For a New York business facing merchant cash advance enforcement, one of the most important questions may be whether the agreement is actually what it says it is.

An MCA agreement may describe the transaction as a purchase of future receivables rather than a loan. But that label does not necessarily end the analysis.

New York courts can look at how the transaction is structured and how it actually operates. The LG Funding framework has become an important part of that analysis.

The basic question is whether the funder genuinely purchased a portion of uncertain future receivables and accepted the risk that those receivables might decline, or whether the transaction created an obligation that functioned more like loan repayment.

That distinction can have significant consequences.

If an MCA is legally characterized as a loan, New York’s usury laws may become relevant. The result depends on the particular agreement, the economics of the transaction, the parties’ conduct, and the defenses actually available in the case.

For business owners already dealing with merchant cash advance defense, this analysis should not begin and end with the title printed at the top of the contract.

It begins with how the transaction actually worked.

The LG Funding analysis generally focuses on three interconnected questions: whether payments can be reconciled to the merchant’s actual receivables, whether the agreement creates a finite or effectively fixed repayment term, and whether the funder has recourse if the business’s receivables do not generate the purchased amount.

No one question should be evaluated in isolation.

A reconciliation provision may look meaningful on paper but operate differently in practice. A payment schedule may appear contingent but function predictably. A personal guarantee or other recourse provision may matter, but its significance depends on the rest of the agreement.

That is why MCA recharacterization is a contract-and-facts analysis, not a checklist that automatically produces the same result for every business.

This article is written for New York business owners facing MCA litigation, collection activity, a confession of judgment, or a broader financial problem involving one or more merchant cash advances.

For businesses in Manhattan, Brooklyn, Queens, Long Island, Westchester, and elsewhere whose MCA agreements are governed by New York law, understanding this framework can help you decide what comes next.

Stephanie Meltzer works with J. Singer Law Group on MCA disputes involving contract enforcement, recharacterization issues, and related defenses. The firm examines the MCA agreement alongside payment history, the reconciliation process, enforcement activity, personal guarantees, and the business's financial condition before determining the best legal strategy.

A merchant cash advance is generally structured as a purchase of a portion of a business’s future receivables. The funder provides capital upfront and, in exchange, receives an agreed share of future revenue until the purchased amount is repaid.

That structure is different from a traditional loan.

A genuine receivables purchase involves uncertainty. If the business generates less revenue, the amount and timing of the funder’s recovery should reflect the economic arrangement the parties actually made.

Recharacterization becomes relevant when the transaction operates differently from the way it is labeled.

The question is not simply whether the contract contains the words “purchase of receivables.”

The question is whether the transaction's economic substance supports that characterization.

What Is the LG Funding Recharacterization Test?

The LG Funding recharacterization test is a framework New York courts use when evaluating whether a merchant cash advance is a genuine purchase of future receivables or, despite its label, functions as a loan.

The analysis centers on the substance of the transaction.

Courts evaluating an MCA may consider whether the merchant can meaningfully reconcile payments to actual revenue, whether the repayment period is finite or effectively fixed, and whether the funder has recourse if the receivables do not materialize as expected.

These factors help answer the larger question at the center of MCA recharacterization:

Did the funder actually assume the risk associated with purchasing uncertain future receivables, or did the merchant effectively assume an obligation to repay a fixed amount?

That distinction matters because usury applies to loans, not genuine purchases of receivables.

A high-cost MCA does not become a usurious loan simply because the financing was expensive.

Likewise, calling a transaction a receivables purchase does not necessarily prevent a court from examining whether it functioned as a loan.

The legal characterization comes first.

Only if the transaction is properly treated as a loan does the usury analysis become relevant.

The Case That Started It All: LG Funding, LLC v. United Senior Props.

LG Funding involved a dispute over a merchant cash advance agreement and helped establish the framework New York courts use to distinguish a true receivables purchase from a loan.

Its importance comes from a straightforward principle:

The substance of the transaction matters more than the label attached to it.

That principle matters in MCA litigation because these agreements are ordinarily drafted to describe the transaction as a purchase and sale of receivables.

But the contract’s terminology is only part of the analysis.

A court can examine whether the merchant’s payment obligation was actually contingent on revenue, whether reconciliation provided a meaningful way to adjust payments, whether the term was truly indefinite, and what risk the funder assumed if the business’s receivables declined.

This is why two agreements that both call themselves merchant cash advances may not necessarily receive the same legal treatment.

One may operate as a genuine receivables purchase.

Another may contain provisions that cause the transaction to function differently in practice.

The analysis depends on the agreement as a whole.

Why New York Law Controls MCA Agreements Nationwide

New York law appears frequently in merchant cash advance agreements, including agreements involving businesses located outside the state.

That can make New York law relevant even when the merchant operates elsewhere.

However, the analysis should not begin with the assumption that every MCA agreement nationwide is governed by New York law.

The agreement’s choice-of-law provision, forum provision, parties, transaction, and procedural posture all matter.

When New York law does govern the dispute, the state’s approach to MCA recharacterization can become central to determining whether the transaction should be treated as a receivables purchase or analyzed as a loan.

That is one reason a business located outside New York can still find itself dealing with a New York MCA dispute.

The business's location does not necessarily determine which law governs the contract or where enforcement may occur.

For a business already facing default or collection activity, understanding what happens after an MCA default should include reviewing the governing-law and forum provisions alongside the agreement's substantive terms.

The contract may determine where the dispute begins.

The way the transaction actually operated may determine what defenses are available once it gets there.

The Second Circuit Adopts the LG Funding Framework (Fleetwood Services)

The LG Funding analysis has also influenced the way federal courts evaluate merchant cash advance transactions governed by New York law.

That matters because an MCA dispute does not always remain in state court.

A business may face federal litigation, or the MCA relationship may become part of a bankruptcy proceeding in which the nature of the funder’s claim must be determined.

The same underlying issue remains important:

Was the transaction a genuine purchase of receivables, or did it function as a loan?

That question can affect much more than a collection lawsuit.

If the business later considers restructuring, the characterization of an MCA claim can become part of a broader analysis involving creditor treatment, secured claims, personal guarantees, cash flow, and the company’s ability to reorganize.

This is where MCA litigation and restructuring begin to overlap.

A company facing one disputed MCA may primarily have a litigation problem.

A company facing several MCA obligations, judgments, bank restraints, tax debt, vendor obligations, and declining cash flow may have a larger restructuring problem.

For businesses evaluating merchant cash advance restructuring, classifying each obligation is part of understanding the company’s complete debt structure.

The LG Funding framework matters not because it guarantees a particular result, but because it helps you ask the right question about the transaction.

Before calculating an interest rate, asserting usury, negotiating a settlement, or deciding whether bankruptcy is necessary, the business first needs to understand what kind of financial transaction it actually entered into.

What Are the Three Factors of the LG Funding Test?

The LG Funding analysis focuses on three features of a merchant cash advance agreement: reconciliation, the length and structure of the repayment period, and the funder’s recourse if the merchant’s receivables do not generate the purchased amount.

These factors are connected.

A meaningful reconciliation provision can affect whether payments are truly tied to revenue. That, in turn, can affect whether the agreement has an indefinite term. Recourse provisions help show who bears the risk if the expected receivables never materialize.

The larger question running through all three factors is the same:

Did the funder purchase uncertain future receivables and assume the risk that comes with them, or did the transaction create an obligation that functions like repayment of a loan?

You can't answer that question by looking at one sentence in the contract.

You need to evaluate the agreement as a whole, and how the parties actually administered the transaction may also matter.

Factor One: Reconciliation — Can Payments Be Adjusted Based on Actual Revenue?

Reconciliation goes to the heart of the difference between a receivables purchase and a loan.

If a funder genuinely purchases a percentage of future receivables, the amount collected should meaningfully relate to the revenue the business actually generates.

When revenue declines, the payment structure should respond to that decline as contemplated by the agreement.

When revenue increases, the funder’s collection may change accordingly.

That variability reflects the underlying concept of a receivables purchase: the funder is purchasing revenue that has not yet been earned and therefore bears some risk as to how much revenue will actually be generated.

A reconciliation clause connects the contractual payment amount to that economic reality.

But the existence of a paragraph labeled “reconciliation” does not answer the question by itself.

The provision has to be examined in context.

What must the merchant do to request an adjustment?

What financial information must be provided?

Can payments actually change based on revenue?

Does the agreement give the funder meaningful discretion over whether an adjustment will occur?

What happened when the merchant’s revenue declined?

Did the merchant ever request reconciliation?

If so, how did the funder respond?

These questions can matter because the contract and the parties’ conduct may tell different stories.

An agreement may describe a payment as an estimate of receivables while the actual withdrawals remain unchanged despite significant fluctuations in revenue. Another agreement may provide a workable mechanism through which payments genuinely adjust as revenue changes.

Those transactions should not automatically be treated as economically identical simply because both documents contain reconciliation language.

This is why reconciliation is often one of the most important parts of an MCA recharacterization analysis.

The issue is not merely whether the right exists on paper.

The issue is what the provision requires, whether it can meaningfully connect payments to actual receivables, and how the financing operated in practice.

Factor Two: Fixed Repayment Schedule — Does the Agreement Have a Defined End Date?

The second factor examines whether the transaction has a finite repayment period.

A traditional loan generally creates an obligation to repay principal, plus applicable interest, under an established payment structure.

A genuine purchase of future receivables operates differently.

If the funder purchased a percentage of revenue that has not yet been generated, the time required to deliver the purchased receivables should depend, at least in part, on the business's performance.

Higher revenue may cause the purchased amount to be delivered sooner.

Lower revenue may extend the period.

That uncertainty can support characterizing the transaction as a receivables purchase because the funder’s recovery depends on the merchant’s future business performance.

A payment schedule that effectively requires the same amount to be delivered over a predictable period can point in a different direction.

But again, the analysis should not stop at the number of daily or weekly payments shown in the agreement.

A contract may use an estimated payment amount while also providing a genuine mechanism for adjusting that amount to actual receivables.

If reconciliation meaningfully changes payments, it may also change how long it takes to deliver the purchased amount.

That is why Factor One and Factor Two often need to be considered together.

A payment amount can look fixed on paper while the actual term remains contingent on revenue.

Conversely, a contract can describe the term as indefinite while operating in a way that produces a substantially fixed repayment obligation.

The economic structure matters more than any single word used to describe it.

For a business evaluating an MCA agreement, the relevant question is therefore not simply:

“Does this contract list a daily payment?”

It is:

“Does the business have an unconditional obligation to deliver a fixed amount within a predictable period, or does the funder’s recovery genuinely depend on the receivables the business generates?”

That distinction goes directly to whether the transaction behaves like a purchase or a loan.

Factor Three: Recourse — What Happens If the Business Defaults or Files Bankruptcy?

The third factor examines risk.

If a funder has genuinely purchased future receivables, there should be some meaningful possibility that the receivables will not develop as expected.

The way the agreement allocates that risk can therefore be important.

What happens if the business experiences a legitimate decline in revenue?

What happens if the expected receivables never materialize?

What obligations survive?

What rights does the funder have against the business?

Is there a personal guarantee?

What does that guarantee actually cover?

Does the agreement treat a decline in revenue as part of the risk of the transaction, or does it effectively require repayment regardless of the merchant’s performance?

These questions help determine whether the funder bears the type of risk associated with purchasing future receivables.

A personal guarantee can be relevant, but you should not treat its existence as an automatic answer.

Guarantees differ.

The language of the guarantee, the obligations it secures, the events that trigger liability, and the rest of the MCA agreement all need to be examined together.

The same caution applies to bankruptcy-related provisions.

An agreement's insolvency or bankruptcy provisions do not determine whether the transaction is a loan on their own.

Instead, those provisions are part of the broader analysis of whether the funder truly assumed the risk that the purchased receivables might not be generated.

That distinction also becomes important when an owner has personally guaranteed the company’s obligations.

A business obligation and an owner’s personal exposure are related, but they are not necessarily the same legal problem. Before deciding what strategy makes sense, review the language of the guarantee and the financial position of both the company and the guarantor.

The third factor therefore should not be reduced to:

“There is a guarantee, so this is a loan.”

The better question is:

“Taken together, do the recourse provisions leave the funder exposed to genuine receivables risk, or do they function to assure repayment regardless of business performance?”

That is the issue the recourse analysis is designed to help answer.

How Spin Capital, LLC v. Bridgelink Engineering Refined the Test

LG Funding established the framework, but later MCA decisions have added important detail on how those factors apply.

Spin Capital is particularly important to the reconciliation analysis.

One issue is whether a reconciliation provision must require the funder to refund money already collected in excess of the agreed percentage of receivables to be meaningful.

The analysis reflected in Spin Capital is more nuanced than a simple refund requirement.

A reconciliation mechanism may still matter even when it adjusts future payments rather than requiring an immediate refund, particularly where the adjustment mechanism can make the time required to deliver the purchased receivables genuinely indefinite.

That matters because reconciliation and the repayment term are connected.

If payments can meaningfully decrease when revenue decreases, it may take longer for the funder to receive the purchased amount.

If revenue remains low, that period may extend further.

That uncertainty can support the economic structure of a receivables purchase.

But Spin Capital should not be read to mean that any contract containing adjustment language automatically satisfies the reconciliation factor.

The actual provision still matters.

So does the way the transaction operates.

A court evaluating the agreement may need to consider the mechanics of requesting reconciliation, the financial records required, the funder’s obligations after receiving a request, and whether the adjustment mechanism genuinely connects collections to the merchant’s revenue.

This is why MCA recharacterization should not be reduced to a form-checking exercise.

A reconciliation clause does not automatically establish a receivables purchase.

The absence of a mandatory refund provision does not automatically establish a loan.

A fixed daily withdrawal does not automatically establish a loan either.

Each provision has to be understood as part of the economic arrangement created by the agreement.

The three LG Funding factors ultimately point back to one central issue:

Who bears the risk?

If the business must deliver a fixed amount on a substantially fixed schedule regardless of what happens to its receivables, that can support an argument that the transaction functions more like a loan.

If the funder’s recovery genuinely rises, falls, and extends with the merchant’s actual receivables, that can support characterizing the transaction as a purchase.

Most agreements will require a closer analysis than either extreme.

That is why the strongest recharacterization analysis begins with the complete contract, then looks at how the transaction actually operated.

The next question is whether the reconciliation provision itself is meaningful or merely appears to provide flexibility on paper.

What Makes a Reconciliation Clause “Meaningful” Under New York Law?

A reconciliation clause should connect the funder’s collection to the merchant’s actual receivables.

That sounds straightforward.

In practice, the analysis can be much more complicated.

An MCA agreement may contain several paragraphs describing a merchant’s right to request an adjustment. Another agreement may address reconciliation in only a few sentences. Neither tells you, based on length alone, whether the provision meaningfully changes the economics of the transaction.

The more important question is whether the reconciliation mechanism actually allows payments to respond to changes in the business’s revenue.

That requires looking at the agreement's language, the process for requesting an adjustment, the information the merchant must provide, the funder’s obligations after receiving a request, and, where relevant, what happened when reconciliation was actually requested.

The distinction matters because reconciliation is closely connected to the risk the funder accepted when it purchased the merchant’s future receivables.

If payments genuinely adjust with revenue, the funder’s recovery can take longer when the business performs poorly.

If payments remain effectively fixed regardless of revenue, the economic arrangement may look different.

That does not mean a particular reconciliation provision automatically decides whether an MCA is a loan.

It means reconciliation is one important part of the larger recharacterization analysis.

Genuine vs. Illusory Reconciliation Provisions

A genuine reconciliation provision should provide a workable mechanism for connecting the merchant’s payments to its actual receivables.

The details matter.

The agreement may identify when reconciliation can be requested, what records must be submitted, how actual revenue will be measured, and how the payment amount will be adjusted after the funder receives the required information.

Those procedures are not necessarily problematic simply because they require the merchant to take action.

A funder can reasonably require financial information before changing payments based on a claim that revenue has declined.

The question is whether those requirements create a real adjustment process or make reconciliation largely theoretical.

For example, a provision may deserve closer review if the merchant’s ability to obtain an adjustment depends on conditions that are exceptionally difficult to satisfy, if the funder retains broad discretion over whether a qualifying request will be honored, or if the contractual process does not meaningfully connect the adjusted payment to actual receivables.

The parties’ conduct can also provide useful context.

If the merchant requested reconciliation after a substantial revenue decline, what happened?

Did the funder review the request?

Were payments adjusted?

Was additional information requested?

Was reconciliation denied, and if so, on what basis?

Those facts may help explain how the contractual mechanism operated.

But non-use should also be treated carefully.

The fact that reconciliation never occurred does not necessarily establish that the provision was illusory. A merchant may never have requested it.

Revenue may not have declined enough to make reconciliation necessary. The contractual requirements may never have been triggered.

That is why the analysis should distinguish between a reconciliation right that was never used and a reconciliation right that could not meaningfully be used.

Those are not the same thing.

The contract establishes the framework.

The parties’ conduct can help show how that framework operated.

Both can matter when evaluating whether payments were genuinely contingent on future receivables.

The Spin Capital Clarification: Adjustment Without Refund May Be Sufficient

One important point in the reconciliation analysis is that a meaningful provision does not necessarily require the funder to refund money every time prior collections exceed the percentage of receivables ultimately reflected in the merchant’s records.

An adjustment mechanism can operate prospectively.

Instead of refunding previously collected amounts, future payments may be reduced so that collections better correspond to the merchant’s actual receivables.

That distinction matters because the legal question is broader than whether the agreement contains a refund provision.

The issue is whether reconciliation can genuinely change the funder’s collection based on the merchant’s revenue and, as a result, affect how long it takes to deliver the purchased amount.

If revenue falls and payments are meaningfully reduced, the collection period may become longer.

That uncertainty can be consistent with a receivables purchase because the funder’s recovery remains tied to the business's performance.

Spin Capital therefore adds an important qualification to the analysis.

The absence of a mandatory refund mechanism does not, by itself, make reconciliation meaningless.

At the same time, an adjustment mechanism should not automatically end the inquiry.

The provision must still be read as part of the complete agreement.

How is the adjusted amount determined?

What must the merchant do to obtain it?

Does the adjustment reflect actual revenue?

Can the payment change enough to make the term genuinely responsive to business performance?

And what does the rest of the agreement say about the merchant’s obligation to deliver the purchased amount?

Those questions are more useful than looking for a single contractual feature and treating it as dispositive.

Reconciliation matters because it can affect several parts of the recharacterization analysis at once.

A genuine adjustment mechanism can connect payments to actual revenue.

That can make the transaction duration less predictable.

That uncertainty can help show whether the funder assumed the risk of purchasing future receivables.

The provisions work together.

So should the analysis.

Red Flags Courts Look For in Reconciliation Language

Certain features of an MCA agreement may justify closer review of the reconciliation process.

An unusually restrictive request procedure may be one.

Documentation requirements that are difficult for the particular business to satisfy may be another.

Broad contractual discretion over whether an otherwise proper reconciliation request will be granted may also deserve attention.

A payment structure that remains unchanged despite substantial revenue fluctuations can raise additional questions, particularly when the merchant requested an adjustment and complied with the contractual procedure.

But these features should be treated as facts to investigate, not automatic conclusions.

A short request period does not necessarily make a reconciliation provision illusory.

A documentation requirement is not automatically unreasonable.

A fixed ACH amount does not, standing alone, establish that the transaction is a loan.

And the placement or length of a reconciliation provision within the contract does not determine its legal effect.

The stronger analysis asks how all of those provisions work together.

For example, assume a business experiences a substantial decline in monthly revenue.

The agreement says the daily payment is based on estimated receivables and provides a reconciliation process.

The business submits the required revenue records and requests an adjustment.

What happens next can be significant.

If the payment is recalculated to reflect actual revenue and the resulting reduction extends the time necessary to deliver the purchased amount, that can support the position that the transaction remains contingent on receivables.

If the payment cannot meaningfully change despite the merchant following the contractual procedure, the business may have a different argument about how the agreement actually operates.

The analysis therefore moves beyond:

“Does the contract contain a reconciliation clause?”

It asks:

“Does reconciliation create a real relationship between the funder’s collection and the merchant’s actual receivables?”

That is the more useful question for a business owner reviewing an MCA agreement.

It also explains why you should not evaluate a contract through isolated provisions.

Reconciliation, the payment structure, the transaction duration, default provisions, recourse rights, and guarantees can all affect the overall analysis.

A business considering a recharacterization defense should therefore preserve more than the signed agreement.

Bank statements, payment histories, reconciliation requests, responses from the funder, revenue records, amendments, emails, and other communications may help establish how the relationship operated in practice.

The goal is not to find one problematic sentence.

It is to understand the economic substance of the transaction as a whole.

And that becomes particularly important when recharacterization could change the legal consequences of the MCA agreement.

What Are the Consequences of Recharacterization?

If a merchant cash advance is recharacterized as a loan, the legal analysis changes significantly.

Usury laws that generally do not apply to a genuine purchase of receivables may become relevant. If the business is in bankruptcy, the transaction's characterization may also affect how the funder’s claim is treated and whether particular pre-bankruptcy transfers can be challenged.

But recharacterization does not automatically produce the same result in every case.

It establishes that the transaction should be analyzed as a loan rather than a purchase of receivables.

From there, the parties still need to address the transaction's terms, the applicable interest rate, the borrower’s legal status, the defenses properly available, the procedural posture of the dispute, and, where bankruptcy is involved, the requirements of the Bankruptcy Code.

That distinction is important.

Recharacterization answers what the transaction is.

The next analysis determines what follows from that classification.

New York Usury Law: Criminal vs. Civil Usury Thresholds

New York law distinguishes between civil and criminal usury, and the rules differ.

The original structure of an MCA matters because usury law applies to loans, not genuine purchases of future receivables.

That is why the analysis cannot be reversed.

A business should not begin with a factor rate, convert it into an annualized percentage, and assume that the result proves the MCA is unlawful.

The first question remains whether the transaction is legally a loan.

If it is, the applicable usury rules can then be evaluated.

New York’s criminal usury threshold generally involves an annual interest rate exceeding 25 percent. Civil usury involves a lower rate, but whether a particular borrower can invoke civil usury depends on additional legal rules, including the nature of the borrower and the transaction.

For business owners, that distinction matters because corporations and other business entities face specific limitations on civil usury defenses.

Criminal usury can present a different analysis.

If an MCA is recharacterized as a loan and the transaction satisfies the requirements for a criminal usury defense, enforceability may become a significant issue.

But neither part of that sentence should be skipped.

First, the MCA must be treated as a loan.

Then the financial terms and applicable law have to support the usury defense.

A high factor rate alone does not complete that analysis.

Neither does a fixed daily ACH withdrawal.

Neither does a personal guarantee.

Those facts may be relevant, but they need to be evaluated within the complete transaction.

This is why recharacterization can be so important in MCA litigation. It can open the door to defenses that would not apply if the transaction remains characterized as a genuine receivables purchase.

It does not guarantee that those defenses will succeed.

Recharacterization in Bankruptcy: Claim Disallowance and Preference Exposure

The consequences can become more complicated when the business is also considering bankruptcy.

A bankruptcy case requires the debtor and the court to determine how creditor claims should be treated under the Bankruptcy Code.

If an MCA funder files a proof of claim, the nature and enforceability of the underlying obligation can become important.

Recharacterization may affect that analysis because a transaction treated as a loan can raise different issues from a genuine purchase of receivables.

If applicable non-bankruptcy law provides a valid basis for challenging the enforceability of the obligation, that issue may also affect the treatment of the funder’s claim.

But a claim is not automatically disallowed simply because an MCA is recharacterized.

The debtor still needs a legal basis for the objection, and the particular facts and applicable law matter.

The same caution applies to pre-bankruptcy payments.

The original MCA relationship may include daily or weekly withdrawals, lump-sum settlement payments, or other transfers made shortly before a bankruptcy filing.

Some pre-bankruptcy transfers may be subject to review under the Bankruptcy Code’s avoidance provisions.

Preference law is one example.

Certain transfers made before bankruptcy could be avoided if the statutory requirements are satisfied. The analysis can include when the transfer occurred, who received it, the nature of the debt, what the creditor received, and whether any defenses apply.

A payment made within a particular period before bankruptcy does not automatically mean the money can be recovered.

Fraudulent-transfer law is also a separate analysis.

A transfer is not avoidable merely because the underlying MCA was later disputed or recharacterized. The applicable statutory requirements still have to be established based on the particular transfer and circumstances.

This is where a broader restructuring analysis becomes important.

For a business with several MCA obligations, the question may no longer be whether one agreement can be challenged.

The company may need to determine how all of its obligations fit together, whether operations remain viable, how much debt the business can realistically support, and whether a formal restructuring is necessary.

For qualifying businesses, Subchapter V bankruptcy may be one restructuring option to evaluate.

Subchapter V does not automatically eliminate MCA debt.

It provides a bankruptcy framework for eligible small business debtors to reorganize their financial obligations, subject to Bankruptcy Code requirements.

Within that process, disputes over MCA claims, security interests, guarantees, and the characterization of particular transactions may become part of the broader restructuring strategy.

That is why the state-law MCA analysis and the bankruptcy analysis should not be treated as unrelated problems.

A company may begin by asking whether one funder can enforce an MCA agreement.

It may eventually need to ask whether the business can support its entire debt structure.

Those are different questions, but they can arise from the same financial problem.

Criminal Usury as an Affirmative Defense — But Not a Counterclaim

The procedural role of criminal usury is another area where business owners can easily misunderstand the law.

A defense and a counterclaim are not the same thing.

An affirmative defense is raised in response to a claim being asserted against the defendant. A counterclaim is an independent claim for relief asserted against the opposing party.

In an MCA enforcement action, criminal usury may be available as an affirmative defense when the facts and law support it, including the threshold issue of whether the MCA should be characterized as a loan.

That does not mean every business sued by an MCA funder has a criminal usury defense.

It also does not mean that describing the MCA as usurious creates an independent claim for damages against the funder.

The distinction affects strategy.

If a funder files an enforcement action, the business needs to evaluate the defenses available in that case and assert them properly.

If a judgment has already been entered, the procedural posture is different again. The business may need to determine whether there are grounds to challenge the judgment, what procedures are available, and whether the underlying MCA issues can properly be raised in that context.

And if no lawsuit has been filed, a business should not assume that a potential usury defense automatically creates a standalone affirmative lawsuit against the funder.

The correct procedural path depends on what has happened and what relief the business is seeking.

This is especially important when an MCA agreement includes a confession of judgment.

Once a judgment or enforcement action exists, the question is no longer only whether the underlying MCA can be recharacterized.

The business also needs to understand the judgment, how it was obtained, the collection activity that followed, and the legal mechanism available to raise any challenge.

This is why timing matters, but not because one universal deadline applies to every MCA dispute.

It matters because the procedural options can change as a case moves from contract performance to default, litigation, judgment enforcement, and potentially bankruptcy.

The same underlying MCA may therefore need to be examined in several different legal contexts.

Through all of them, the analytical sequence remains important:

First, determine what the transaction actually is.

Second, determine what defenses follow from that characterization.

Third, determine how and where those defenses can properly be raised.

Finally, determine whether resolving the MCA dispute actually resolves the business’s larger financial problem.

That last question becomes especially important when a company faces multiple funders, personal guarantees, tax obligations, vendor debt, secured claims, or other pressures on operating cash.

Recharacterization can be a powerful issue when the facts support it.

But it is still a legal tool.

The strategy has to account for the business that remains after the dispute is resolved.

Five Mistakes New York Business Owners Make When Challenging an MCA Under LG Funding

Assuming the reconciliation clause is illusory without reading Spin Capital. Don't evaluate a reconciliation provision by looking for one particular feature. For example, the absence of a mandatory refund mechanism does not necessarily make reconciliation meaningless.

The better analysis asks whether the provision creates a genuine mechanism for adjusting payments based on actual receivables and whether those adjustments can affect the duration of the transaction. Contract language, request procedures, documentation requirements, payment history, and the parties’ conduct can all matter.

That is why a business owner should be careful about concluding after reading only the paragraph labeled “reconciliation.” The provision must be considered alongside the rest of the agreement and how the MCA actually operated.

Treating criminal usury as a counterclaim rather than an affirmative defense. Recharacterization and criminal usury are related issues, but they are not interchangeable.

The threshold question is whether the MCA should legally be treated as a loan. If it remains a genuine purchase of receivables, the loan-based usury analysis does not apply in the same way.

When the transaction is properly characterized as a loan and the facts support the defense, criminal usury may become relevant in responding to an enforcement action.

But a defense to a funder’s claim is not automatically an independent claim for affirmative relief.

That procedural distinction matters.

A business owner should first identify what has actually happened. Has the funder threatened enforcement? Has a lawsuit been filed? Has a judgment already been entered? Has a bank account been restrained? Is the business considering its own affirmative legal action?

The answer can affect which arguments are available and how to raise them.

Waiting until after a confession of judgment is entered to raise recharacterization. Review the original MCA agreement as early as reasonably possible when enforcement becomes a concern.

That does not mean there is a universal 24-hour rule or that a business automatically loses its defenses once a judgment has been entered.

It means the procedural posture matters.

Before judgment, the business may be evaluating defenses to a threatened or pending enforcement action.

After judgment, the analysis may also involve the procedure used to obtain the judgment, available grounds for challenging it, and any collection activity that has followed.

A confession of judgment should not automatically be treated as the end of the analysis.

At the same time, a business should not assume that every confession of judgment can be undone simply because the underlying transaction is disputed.

The agreement, judgment, affidavit, filing history, jurisdictional facts, enforcement activity, and potential defenses must be reviewed together.

Understanding how to fight a confession of judgment in New York becomes especially important once the dispute moves beyond the MCA contract itself and into judgment enforcement.

The earlier the business understands its legal position, the more clearly it can evaluate the available options.

Failing to account for bankruptcy preference exposure when calculating settlement value. A settlement should be evaluated in the context of the business’s complete financial condition, particularly when bankruptcy is already a realistic possibility.

Suppose a company makes a substantial payment to resolve one MCA and then files bankruptcy shortly afterward.

The Bankruptcy Code’s preference provisions may require reviewing that payment.

But a payment within the statutory lookback period does not automatically make it recoverable.

Preference analysis involves several statutory elements, and creditors may have defenses. The timing of the payment is only one part of the inquiry.

That is why a business considering a substantial MCA settlement while also evaluating bankruptcy should not treat those decisions as unrelated.

A settlement may reduce one immediate pressure while consuming cash the company needs to operate.

It may resolve one funder’s claim while leaving several others untouched.

It may also affect the financial picture that must later be addressed in bankruptcy.

The question is not simply:

“Can we settle this MCA?”

It is:

“What does this settlement do to the business’s overall financial position?”

That question is more useful when the company has multiple creditors or limited operating cash.

Hiring a firm that handles only MCA defense without bankruptcy capability, then needing to switch counsel mid-crisis. An MCA dispute can begin as a contract and enforcement problem and later become part of a much broader restructuring problem.

That does not mean every business facing MCA litigation needs bankruptcy counsel or should file bankruptcy.

Many MCA disputes may be addressed without a bankruptcy filing.

The issue is whether the business’s financial condition requires deeper analysis.

A company with one disputed MCA, stable operations, sufficient cash flow, and manageable obligations may primarily need a litigation strategy.

A company with multiple stacked MCAs, personal guarantees, judgments, tax obligations, vendor debt, secured claims, and declining cash flow may need a broader restructuring analysis.

Those situations should not automatically receive the same legal response.

This is where the distinction between defending the MCA and solving the company’s financial problem becomes important.

Litigation asks whether the funder’s claim can be challenged and what defenses are available.

Negotiation asks whether the parties can reach terms that the business can realistically perform.

Restructuring asks whether the company’s overall debt structure can support continued operations.

Bankruptcy asks whether a formal court-supervised process is necessary and available to address the broader financial problem.

Those tools can overlap, but they are not interchangeable.

The right strategy depends on the business.

That is why one of the most useful questions a business owner can ask at the beginning of an MCA dispute is not simply:

“How do we fight this funder?”

It is:

“What problem are we actually trying to solve?”

If the answer is one disputed agreement, litigation may be the primary issue.

If the answer is several MCA obligations that the business can no longer service while meeting payroll, taxes, rent, vendor obligations, and other operating expenses, the problem is larger than one lawsuit.

Understanding that distinction early can prevent a business from spending its remaining resources solving the wrong problem.

The LG Funding framework can be an important part of the analysis when an MCA’s legal characterization is genuinely in dispute.

But recharacterization is not a complete financial strategy.

It is one legal issue within a broader assessment of the agreement, enforcement posture, available defenses, creditor structure, cash flow, guarantees, and the business's future viability.

The strongest strategy starts with diagnosing those issues before deciding which legal tool to use.

How Does the LG Funding Test Apply in New York City Courts?

Where an MCA dispute is litigated can matter.

New York business owners may encounter MCA disputes in state court, federal court, or bankruptcy court depending on the agreement, the parties, the claims being asserted, the procedural history, and whether the business has filed for bankruptcy.

The governing-law and forum provisions in the MCA agreement can also affect where a dispute begins.

That is why a business reviewing a potential LG Funding recharacterization argument should not analyze the contract in isolation from the court in which the dispute is pending.

The substantive question is whether the MCA is a genuine purchase of receivables or a transaction that functions as a loan.

But the procedural path for raising that issue can depend on where the case is being heard and what has already happened.

Second Department Jurisdiction: Brooklyn, Queens, Long Island, Westchester

The New York Appellate Division, Second Department decided LG Funding.

That makes the Second Department particularly important to MCA disputes arising in its jurisdiction, including Brooklyn, Queens, Nassau and Suffolk Counties on Long Island, Westchester, and other counties within the department.

For businesses in these areas, the LG Funding framework provides an important part of the legal analysis when a court must determine whether an MCA should be treated as a true receivables purchase or as a loan.

But the framework should still be applied to the particular agreement.

A business does not prevail on recharacterization simply because its case is being litigated within the Second Department.

The court still needs to evaluate the transaction.

That means examining the reconciliation mechanism, the payment structure and duration of the transaction, the funder’s recourse, and the agreement as a whole.

The procedural posture matters as well.

A business defending an MCA lawsuit is in a different position from a business challenging an already-entered judgment.

A company evaluating its options before enforcement begins is in a different position again.

And a debtor raising issues concerning an MCA claim in bankruptcy is operating within another legal framework.

The underlying transaction may be the same, but the procedure for addressing it can change.

This is one reason early contract review can be valuable.

The objective is not simply to identify language that might support recharacterization.

It is to understand where the dispute stands, which court has the matter, what relief has already been requested or entered, and how the MCA characterization issue fits into that proceeding.

Eastern District of New York Bankruptcy Court and MCA Recharacterization

Bankruptcy changes the context of an MCA dispute.

For businesses whose bankruptcy cases are properly venued in the Eastern District of New York, the bankruptcy court may need to address MCA-related issues as part of administering or restructuring the debtor’s obligations.

That can include disputes over the nature of a funder’s claim, the enforceability of the underlying obligation, asserted security interests, pre-bankruptcy transfers, and other issues that arise under the Bankruptcy Code and applicable non-bankruptcy law.

Recharacterization may become part of that analysis.

But filing bankruptcy does not automatically recharacterize an MCA.

The debtor still needs a legal and factual basis for challenging the transaction.

The agreement still matters.

The LG Funding factors still require analysis.

And any bankruptcy remedy has its own requirements.

This is where understanding both the commercial dispute and the bankruptcy case becomes important.

A state-court MCA defense may focus initially on whether the funder can enforce the agreement as written.

A bankruptcy case may require the business to go further and determine how that obligation should be treated alongside every other creditor claim.

The questions become broader.

Is the MCA obligation enforceable?

Is the claim secured, unsecured, disputed, or subject to objection?

What rights does the funder assert against the company’s assets?

Are there personal guarantees that create separate exposure for an owner?

Are there other MCA funders competing for the same cash flow or collateral?

Can the business keep operating while meeting all those obligations?

Those questions illustrate why bankruptcy should not be viewed simply as another MCA defense tactic.

Bankruptcy is a separate legal framework that may become appropriate when the company’s financial problem extends beyond one disputed agreement.

Ira Reid, a partner at J. Singer Law Group, previously clerked for the Hon. Cecelia H. Goetz of the U.S. Bankruptcy Court for the Eastern District of New York and later spent approximately two decades as a restructuring partner at Baker McKenzie before joining the firm.

That restructuring background is relevant when an MCA dispute becomes part of a larger Chapter 11 or Subchapter V analysis because the focus is no longer limited to defeating one creditor’s enforcement effort.

The business has to determine what its overall debt structure will look like going forward.

Venue Considerations: Why Your MCA Contract’s Forum Clause Matters

An MCA agreement may contain both a choice-of-law provision and a forum selection provision.

They address different questions.

A choice-of-law provision generally identifies which jurisdiction’s law the parties selected to govern the agreement.

A forum selection provision addresses where disputes may or must be litigated.

Business owners should not assume those provisions mean the same thing.

An agreement may select New York law while separately identifying a particular court or location for litigation.

The wording of the forum provision therefore deserves careful review.

How specific is it?

Does it identify New York generally?

Does it identify a county?

Does it identify state or federal courts?

Is the provision mandatory or permissive?

Do the claims being asserted fall within its scope?

Those questions can affect where a dispute proceeds.

Venue can also matter for practical reasons.

If an MCA funder has already filed suit or obtained a judgment, the business needs to understand where that occurred before deciding what procedural response may be available.

The same applies when a business is considering affirmative litigation.

The existence of a New York provision in the contract should not be treated as a substitute for analyzing jurisdiction and venue in the actual dispute.

The stronger approach is to review the governing-law provision, forum clause, parties, underlying transaction, filed pleadings, and procedural history together.

That tells the business much more than the words “New York law applies” alone.

Southern District of New York (Manhattan) and the Federal Framework

MCA disputes involving Manhattan businesses may also arise within the federal courts of the Southern District of New York when there is an independent basis for federal jurisdiction or when MCA issues become part of a bankruptcy proceeding.

The court matters, but the central characterization question remains familiar.

Is the funder genuinely purchasing future receivables and assuming the risk associated with those receivables?

Or does the agreement, considered as a whole, create an obligation that functions as a loan?

Federal proceedings can also bring the MCA issue into contact with bankruptcy law, creditor claims, restructuring, and other questions that extend beyond the original contract dispute.

Jeb Singer, Managing Partner of J. Singer Law Group, previously clerked for the Hon. Stuart M. Bernstein of the U.S. Bankruptcy Court for the Southern District of New York.

That experience informs the firm’s broader approach to MCA matters involving both enforcement and financial restructuring.

The objective is not to force every MCA dispute into litigation or bankruptcy.

It is to determine what the business is actually facing.

A company with one disputed agreement may need a focused defense.

A company facing several MCA obligations, judgments, guarantees, liens, tax liabilities, and operating pressures may need a restructuring analysis.

And a company already in bankruptcy may need to determine how the MCA claim fits within a federal reorganization process.

The legal forum changes the procedure.

It does not change the need for careful diagnosis.

For New York business owners, that means the LG Funding analysis should never be separated from three practical questions:

What does the agreement actually require?

What has the funder already done to enforce it?

What court or proceeding now controls what happens next?

Answering those questions together gives the business a clearer picture of whether recharacterization is a viable issue and where that issue can properly be raised.

What Should New York Business Owners Do If They Have an MCA Agreement?

If your business has a merchant cash advance agreement, the first step is to understand what you actually signed and how the transaction has operated.

That review becomes especially important when payments are becoming difficult to maintain, revenue has declined, a funder has threatened enforcement, a lawsuit has been filed, a judgment has been entered, or the business is carrying several MCA obligations at the same time.

Don't start by assuming the agreement is an illegal loan.

Do not assume the words “purchase of receivables” settle the question either.

Start with the transaction.

The agreement, reconciliation provisions, payment history, revenue records, default provisions, personal guarantees, UCC filings, communications with the funder, and any enforcement documents can help establish the business's legal and financial position.

From there, the business can determine what problem it actually needs to solve.

Assessing Your MCA Agreement for Recharacterization Vulnerability

A recharacterization review should begin with the complete MCA agreement.

The reconciliation provision is an important part of that review.

Does the agreement provide a process for adjusting payments based on actual receivables?

What must the merchant submit?

What is the funder required to do after receiving a proper request?

Can the payment meaningfully change when revenue changes?

If the merchant requested reconciliation, what happened?

The payment structure should then be examined alongside reconciliation.

Does the transaction have a genuinely indefinite duration tied to the performance of the business, or does it operate in a way that effectively requires a fixed amount to be delivered within a predictable period?

Recourse is the third part of the analysis.

What happens if the business’s receivables decline?

What obligations remain?

What events constitute default?

Is there a personal guarantee?

If so, what does the guarantee actually cover?

What other enforcement rights does the agreement provide?

Those questions should be evaluated together.

A business owner should be cautious about reducing the LG Funding analysis to a scorecard in which three unfavorable answers automatically establish that the MCA is a loan.

The factors help a court understand the economic substance of the transaction.

They are not a substitute for reading the agreement as a whole.

The same is true of interest calculations.

If the MCA is legally a genuine receivables purchase, simply converting the purchased amount and payment schedule into an annualized percentage does not establish a usury violation.

Characterization comes first.

If the transaction is properly treated as a loan, counsel can evaluate the financial terms and determine whether New York usury law applies.

Business owners should also preserve the records showing how the MCA operated.

The signed agreement is only the beginning.

Bank statements, ACH withdrawal records, reconciliation requests, revenue reports, emails, amendments, settlement communications, notices, pleadings, judgments, restraining notices, and other enforcement documents may become important depending on the dispute.

The objective is to understand both sides of the transaction:

What did the agreement say would happen?

What actually happened?

The difference between those answers can matter.

Bankruptcy Options: Subchapter V Chapter 11 and MCA Creditors

Not every MCA dispute is a bankruptcy problem.

And not every business with several MCAs should file bankruptcy.

The question is whether resolving one MCA dispute will actually solve the company’s financial problem.

A business with one disputed MCA and otherwise manageable obligations may primarily need a litigation or negotiation strategy.

A company with several MCA obligations, judgments, personal guarantees, tax debt, vendor obligations, secured debt, and insufficient operating cash may need to consider a broader restructuring.

Chapter 11 can provide a framework for restructuring business obligations when the statutory requirements are satisfied.

Subchapter V is a specialized part of Chapter 11 designed for qualifying small business debtors and can provide a more streamlined restructuring process than a traditional Chapter 11 case.

Eligibility should be determined under the law in effect when the business is evaluating a filing. A company should not rely on an old debt-limit figure or assume it qualifies based solely on the size of its MCA obligations.

The analysis should include the company’s complete debt structure, creditor relationships, assets, cash flow, ownership, pending litigation, guarantees, and ability to continue operating.

MCA claims may become part of that process.

If the debtor has a legitimate basis to dispute the characterization or enforceability of an MCA obligation, that issue can be evaluated in the appropriate bankruptcy context.

But bankruptcy does not automatically transform an MCA into a loan, eliminate the funder’s claim, or erase an owner’s personal guarantee.

Those are separate issues that require their own analysis.

The automatic stay can also matter after a bankruptcy filing because it generally restricts many collection actions against the debtor and the bankruptcy estate's property.

But the automatic stay should not be confused with the restructuring strategy itself.

It creates a legal framework that lets the debtor address its financial position.

The business still needs a plan for what happens next.

That means determining which debts can be restructured, what the business can realistically afford, whether operations are viable, how to handle disputed MCA claims, and whether the company can emerge with a sustainable capital structure.

The objective is not simply to stop collection activity.

It is to determine whether the business can be reorganized into something that works.

Myths About MCA Agreements New York Business Owners Must Stop Believing

One of the most persistent misconceptions about MCA agreements is that the contract’s label decides the legal characterization.

It does not.

Calling a transaction a “purchase of receivables” is relevant because that is how the parties documented the deal. Still, the recharacterization analysis looks more closely at the transaction's economic structure.

The opposite misconception is equally problematic.

A business should not assume that every expensive MCA is actually a loan.

High cost can create significant financial pressure, but cost alone does not answer the characterization question.

The transaction's structure still has to be analyzed.

Another misconception involves personal guarantees.

Signing a personal guarantee does not, by itself, establish that the underlying MCA is a loan.

Nor should a business owner assume that a guarantee has no effect simply because the MCA itself is being challenged.

The guarantee needs to be read.

Its scope, triggering events, underlying obligation, and relationship to the MCA agreement can all matter.

A fourth misconception is that an entered confession of judgment necessarily means the underlying MCA can no longer be challenged.

An existing judgment changes the procedural posture, but it should not replace legal analysis.

The business needs to understand how the judgment was obtained, what enforcement has occurred, whether grounds for a challenge exist, and what procedure is available for raising those issues.

At the same time, the existence of a disputed MCA does not mean every confession of judgment can be vacated.

The facts and procedural history matter.

The most important misconception is that every MCA problem should be solved by fighting the funder.

Sometimes litigation is appropriate.

Sometimes negotiation is appropriate.

Sometimes restructuring is necessary.

And sometimes you need to evaluate several of those tools together.

The correct strategy depends on what is threatening the business.

If one agreement is the problem, focus on the agreement.

If the company’s entire debt structure is the problem, solving one agreement may not be enough.

How J. Singer Law Group Handles MCA Recharacterization and Defense in New York

J. Singer Law Group approaches MCA disputes by first determining what the business is actually facing.

That means reviewing the agreement, payment structure, reconciliation provisions, guarantees, enforcement history, creditor pressure, and the company’s broader financial condition before deciding which legal tool fits the problem.

Stephanie Meltzer, Esq., handles MCA matters involving recharacterization issues, enforcement disputes, and related defenses.

Managing Partner Jeb Singer brings bankruptcy experience to that analysis, including his prior clerkship with the Hon. Stuart M. Bernstein of the U.S. Bankruptcy Court for the Southern District of New York.

Ira Reid brings decades of restructuring experience, including approximately 20 years as a restructuring partner at Baker McKenzie and a prior clerkship with the Hon. Cecelia H. Goetz of the U.S. Bankruptcy Court for the Eastern District of New York.

That combination matters when an MCA dispute does not remain just an MCA dispute.

A lawsuit may reveal a cash-flow problem.

A bank restraint may expose the effect of several stacked obligations.

A personal guarantee may create a second layer of exposure for an owner.

A proposed settlement may resolve one creditor while leaving the business unable to satisfy the rest.

At that point, the question changes.

It is no longer simply:

Can this MCA be challenged?

It becomes:

What legal and financial strategy gives this business a workable path forward?

J. Singer Law Group evaluates MCA defense, commercial litigation, and restructuring as parts of that larger question.

The goal is not to force a business into litigation, settlement, Chapter 11, or Subchapter V.

The goal is to understand the transaction, identify the legal options that are actually available, and determine which approach addresses the problem the business needs to solve.

Frequently Asked Questions

What is the LG Funding recharacterization test in New York?

The LG Funding recharacterization test is a framework New York courts use when evaluating whether a merchant cash advance is a genuine purchase of future receivables or a transaction that functions as a loan.

The analysis generally focuses on three factors: whether the agreement provides meaningful reconciliation based on the merchant’s actual revenue, whether the transaction has a finite or effectively fixed repayment term, and whether the funder has recourse if the expected receivables do not materialize.

Those factors are considered as part of the agreement as a whole.

The central question is whether the funder genuinely purchased uncertain future receivables and assumed the risk associated with those receivables, or whether the merchant effectively assumed an obligation to repay a fixed amount.

That characterization matters because New York usury law applies to loans, not genuine purchases of receivables.

Recharacterization does not automatically establish a usury defense. If the transaction is properly characterized as a loan, you must then analyze the financial terms and applicable law separately.

What are the three factors of the LG Funding test for MCA agreements?

The first factor is reconciliation. The analysis considers whether payments can meaningfully adjust based on the merchant’s actual receivables rather than remaining effectively fixed regardless of business performance.

The second factor concerns the repayment term. A genuine purchase of future receivables generally involves uncertainty about how long it will take to collect the purchased amount because that timing depends on the revenue the business actually generates.

The third factor examines recourse. This part of the analysis considers what happens if the expected receivables do not materialize and whether the funder has assumed genuine risk or retains rights that effectively require repayment regardless of the merchant’s performance.

These factors are connected and should not be treated as a mechanical scorecard.

A personal guarantee does not automatically make an MCA a loan. A fixed ACH amount does not automatically make an MCA a loan. And a reconciliation clause does not automatically establish that the transaction is a genuine receivables purchase.

You must consider the agreement and the transaction's economic substance together.

What makes a reconciliation clause meaningful under New York law?

A meaningful reconciliation provision should provide a genuine mechanism for connecting the funder’s collection to the merchant’s actual receivables.

That analysis can include the procedure for requesting an adjustment, the financial information the merchant must provide, how the adjusted payment is calculated, the funder’s obligations after receiving a proper request, and how the provision interacts with the rest of the agreement.

The absence of a mandatory refund provision does not necessarily make reconciliation meaningless. An adjustment to future payments may still be relevant if it genuinely responds to changes in revenue and affects how long it takes to deliver the purchased receivables.

The parties’ conduct may also provide context.

If the merchant requested reconciliation, records showing what was submitted and how the funder responded may help explain how the provision operated in practice.

But the fact that reconciliation never occurred should not automatically be treated as evidence that the provision was illusory. A merchant may never have requested an adjustment or the circumstances requiring one may never have arisen.

The more useful question is whether the reconciliation process created a real relationship between collections and actual receivables.

What happens if a merchant cash advance is recharacterized as a loan in bankruptcy?

If an MCA is recharacterized as a loan in bankruptcy, that characterization can affect the analysis of the funder’s claim.

It does not automatically mean the claim is disallowed or that the debtor can recover money previously paid to the funder.

If applicable law provides a basis for challenging the enforceability of the underlying loan, the debtor may be able to raise that issue as part of the claims process. The particular defense and remedy depend on the agreement, governing law, financial terms, and procedural posture.

Payments made before bankruptcy may also be reviewed under the Bankruptcy Code’s avoidance provisions when the statutory requirements are satisfied.

Preference and fraudulent-transfer claims are separate legal analyses. A payment made shortly before bankruptcy, or an MCA later disputed or recharacterized, does not by itself establish that the transfer can be recovered.

For a business with several MCA obligations, the larger issue may be whether the company needs a broader restructuring rather than simply a ruling concerning one funder’s agreement.

Recharacterization can matter in that process, but it remains one part of the company’s overall bankruptcy and restructuring analysis.

Does the LG Funding recharacterization test apply outside New York State?

The answer depends on the particular agreement and dispute.

MCA agreements involving businesses outside New York may contain New York choice-of-law or forum provisions. When New York law properly governs the transaction, New York’s approach to MCA characterization may still matter even if the merchant operates elsewhere.

But a business should not assume that the LG Funding framework automatically controls every MCA dispute nationwide.

Choice of law, jurisdiction, venue, the parties, the contractual provisions, and the court hearing the dispute can all affect the analysis.

For an out-of-state business with a New York provision in its MCA agreement, start with the contract itself.

Review the governing-law clause and forum provision alongside the substantive MCA terms and any enforcement activity that has already occurred.

Can a New York business owner use criminal usury as a defense against an MCA company?

Criminal usury may be available as an affirmative defense in an MCA enforcement action when the facts and applicable New York law support it.

But the analysis begins with characterization.

Usury law applies to loans. A genuine purchase of future receivables does not become a usurious loan simply because the financing was expensive.

If the MCA is properly characterized as a loan, counsel can then evaluate whether the financial terms and other requirements support a criminal usury defense.

Business owners should also distinguish between an affirmative defense and an independent claim for relief.

A potential criminal usury defense does not automatically give a merchant an affirmative damages claim against the funder.

The procedural posture matters.

A business that has been sued, a business facing an entered judgment, and a business considering legal action before enforcement has occurred may have different procedural options.

That is why the analysis should address not only whether a defense exists, but also when, where, and how it can properly be raised.

Take the Next Step With J. Singer Law Group

For New York business owners in Manhattan, Brooklyn, Queens, Long Island, Westchester, the Bronx, and surrounding areas, that process starts with the documents.

If your business is facing MCA enforcement, a confession of judgment, a bank restraint, multiple MCA obligations, or a potential restructuring, contact J. Singer Law Group or call (917) 905-8280 to discuss the situation.

Don't let the most immediate collection action define the entire problem.

Start with the transaction.

Understand the enforcement posture.

Identify the defenses the facts actually support.

Then determine whether litigation, negotiation, or restructuring addresses the business’s real financial problem.



Strategy. Not just defense.