MCA True Sale Defense in New York: How Courts Decide Whether Your Merchant Cash Advance Is a Loan or a Purchase of Receivables

If your business is making the same MCA payment every day even when revenue changes, take a closer look at the agreement and what is actually happening in your bank account.

Start with your recent bank statements. Compare the daily ACH withdrawals taken by the MCA funder with the revenue your business generated during the same period. If revenue fell but the withdrawal stayed the same, that payment history may matter when determining whether the transaction operated as a genuine purchase of future receivables or functioned more like a loan.

New York courts do not decide that question based only on what the agreement is called. They look at how the transaction is structured and how it operates in practice.

That distinction is central to an MCA true sale defense. New York courts examine several features of the transaction, including whether payments can actually adjust with revenue, whether repayment is tied to a fixed period, and whether the funder has recourse against the merchant if the business fails.

For a business already dealing with a demand letter, confession of judgment, bank restraint, or other MCA enforcement activity, those questions can have immediate consequences. Before agreeing to a settlement or deciding how to respond to the funder, the business should understand what the MCA agreement says and whether the transaction operated as a true purchase of receivables.

This article explains the framework New York courts use to make that determination, what the three factors can reveal about an MCA agreement, and which legal options may become relevant when the transaction's substance does not match its label.

What Is the MCA True Sale Defense in New York?

The MCA true sale defense addresses a basic legal question: Did the funder purchase a portion of the business’s future receivables, or did the transaction function as a loan that had to be repaid regardless of what happened to the business’s revenue?

That distinction matters because New York law treats a genuine purchase of future receivables differently from a loan.

A true sale occurs when a funder purchases an agreed portion of a merchant’s future receivables and accepts the risk that those receivables may rise or fall. If the business generates less revenue, the amount collected should reflect that change. The funder is purchasing receivables rather than simply advancing money that must be repaid on a predetermined schedule.



Recharacterization occurs when a court looks beyond the contract's language and determines that an agreement presented as a purchase of receivables actually operated as a loan.

The distinction turns on substance, not simply terminology.

Calling an agreement a “purchase of future receivables” does not automatically make it one. A court can examine the payment structure, the rights given to the funder, the risk each party assumed, and how the agreement operated after it was signed.

A reconciliation clause is particularly important in that analysis. This provision generally allows payments to adjust based on the merchant’s actual receivables. If revenue declines, a meaningful reconciliation process should allow the payment amount to decline as well.

A reconciliation provision that exists in the contract but cannot realistically be used may tell a different story.

New York courts evaluate these issues through the three-factor framework associated with LG Funding, LLC v. United Senior Properties of Olathe, LLC. The analysis considers whether the agreement has a meaningful reconciliation provision, whether repayment is fixed or genuinely indefinite, and whether the funder has recourse against the merchant if the business cannot generate the expected receivables.

Together, those factors help answer the central question: Did the funder actually accept the risk associated with purchasing future receivables?

If the answer is no, the merchant may have grounds to argue that the transaction should be treated as a loan.

That can materially change the legal analysis.

Once an MCA is treated as a loan, New York’s interest and usury rules may become relevant. For corporate merchants, the criminal usury threshold under Penal Law § 190.40 can be particularly important. Depending on the circumstances and the court’s findings, recharacterization can also affect the agreement's enforceability and the funder’s position in a bankruptcy proceeding.

For a business owner, however, the analysis should begin before reaching those consequences.

The first question is what the agreement required and what actually happened.

Were payments adjusted when revenue changed? Was there a practical way to request reconciliation? Did the payment structure effectively create a predetermined repayment period? Could the funder pursue the merchant or guarantor even if the expected receivables never materialized?

Those facts can tell a business owner much more about the transaction than the title printed at the top of the agreement.

Why New York Law Governs MCA Agreements Nationwide

A business does not necessarily have to be located in New York for New York MCA law to matter.

MCA agreements may contain New York choice-of-law provisions that designate New York law as governing the contract. As a result, a business operating elsewhere may still find that New York law plays an important role when a dispute develops.

That makes the New York true sale analysis relevant beyond Manhattan, Brooklyn, Queens, Long Island, and Westchester.

When New York law governs the transaction, the distinction between a true purchase of receivables and a loan can become central to the dispute.

Courts examining that issue look at the arrangement's substance, including reconciliation, the repayment structure, and the funder’s recourse rights.

For merchants, the practical lesson is straightforward.

Do not assume that the state where the business operates tells you which law controls the MCA agreement. Review the choice-of-law provision and the rest of the contract before deciding what legal options may be available.

This is also why MCA disputes require more than a quick calculation of the balance remaining.

You must read the agreement as a whole. You need to compare the payment history with actual business performance. Reconciliation rights need to be evaluated. Guarantees, default provisions, UCC filings, and enforcement documents may also matter.

Jeb Singer, Managing Partner of Singer Law Group, represents businesses facing merchant cash advance disputes as part of a broader commercial litigation and restructuring practice. His experience includes a federal bankruptcy court clerkship with Judge Stuart M. Bernstein in the Southern District of New York, which informs the firm’s approach when an MCA dispute intersects with insolvency, enforcement, or a potential restructuring.

For Singer Law Group, the analysis starts with the transaction itself: what the agreement says, how the funder collected, what risks the funder actually assumed, and what options those facts may give the business.

What Are the Three Factors Courts Use to Decide If an MCA Is a True Sale or a Loan?

When a New York court examines whether a merchant cash advance is a true purchase of receivables or a loan, the analysis focuses on the substance of the transaction.

An agreement calling itself a purchase of future receivables does not end the inquiry.

The court can examine how the agreement allocates risk between the merchant and the funder and whether the payment structure depends on the business generating receivables.

The three-factor framework associated with LG Funding, LLC v. United Senior Properties of Olathe, LLC provides the starting point.

Courts consider whether the agreement contains a meaningful reconciliation provision, whether the transaction has a finite repayment term, and whether the funder has recourse if the merchant enters bankruptcy or otherwise fails to generate the anticipated receivables.

No factor should be viewed in isolation.

Together, they help answer the larger question of whether the funder truly purchased receivables and accepted the risk that those receivables might never materialize, or whether the merchant was effectively required to repay a fixed debt.

For a business owner evaluating an MCA agreement, these factors provide a practical way to begin reviewing the transaction.

Factor 1: Is There a Genuine Reconciliation Provision?

Reconciliation is one of the most important features of a true receivables purchase.

In a genuine MCA transaction, payments should relate to the merchant’s actual receivables. If the business earns more, the funder’s share may increase.

If revenue falls, the amount collected should be able to decrease.

A reconciliation provision is intended to make that adjustment possible.

However, the contract's reconciliation language does not necessarily answer the question.

The provision has to work in practice.

A court may consider whether the merchant can realistically request an adjustment, what documentation the funder requires, whether the funder has discretion to deny the request, and whether the process actually ties payments to receivables.

A provision can appear to offer reconciliation while placing conditions on the merchant that make an adjustment difficult or unrealistic to obtain.

That distinction matters.

If a business experiences a substantial decline in revenue but the same fixed amount continues to leave its account every day, the payment history may provide important evidence about how the transaction actually operated.

For example, assume a business was generating approximately $100,000 per month when the MCA began, and the funder withdrew $1,500 each business day.

Several months later, monthly revenue falls to $55,000, but the funder continues withdrawing the same $1,500 each day.

The business asks for reconciliation.

If the agreement provides a practical process and the payment adjusts to reflect actual receivables, that can support the position that the funder assumed receivables risk.

If the funder refuses to adjust the payment despite the revenue decline, or the reconciliation provision gives the funder effectively unlimited discretion to reject the request, the analysis may look different.

The question is not simply whether the word “reconciliation” appears in the agreement.

The question is whether reconciliation is real.

Business owners reviewing an MCA should therefore preserve records showing revenue, withdrawals, reconciliation requests, communications with the funder, and any response to those requests.

Those records can help show whether the payment obligation actually moved with receivables or remained fixed regardless of business performance.

Factor 2: Does the Agreement Have a Finite Repayment Term?

A true purchase of future receivables does not operate like a conventional loan with a fixed maturity date.

If the funder has purchased a percentage of receivables, the time required to collect the purchased amount should depend on how quickly the business generates those receivables.

Strong revenue may allow the business to collect the purchased amount sooner.

Weak revenue may extend the collection period.

That uncertainty is part of the risk associated with purchasing future receivables.

A transaction begins to look more like a loan when the payment structure effectively establishes a predetermined repayment period.

An agreement may avoid using words such as “term” or “maturity date,” but the numbers can still matter.

If the contract identifies a purchased amount and requires a fixed daily ACH withdrawal, dividing the purchased amount by the daily payment may reveal that the transaction is expected to conclude within a predictable number of business days.

That does not automatically establish that the MCA is a loan.

But it can matter when considered alongside other factors.

Suppose the agreement states that the funder purchased $150,000 in future receivables and requires a daily withdrawal of $1,500.

If those withdrawals continue at the same amount regardless of actual receivables, the payment structure may function much like a fixed repayment schedule.

By contrast, if the amount collected genuinely changes with the merchant’s revenue and the collection period expands or contracts accordingly, the transaction more closely reflects the funder purchasing receivables with uncertain timing.

The practical question is whether time creates an absolute repayment obligation.

A business owner should therefore look beyond the contract's terminology and examine how the payment formula works.

Was the daily amount fixed from the beginning?

Did it ever change?

Was the expected collection period effectively predetermined?

Did the business remain obligated to deliver the same amount even when receivables declined?

Those facts can help show whether the transaction contained the uncertainty expected in a true receivables purchase.

Factor 3: Does the Funder Have Recourse If the Business Fails?

The third factor looks at who bears the risk if the merchant’s business fails or the expected receivables never materialize.

That question goes to the heart of the distinction between a purchase and a loan.

A purchaser of future receivables accepts some risk that the receivables it purchased may not be generated.

A lender, by contrast, generally expects repayment of the debt regardless of whether the borrower’s business performs as anticipated.

Courts may therefore examine what rights the MCA agreement gives the funder when the merchant experiences financial distress, closes, or enters bankruptcy.

If the merchant must repay the purchased amount regardless of whether receivables exist, the transaction may look less like a true sale.

Personal guarantees can also matter, although a guarantee alone does not determine the issue.

The important question is what the guarantee actually covers.

A guarantee tied to fraud, diversion of receivables, or other misconduct can serve a different purpose from a guarantee that effectively requires the owner to repay the entire MCA whenever the business cannot generate sufficient receivables.

The same is true of default provisions.

A court may examine whether ordinary business failure is treated as a breach or whether the funder bears the risk that the business may legitimately generate fewer receivables than expected.

Bankruptcy provisions deserve similar attention.

If filing bankruptcy automatically creates liability designed to ensure the funder receives the full purchased amount despite the absence of future receivables, that provision may become relevant to the true sale analysis.

For business owners, this means the review should extend beyond the payment paragraph.

Guarantees, default provisions, bankruptcy clauses, security interests, and other enforcement rights can all help show how risk was allocated.

How Courts Weigh All Three Factors Together

The three factors are most useful when considered together.

A weak reconciliation provision may raise questions, but the rest of the agreement still matters.

A payment schedule that appears fixed may be significant, but it should be considered alongside the funder’s recourse rights and whether payments actually adjust with revenue.

Likewise, a personal guarantee does not automatically turn an MCA into a loan.

The broader economic structure matters.

The strongest true sale analysis therefore looks at both the contract and the parties’ conduct after signing.

What did the agreement promise?

What happened when revenue changed?

Were reconciliation requests honored?

Did the payment amount remain fixed?

What remedies did the funder invoke when the merchant could no longer support the withdrawals?

Did the funder behave as though it had purchased a variable stream of receivables, or as though it was collecting a debt that had to be repaid in full?

Those facts can matter, especially when a funder begins enforcement.

If the dispute has reached the point where a confession of judgment has been entered, the merchant may need to evaluate both the judgment itself and

the underlying MCA transaction. Singer Law Group discusses the legal issues that can arise when a business needs to fight a confession of judgment in New York.

The true sale analysis is not simply an argument about contract language.

It examines who actually carried the risk of the business’s future performance.

That distinction matters even more when the MCA's terms suggest reconciliation existed on paper but did not operate as a meaningful right in practice.

When Do New York Courts Uphold True Sale Classification?

New York courts are more likely to uphold an MCA as a true purchase of receivables when the agreement does what a receivables purchase is supposed to do: tie the funder’s recovery to the merchant’s actual revenue and leave the funder with meaningful risk.

That means the analysis doesn't stop at language stating that the funder purchased future receivables.

The payment structure has to support that description.

A meaningful reconciliation provision should allow payments to change when the merchant’s receivables change. The collection period should be able to lengthen or shorten based on business performance rather than operating as a fixed repayment term. The agreement should also leave the funder exposed to the possibility that the merchant may not generate the anticipated receivables.

When those features are present and function as written, the agreement is more consistent with a true sale.

That is an important point for merchants evaluating a possible recharacterization defense.

A high factor rate or aggressive collection activity does not, by itself, establish that an MCA is a loan. The agreement and the parties’ actual conduct still have to be examined under the same three-factor framework.

The strongest analysis therefore looks at both sides of the issue.

If reconciliation was available and actually worked, payments changed with revenue, the collection period was genuinely uncertain, and the funder assumed the risk that receivables might decline, those facts can support true sale treatment.

If the contract said those things but the transaction operated differently, the merchant may have a stronger argument for recharacterization.

Principis Capital and Samson: The Appellate Benchmarks

Two New York appellate decisions help show what courts look for when an MCA is treated as a true sale.

In Principis Capital, LLC v. I Do, Inc., the Second Department examined an agreement in which repayment was contingent on the merchant’s receivables rather than an absolute obligation to repay a fixed debt.

The reconciliation provision mattered because it provided a mechanism for adjusting payments based on actual revenue. The repayment period was not fixed as it would be with a conventional loan, and the structure placed meaningful receivables risk on the funder.

Those features supported treatment of the transaction as a purchase rather than a loan.

Samson MCA LLC v. Joseph A. Russo M.D. P.C. provides another useful example.

There, the Fourth Department likewise considered whether the transaction’s structure reflected a genuine purchase of receivables. The reconciliation mechanism, indefinite repayment structure, and allocation of risk supported true sale treatment.

The lesson from these cases is that a reconciliation paragraph does not automatically protect an MCA agreement.

Rather, the agreement must operate consistently with the economic structure of a receivables purchase.

Consider what happens when business revenue drops.

If the funder purchased a percentage of future receivables, declining revenue should affect the amount remitted and may extend the time needed for the funder to receive the purchased amount.

That uncertainty is part of the transaction.

By contrast, if the merchant continues paying the same amount every business day until a predetermined total has been collected, the transaction may begin to look less like a purchase of uncertain future revenue and more like repayment of a fixed obligation.

The same distinction applies to reconciliation.

A provision that allows a merchant to request an adjustment and brings payments into line with actual receivables differs from language that technically permits reconciliation but gives the merchant no realistic way to obtain one.

That is why you should compare the paper agreement with the payment history.

Bank statements can show whether withdrawals changed when revenue changed. Communications with the funder can show whether the funder requested reconciliation and how it responded. The agreement itself can show whether the collection period and funder’s remedies were genuinely

contingent on receivables.

Taken together, those records can help show whether the transaction functioned the way the contract says it did.

What MCA Funders Must Do to Survive Judicial Scrutiny

For an MCA to withstand a true sale challenge, the overall transaction should reflect the characteristics of an actual receivables purchase.

A meaningful reconciliation process is one part of that structure.

If a merchant’s revenue falls, the agreement should provide a workable method for adjusting remittances based on actual receivables. A funder that consistently honors that process has a stronger argument that it assumed the revenue risk associated with purchasing receivables.

The repayment structure matters as well.

A true sale should not function as though the merchant borrowed a fixed amount that must be repaid by a predetermined date. The collection period should depend on the receivables the business actually generates.

The funder’s remedies also deserve close review.

If the agreement gives the funder broad recourse whenever the merchant cannot generate sufficient revenue, that may undermine the argument that the funder accepted the risk of purchasing future receivables.

Personal guarantees, bankruptcy provisions, default clauses, and other enforcement rights should therefore be considered as part of the complete transaction rather than viewed separately.

New York’s commercial financing disclosure requirements can also affect the legal review of an MCA transaction.

The disclosure rules apply independently of the true sale analysis. For a merchant already examining whether an MCA should be treated as a loan, the required disclosures and the funder’s compliance with applicable requirements may be another part of the contract review.

That is why an MCA defense should not rest on a single clause pulled from the agreement.

The reconciliation language matters, but so do the payment records.

The stated term matters, but so does the mathematical reality of the withdrawal schedule.

The guarantee matters, but so do its scope and triggering events.

The question throughout the analysis is the same: Who actually carried the risk that the future receivables would not be generated?

When the funder genuinely carries that risk, the transaction is more consistent with a true sale.

When the merchant remains obligated to deliver a fixed return regardless of what happens to revenue, the agreement may require a different legal analysis.

When Can an MCA Be Recharacterized as a Loan?

An MCA may be recharacterized when the transaction is described as a purchase of future receivables but operates more like a fixed repayment obligation.

The analysis comes back to the same three factors New York courts use when evaluating true sale treatment: reconciliation, the repayment term, and the funder’s recourse.

A merchant does not establish that an MCA is a loan simply by showing that the transaction was expensive or that the daily withdrawals became difficult to manage.

The stronger question is whether the funder assumed the risk of purchasing future receivables.

If payments remained fixed even when revenue declined, reconciliation was unavailable or ineffective, the collection period was essentially predetermined, and the merchant remained responsible for repayment regardless of whether the anticipated receivables were generated, those facts

may support a recharacterization argument.

The agreement itself is only part of that review.

Bank statements, revenue records, reconciliation requests, emails with the funder, payment histories, default notices, and enforcement documents may help show how the transaction operated after closing.

That evidence can be especially important when the contract describes payments as contingent on receivables, but the merchant’s experience suggests otherwise.

What Happens If a Court Recharacterizes an MCA as a Loan?

Recharacterization changes the legal framework applied to the transaction.

If a court determines that an MCA was actually a loan rather than a purchase of future receivables, lending laws may apply.

For New York businesses, that can include the state’s usury laws.

The analysis is not as simple as converting the MCA’s payments into an annual percentage rate and concluding that the agreement is unenforceable.

The court must first determine that the transaction is legally a loan. The borrower's identity, the transaction terms, the interest calculation, and other circumstances can then affect the usury analysis.

For corporate transactions, New York Penal Law § 190.40 is particularly significant because it addresses criminal usury at an annual interest rate exceeding 25 percent.

If the facts support both recharacterization and a legally sufficient usury defense, the consequences can be substantial.

That is why the order of the analysis matters.

First, determine whether the transaction was a true purchase of receivables or a loan.

Then determine what lending laws apply if the transaction is treated as a loan.

A merchant should not assume that a high factor rate automatically establishes either point.

How Criminal Usury Can Affect an MCA Dispute

Criminal usury can become an important issue when an MCA has first been recharacterized as a loan.

New York’s criminal usury statute generally addresses interest exceeding 25 percent per year.

For an MCA dispute, however, calculating an effective annual rate is only one part of the analysis.

First, you must treat the underlying transaction as a loan.

That distinction is critical because New York’s usury laws apply to loans or forbearances, not genuine purchases of receivables.

If the funder truly purchased future receivables and assumed the risk that those receivables might decline or never materialize, a usury argument generally does not arise in the same way.

If the transaction instead required the merchant to repay a fixed amount regardless of revenue, the legal analysis may change.

Payment history can be particularly useful here.

A business owner may have an agreement stating that the funder purchased a percentage of future receivables. At the same time, the bank records show the same fixed ACH debit leaving the account every business day.

If those withdrawals continued unchanged through substantial revenue fluctuations and the merchant could not obtain meaningful reconciliation, the records may support a closer examination of the transaction’s actual character.

That review is not meant to label every costly MCA as usurious.

It is to determine whether the agreement and the parties’ conduct support treating the transaction as a loan and, if so, whether New York’s usury laws provide a defense.

How Recharacterization Can Affect a Confession of Judgment

Recharacterization can also matter when an MCA funder has obtained or is attempting to enforce a confession of judgment.

A confession of judgment gives the funder a potentially powerful enforcement mechanism, but the judgment does not eliminate questions about the underlying transaction.

If there are grounds to argue that the MCA was actually a loan and that the underlying obligation is legally defective or unenforceable, those issues may become part of the merchant’s broader strategy for addressing the judgment.

The available options depend on the facts, the court record, the agreement, and the case's procedural posture.

A merchant should not assume that recharacterization automatically vacates a confession of judgment.

Likewise, the existence of a COJ does not mean the underlying MCA should never be examined.

Counsel may need to review both issues together.

That means looking at how the judgment was obtained, whether the confession complied with applicable requirements, what defenses may exist to the underlying transaction, and whether there are grounds to seek relief from the judgment.

If a judgment is already affecting the company’s bank account or operations, timing becomes particularly important.

A business facing active enforcement should provide counsel with the MCA agreement, confession of judgment, judgment papers, bank restraint documents, payment records, and relevant communications as quickly as possible.

The legal strategy should address the immediate enforcement problem while also evaluating the transaction that produced it.

What Recharacterization Means in Bankruptcy

The true sale question can become even more significant when a merchant files for bankruptcy.

If the MCA is a genuine purchase of receivables, the funder may argue that the purchased receivables belong to it rather than to the bankruptcy estate.

If the transaction is recharacterized as a loan, the funder’s position may be different.

The funder may instead be treated as a creditor whose rights depend on the loan obligation, its security interests, and the priorities established under applicable law and the Bankruptcy Code.

That distinction can affect how the MCA claim is treated during the case.

It can also affect the broader restructuring strategy when the business has multiple MCA positions, secured debt, tax obligations, vendor balances, lease obligations, and other liabilities that need to be addressed together.

For some businesses, a bankruptcy filing may provide a structured way to address those competing obligations rather than negotiating with creditors one at a time.

Singer Law Group discusses how Chapter 7 bankruptcy can affect MCA lawsuits when bankruptcy and merchant cash advance enforcement overlap.

For a business that intends to continue operating, Chapter 11 may present a different set of options. A qualifying small business may also be able to consider Subchapter V, which provides a streamlined Chapter 11 process for eligible debtors.

Bankruptcy is not the appropriate response to every MCA dispute.

But when the business has a broader debt problem, the true sale analysis should not be separated from the company’s overall financial position.

Whether the MCA is treated as purchased receivables or debt can matter to what happens after the case is filed.

Why the Business’s Records Matter

A true sale defense is heavily dependent on evidence.

The agreement establishes the written terms, but the business’s records can show whether those terms reflected what actually happened.

Bank statements can establish the amounts and timing of MCA withdrawals.

Revenue records can show whether business performance changed while those withdrawals remained fixed.

Emails and other communications may document reconciliation requests and the funder’s response.

Court papers can show what enforcement remedies the funder pursued.

The merchant should preserve those materials before a dispute becomes harder to resolve.

That is especially important when the business is considering a recharacterization argument based on how the MCA operated rather than simply what the agreement said.

A useful review may compare the merchant’s revenue against the funder’s withdrawals over the same period.

If revenue declined sharply but payments remained unchanged, that can help counsel evaluate whether reconciliation was meaningful.

If the agreement supposedly had no fixed term but the payment structure produced a predictable payoff date, that may also deserve attention.

If the funder’s remedies effectively required full repayment even when receivables were not generated, those provisions should be reviewed as part of the recourse analysis.

No single document necessarily decides the issue.

The strength of the analysis comes from combining the contract, financial records, communications, and enforcement history.

That gives counsel a clearer picture of whether the transaction operated as a genuine purchase of receivables or as a fixed debt obligation.

Five Mistakes Merchants Make When Fighting an MCA True Sale Dispute

Even when an MCA agreement raises legitimate questions under New York’s true sale framework, the way a merchant responds can affect the options available.

A strong defense starts with understanding the transaction before making another financial or legal decision. That means reviewing the agreement, payment history, reconciliation process, funder’s remedies, and the business’s broader financial condition together.

Several mistakes can make that analysis harder or cause a merchant to give up potential arguments before fully evaluating them.

• Signing a settlement before completing the three-factor analysis. A settlement may provide certainty, but a merchant should understand the underlying MCA before agreeing to new payment terms or releasing potential claims. If the agreement operated as a loan rather than a genuine purchase of receivables, that distinction may affect the merchant’s legal position and negotiating strategy. Review the reconciliation, the repayment structure, and the funder’s recourse rights first. The goal is to identify potential arguments before deciding whether settlement is the right resolution.
• Assuming the contract’s “true sale” language decides the issue. An MCA agreement may describe the transaction as a purchase of future receivables, but that language does not resolve the legal analysis by itself. New York courts look at the transaction's substance. A merchant should compare what the contract says with what actually happened after funding. If payments remained fixed despite substantial changes in revenue, reconciliation could not be obtained, or the merchant remained responsible for the full amount regardless of receivables, those facts may matter more than the label used in the agreement.
• Using the wrong usury argument as a corporate merchant. New York’s civil and criminal usury rules do not apply to corporate merchants in the same way. A corporation generally cannot rely on the 16 percent civil usury limit as a defense. Criminal usury, which concerns rates exceeding 25 percent per year under Penal Law § 190.40, can present a different issue. Even then, the transaction generally must first be treated as a loan before a usury defense becomes relevant. That is why the true sale analysis should come before conclusions about the effective interest rate.
• Overlooking Commercial Finance Disclosure Law issues. The true sale question may not be the only issue worth reviewing. New York’s Commercial Finance Disclosure Law and its implementing requirements under 23 NYCRR Part 600 may also be relevant to an MCA transaction. Counsel reviewing the agreement should consider applicable disclosure requirements in the initial analysis rather than focusing exclusively on recharacterization. Different legal issues can exist within the same transaction, and the strategy should account for all of them.
• Filing bankruptcy before evaluating how the MCA should be treated. When bankruptcy is a realistic possibility, review the MCA before filing the petition whenever circumstances allow. Recharacterization can affect how the funder’s claim, security interests, and prior payments are treated in a bankruptcy case. Depending on the facts, counsel may also need to evaluate potential preference, fraudulent transfer, lien, or adversary proceeding issues. Bankruptcy can provide powerful restructuring tools, but they're most useful when the legal and financial analysis begins before filing rather than after the case is already underway.

These mistakes have something in common.

They treat the MCA problem as though one decision can be made without considering the rest of the transaction.

A settlement affects potential defenses. Recharacterization affects the usury analysis. The funder’s security interests can matter in bankruptcy.

Bankruptcy, in turn, can change the merchant’s relationship with every creditor, not simply the MCA funder.

The better approach is to understand those pieces together before choosing a strategy.

Geographic Scope: New York City, Long Island, Westchester, and Beyond

New York’s MCA true sale framework can matter well beyond Manhattan.

For businesses located in New York City, Long Island, and Westchester, New York law may apply directly to disputes involving MCA agreements, enforcement actions, judgments, and bankruptcy proceedings.

Businesses located outside New York may also encounter the same legal framework when their MCA agreements contain New York choice-of-law provisions.

That makes the governing-law provision one of the first parts of the agreement worth reviewing.

The business's location matters, but it does not necessarily determine which state’s law will govern every contractual issue.

Courts, the governing-law clause, the type of proceeding, and applicable state and federal law all need to be considered before determining which defenses may be available.

New York City: Manhattan, Brooklyn, Queens, and the Bronx

New York City businesses can encounter MCA disputes in several different forums depending on the nature of the case.

Commercial disputes may proceed in New York State courts, while bankruptcy-related MCA issues can arise in the federal bankruptcy courts serving the Southern and Eastern Districts of New York.

The particular court matters because the procedural posture can affect the strategy.

A business responding to an MCA lawsuit is in a different position than a merchant challenging a confession of judgment. A company considering bankruptcy faces another set of procedural and financial questions.

For a Manhattan business, that may include proceedings in the Southern District of New York or New York County Supreme Court.

Businesses in Brooklyn and Queens may encounter matters in courts serving those counties or, in bankruptcy, the Eastern District of New York.

Regardless of the forum, the underlying true sale analysis remains focused on the transaction.

Did payments genuinely track receivables?

Was reconciliation meaningful?

Was the collection period actually uncertain?

What happened if the business failed to generate the expected receivables?

Answer those questions before assuming the MCA’s contractual label determines the outcome.

Long Island and Westchester

Businesses in Nassau, Suffolk, and Westchester Counties can face many of the same MCA issues as businesses in New York City.

A Long Island business may be dealing with fixed ACH withdrawals, reconciliation disputes, a personal guarantee, a UCC filing, or litigation arising from an MCA agreement.

A Westchester business may face the same questions about whether the funder genuinely purchased receivables or structured the transaction so that repayment remained effectively absolute.

New York’s true sale analysis does not change simply because the merchant operates outside the five boroughs.

The same underlying issues concerning reconciliation, repayment structure, and recourse remain important.

The forum can still affect procedure.

A business should therefore understand both the substantive MCA issues and the court in which the dispute is being handled.

That becomes especially important if enforcement has already begun.

Review court papers, judgment documents, bank restraints, UCC records, and other enforcement materials alongside the original MCA agreement, rather than treating them as separate problems.

Florida, Maryland, Virginia, and DC

Businesses outside New York may also sign MCA agreements containing New York choice-of-law provisions.

When that happens, New York law may become relevant to the characterization dispute even though the merchant operates elsewhere.

The analysis can become more complicated because the court may also need to consider the law and public policy of the jurisdiction where the case is pending.

A Florida business, for example, should not assume that every issue will automatically be decided under New York law simply because the agreement contains a New York provision.

The same caution applies to merchants in Maryland, Virginia, and Washington, DC.

Choice-of-law questions can depend on the agreement, the claims being asserted, the forum, and the particular legal issue before the court.

For the business owner, the practical point is to identify the governing-law provision early.

If New York law applies to the MCA, the three-factor true sale framework may become central to determining whether the transaction should be treated as a purchase of receivables or a loan.

At the same time, counsel should consider whether the law of the merchant’s home jurisdiction creates additional issues that need to be addressed.

That is why an out-of-state merchant with a New York-governed MCA should not assume the dispute is simply a local collection matter.

The agreement may connect the business to New York law even when its operations are hundreds of miles away.

A complete review should therefore consider the contract, the merchant’s payment history, the funder’s conduct, the forum, and the governing law together.

How J. Singer Law Group Defends New York Merchants Against MCA Funders

Singer Law Group represents New York City, Long Island, and Westchester business owners facing MCA true sale disputes, recharacterization claims, usury issues, confession of judgment enforcement, and bankruptcy-related MCA disputes.

The firm’s approach begins with the agreement and the financial reality behind it.

An MCA dispute may involve more than one legal issue. The agreement may raise questions under the LG Funding three-factor test. The funder may already have a UCC filing or confession of judgment. The business may be carrying several MCA positions along with taxes, vendor obligations, lease payments, secured debt, and other liabilities.

That broader picture matters because the right response is not always litigation, and it is not always settlement.

A business first needs to understand whether the MCA operated as a genuine purchase of future receivables, whether the funder assumed meaningful risk, and what defenses the documents and payment history may support. From there, the business can evaluate whether negotiation, litigation, refinancing, restructuring, or bankruptcy makes the most sense.

Singer Law Group handles MCA defense together with commercial litigation and business restructuring. This allows the firm to evaluate the MCA dispute and the business's financial condition at the same time, rather than treating them as unrelated problems.

Jeb Singer, Managing Partner of Singer Law Group, brings that combined perspective to the firm’s MCA work. Before entering private practice, he clerked for Judge Stuart M. Bernstein in the U.S. Bankruptcy Court for the Southern District of New York. That federal bankruptcy court experience informs the firm’s approach when an MCA recharacterization dispute overlaps with creditor enforcement, insolvency, or a potential restructuring.

The firm’s restructuring practice also includes Ira Reid, who served as a law clerk to Judge Cecelia H. Goetz in the U.S. Bankruptcy Court for the Eastern

District of New York and spent about two decades as a restructuring partner at Baker McKenzie.

For a business owner, the practical benefit is having the MCA agreement evaluated within the larger financial problem.

The question is not simply whether the merchant can challenge the funder.

It's about which strategy gives the business the strongest path forward.

The MCA Defense Strategy

Singer Law Group’s MCA defense strategy begins with the documents and develops from there.

Step 1: Review the MCA agreement and how it actually operated.

The first step is a contract audit.

That includes reviewing the reconciliation provision, payment structure, effective cost of the transaction, applicable commercial financing disclosures, UCC filings, guarantees, default provisions, and any confession of judgment.

Then compare the payment history with the agreement.

If revenue declined, did the withdrawals decline too? Was reconciliation requested? Did the funder honor the request? Did the agreement supposedly have an indefinite term while the fixed payment structure produced a predictable payoff period?

Those facts help determine how the MCA operated in practice.

The goal is to complete the LG Funding analysis before recommending a strategy rather than beginning with a predetermined assumption that every

MCA should be settled or challenged.

Step 2: Determine whether litigation or negotiation is appropriate.

Once counsel has reviewed the transaction, they can determine what legal and practical options the facts support.

That may include a recharacterization argument, a criminal usury defense where applicable, a reconciliation dispute, a challenge to enforcement activity, or negotiation with the funder.

If a confession of judgment is involved, counsel may also need to determine whether grounds exist to seek vacatur and whether immediate relief is necessary because collection activity is affecting the business.

The strategy should come from the contract review.

A business with a strong recharacterization argument may approach negotiations differently from a business whose agreement and payment history

support true sale treatment.

Likewise, a company already facing a judgment or bank restraint may need a different response from a merchant trying to address an MCA before default.

Step 3: Evaluate bankruptcy as part of the MCA strategy when necessary.

When a business has several MCA obligations and a broader debt problem, resolving one funder may not solve the underlying financial distress.

Bankruptcy may then become part of the analysis.

For an eligible business that remains operationally viable, Subchapter V bankruptcy in New York can provide a structured path for reorganizing debt while the company continues operating.

The bankruptcy analysis may also involve the MCA itself.

Depending on the circumstances, counsel may need to consider recharacterization through an adversary proceeding, the funder’s asserted security interests, potential preference issues under 11 U.S.C. § 547, fraudulent transfer issues under 11 U.S.C. § 548, and lien-related claims.

Those questions should be part of the restructuring strategy, not considered after the bankruptcy has already been filed.

Bankruptcy is not necessary for every business facing MCA debt.

But when the company is viable and the debt structure is not, it may provide tools that individual negotiations with multiple funders cannot.

Step 4: Build a restructuring or exit strategy around the business.

Litigation is one way to address an MCA problem, but it is not the only one.

For some businesses, a negotiated restructuring may be a better outcome, reducing immediate pressure while preserving operations and key business assets.

Singer Law Group’s discussion of MCA restructuring to protect commercial property explains how restructuring becomes especially important when MCA obligations threaten assets the business needs to keep operating.

Other businesses may be able to replace expensive MCA obligations with a different financing structure. In the right circumstances, MCA take-out financing may offer another path to address existing cash advance debt.

Neither option is appropriate simply because a business has an MCA.

The company’s revenue, existing debt, assets, liens, cash flow, credit position, and ability to support a new arrangement all matter.

That is why MCA defense should not be reduced to a single tactic.

Review the agreement, enforcement posture, and the business's financial condition together before deciding whether the next step is litigation, negotiation, restructuring, refinancing, or bankruptcy.

If your business is facing MCA enforcement or you are considering signing a settlement with a funder, call Singer Law Group at (917) 905-8280 to discuss the situation.

Frequently Asked Questions

Q: What is the MCA true sale defense in New York?

The MCA true sale defense concerns whether a merchant cash advance is legally a purchase of future receivables rather than a loan.

The funder generally argues that it purchased receivables and therefore assumed the risk associated with the merchant’s future revenue. A merchant challenging that characterization may argue that the transaction functioned as a loan because repayment was effectively fixed and the funder did not meaningfully assume receivables risk.

New York courts evaluate that issue by looking at the transaction's substance.

The three-factor LG Funding framework considers whether the agreement provides meaningful reconciliation, whether the repayment period is genuinely indefinite, and whether the funder has recourse if the merchant cannot generate the expected receivables.

The contract’s description of the transaction matters, but it does not end the analysis.

Q: What are the three factors New York courts use to evaluate MCA true sale status?

The first factor is reconciliation.

A true receivables purchase should provide a meaningful way for payments to adjust based on the merchant’s actual revenue. If revenue falls substantially while the same fixed amount continues to be withdrawn and reconciliation cannot realistically be obtained, that may weigh against true sale treatment.

The second factor is the repayment structure.

A genuine receivables purchase should not operate like a conventional loan with a fixed maturity date. The time required for the funder to receive the purchased amount should depend on the receivables the business actually generates.

The third factor is recourse.

Courts consider what happens if the business fails or the anticipated receivables never materialize. If the funder can still require full repayment regardless of business performance, the transaction may look more like a loan.

Courts consider the factors together, based on the agreement and how the transaction operated in practice.

Q: What happens if a New York court recharacterizes an MCA as a loan?

If a New York court recharacterizes an MCA as a loan, the legal rules applicable to lending may become relevant.

That can include New York’s usury laws. For a corporate merchant, criminal usury under Penal Law § 190.40 may become particularly important when the applicable requirements are satisfied.

Recharacterization may also affect enforcement of the agreement, a funder’s bankruptcy claim, and disputes involving liens or prior payments.

The consequences depend on the particular transaction and procedural setting.

That is why recharacterization should not be treated as an automatic result simply because an MCA was expensive or carried a high effective cost.

The first question remains whether the transaction legally functioned as a loan.

Q: Can a New York corporation raise usury as a defense against an MCA funder?

A New York corporation generally cannot rely on the state’s civil usury limit in the same way an individual borrower may.

Criminal usury is different.

Where a transaction is first determined to be a loan and the applicable requirements for criminal usury are satisfied, a corporate merchant may be able to raise criminal usury as a defense.

The criminal usury threshold under Penal Law § 190.40 is an annual rate exceeding 25 percent.

The analysis requires more than looking at the factor rate printed in an MCA agreement.

Counsel must first determine whether the transaction should be characterized as a loan, then evaluate the effective interest rate and other applicable

legal requirements.

Q: Does New York’s three-factor MCA test apply to agreements outside New York?

It can.

MCA agreements frequently contain New York choice-of-law provisions. When New York law governs the agreement, the state’s true sale framework may become relevant even when the merchant operates elsewhere.

That does not mean every legal issue involving an out-of-state merchant will automatically be decided under New York law.

The governing-law provision, forum, claims being asserted, and law of the merchant’s home jurisdiction can all matter.

For a business outside New York, the first step is therefore to review the MCA agreement and determine what law it identifies as governing the transaction.

If New York law applies, the reconciliation, repayment-term, and recourse factors may become central to the characterization dispute.

Q: What is the Commercial Finance Disclosure Law (CFDL) and how does it affect MCA true sale disputes in New York?

New York’s Commercial Finance Disclosure Law establishes disclosure requirements for certain commercial financing transactions.

For an MCA dispute, compliance with applicable disclosure requirements may be another issue to review alongside the true sale analysis.

The two questions are related to the same transaction, but they are not identical.

A merchant may need to evaluate whether the MCA operated as a true purchase of receivables while separately examining whether it satisfied applicable commercial financing disclosure requirements.

That is why Singer Law Group’s initial MCA review considers more than reconciliation alone.

The agreement, disclosures, payment history, guarantees, UCC filings, default provisions, and enforcement documents can all affect the broader legal strategy.

Talk With Singer Law Group About Your MCA Agreement

Evaluate an MCA agreement based on what it requires and how it operated after the money was advanced.

If your business’s revenue declined but the withdrawals never changed, reconciliation was unavailable in practice, the repayment period was effectively fixed, or the funder retained broad recourse even when receivables were not generated, those facts deserve a closer look.

They do not automatically make the MCA a loan.

They do provide a reason to examine the transaction under the framework New York courts use.

That review becomes even more important when the business is already facing a confession of judgment, bank restraint, UCC enforcement, multiple

MCA positions, or broader financial distress.

Jeb Singer is the Managing Partner of Singer Law Group. His practice includes commercial litigation, restructuring, bankruptcy, and merchant cash advance disputes. His experience clerking in the U.S. Bankruptcy Court for the Southern District of New York informs the firm’s approach when an MCA dispute requires both litigation analysis and a broader restructuring strategy.

Singer Law Group’s approach begins with the documents, payment history, and the business's current financial position.

From there, the goal is to determine what the facts support and choose a strategy that addresses the actual problem rather than forcing every merchant into the same solution.

If you are facing MCA enforcement or need to understand whether your agreement operated as a true purchase of receivables or a loan, call Singer Law Group at (917) 905-8280 to discuss your situation.