses, bankruptcy provides an organized forum for resolving complex financial disputes instead of fighting multiple collection actions at the same time.

Why Bankruptcy-Default Clauses Matter

Many MCA agreements state that filing for bankruptcy automatically places the merchant in default.

Ironically, that language may work against the funder.

One of the questions courts ask when evaluating an MCA agreement is whether the funder truly accepted the risk that the business might struggle financially.

A provision declaring bankruptcy to be a default may suggest the funder expected repayment regardless of the business's future revenue.

That issue can become another piece of the overall recharacterization analysis.

Although no single contract provision decides the outcome, bankruptcy-default clauses often receive close attention when courts evaluate whether an MCA functions as a loan.

Chapter 11: Restructuring While the Business Continues Operating

Many business owners assume bankruptcy means closing their doors.

That is not always the case.

Chapter 11 bankruptcy allows many businesses to continue operating while restructuring debt under the protection of the Bankruptcy Court.

For companies with ongoing operations and a realistic path forward, Chapter 11 may provide the time needed to reorganize obligations, negotiate with creditors, and develop a plan for long-term stability.

At the same time, disputes involving merchant cash advances can be addressed within the bankruptcy process rather than through multiple collection lawsuits.

Subchapter V: A More Efficient Option for Many Small Businesses

For qualifying businesses, Subchapter V bankruptcy offers a streamlined alternative to a traditional Chapter 11 case.

Subchapter V was created to make reorganization more accessible for small businesses by reducing costs and simplifying many of the procedural requirements associated with Chapter 11.

For business owners dealing with multiple creditors, including MCA funders, Subchapter V may provide an efficient path toward restructuring while keeping the business operating.

Determining whether a company qualifies requires a careful review of its financial circumstances and debt structure.

When Chapter 7 May Be the Better Choice

Not every business can or should continue operating.

If the business has reached the point where reorganization is no longer practical, Chapter 7 bankruptcy may provide a path toward resolving outstanding debt and moving forward.

Whether Chapter 7, Chapter 11, or Subchapter V is the better choice depends on the company's assets, liabilities, business prospects, and long-term goals.

There is no single solution that fits every business owner.

The legal strategy should always be tailored to the facts of the case.

Geographic Considerations Across New York

Merchant cash advance disputes arise throughout New York.

While the governing legal principles remain the same, the courts handling these cases may differ depending on where the business is located and where the lawsuit was filed.

J. Singer Law Group represents business owners throughout Manhattan, Brooklyn, Queens, the Bronx, Staten Island, Long Island, Westchester, and communities across New York.

Understanding the court handling the case is an important part of developing the right legal strategy.

New York City

Many MCA cases are filed in New York City courts or involve businesses located in the five boroughs.

Because New York City is home to a large concentration of commercial businesses, MCA litigation is common.

The firm's experience representing business owners throughout Manhattan, Brooklyn, Queens, the Bronx, and Staten Island provides valuable insight into the legal and practical issues that frequently arise in these cases.

Long Island and Westchester

Business owners on Long Island and in Westchester often face the same aggressive collection tactics seen throughout the rest of the state.

Several important court decisions addressing merchant cash advances have also originated in these jurisdictions, making them significant locations in the development of New York MCA law.

Regardless of where the lawsuit is filed, the focus remains on the language of the agreement and the facts surrounding the transaction.

Upstate New York

Merchant cash advance lawsuits are not limited to New York City.

Businesses throughout Upstate New York also face collection actions involving MCA agreements.

Although local procedures may differ from one county to another, the legal principles governing criminal usury and recharacterization apply statewide.

Business owners should not assume their location changes the legal analysis.

The same careful review of the agreement is required no matter where the case is pending.

Businesses Operating in Multiple States

Some New York businesses also operate in other states or entered agreements containing out-of-state choice-of-law provisions.

Those situations often involve additional legal issues beyond the scope of a typical MCA dispute.

Determining which state's law applies may require a detailed review of the contract and the parties' relationship.

For businesses with operations in multiple jurisdictions, early legal guidance can help identify the best strategy before significant collection activity begins.

Frequently Asked Questions

What makes a merchant cash advance criminally usurious?

A merchant cash advance may become criminally usurious if a court determines that the agreement is actually a loan rather than a true purchase of future receivables and the effective annual interest rate exceeds New York's criminal usury threshold.

The analysis focuses on how the agreement operates in practice, not simply what the contract is called.

Can my LLC raise a criminal usury defense?

Yes.

Although New York generally prevents corporations and LLCs from asserting civil usury as a defense, business entities may still rely on criminal usury when the facts support it.

That distinction is one of the most important concepts in MCA litigation.

Can I challenge an MCA judgment after it has already been entered?

In some situations, yes.

Depending on the circumstances, New York law may allow a business owner to ask the court to vacate a judgment or raise defenses that were not previously considered.

Whether that relief is available depends on the specific facts of the case and how quickly action is taken.

Will bankruptcy eliminate my MCA debt?

Every case is different.

Bankruptcy may provide important protections and may create opportunities to challenge an MCA claim, but the outcome depends on the facts of the case, the bankruptcy chapter involved, and the nature of the agreement.

A careful legal review is necessary before determining the best course of action.

The Path Forward

Merchant cash advance disputes are rarely as simple as they first appear.

What looks like an enforceable agreement may deserve much closer scrutiny.

Questions about criminal usury, contract language, bankruptcy, confessions of judgment, and commercial restructuring often overlap.

The key is identifying those issues before making decisions that could affect your business for years to come.

At J. Singer Law Group, every case begins with understanding the business, reviewing the agreement, and identifying the strategy that best protects the client's interests.

To learn more about the firm's bankruptcy, restructuring, and MCA defense practice, visit the J. Singer Law Group Home Page.

If you are facing an MCA lawsuit, collection efforts, or questions about bankruptcy, contact J. Singer Law Group to schedule a confidential consultation.