Defaulting on an MCA Does Not Mean Losing in Court
The day the MCA company files against you is not the day you have lost. It is the day the playing field shifts from contract performance to legal scrutiny, and legal scrutiny has not been kind to funders who assumed their agreements were impregnable. Courts across New York, California, and New Jersey have, in recent years, examined the underlying structure of MCA agreements with increasing rigor and found serious defects — some fatal to enforcement.
Challenge the Transaction as a Loan
Every MCA defense begins with the same threshold question: is this a purchase of future receivables, or is it a loan? If it is a loan, it is subject to usury laws. In New York, a loan charging more than 25% annual interest is criminally usurious, and a criminally usurious contract is void — not voidable, not subject to equitable relief, but void. The funder collects nothing. The Appellate Division’s 2024 ruling in Crystal Springs Capital, Inc. v. Big Thicket Coin, LLC held exactly that for at least one class of MCA product, and practitioners have been pressing that argument across dozens of active cases since.
Attack the Reconciliation Clause
A genuine MCA carries risk. If the merchant’s revenue falls, the daily remittance should fall in proportion. Agreements that include a reconciliation provision — a mechanism to adjust the daily debit based on actual revenue — look like true receivables purchases on paper. But the New York Attorney General’s 2024 lawsuit against Yellowstone Capital documented what defense practitioners had long observed: the reconciliation clauses were effectively ornamental. Funders acknowledged receipt of reconciliation requests and then did nothing. That gap between the written term and the operational reality undermines the funder’s core legal argument.
File a Civil RICO Counterclaim
Where the MCA agreement is found to constitute an illegal loan, the systematic collection of interest on that loan constitutes collection of an unlawful debt under 18 U.S.C. Section 1962. The Second Circuit affirmed RICO liability for an MCA funder on exactly this theory, holding that the company was a RICO enterprise and the owner individually liable. A civil RICO claim carries treble damages and attorney’s fees, which changes the economics of litigation considerably. This is not a claim to file casually; the pleading standards are demanding and the elements are specific. But when the facts support it, the counterclaim transforms the merchant from defendant to claimant.
Move to Dismiss on Usury Grounds
Even absent a RICO claim, a motion to dismiss premised on criminal usury is a recognized procedural vehicle in New York. Courts have granted such motions at the pleading stage where the face of the complaint, together with the agreement attached to it, reveals an effective interest rate that exceeds the statutory ceiling. One does not need discovery to make this argument if the amount funded, the total amount owed, and the payment timeline are visible from the contract itself.
Challenge the UCC Lien and Account Freeze
MCA funders routinely file UCC-1 financing statements when the agreement is executed. A blanket lien on all business assets and receivables can effectively strangle operations. Where the underlying agreement is void, the UCC filing is also unauthorized, and courts will order its termination. The motion for lien termination can be filed as part of the same proceeding challenging the agreement, and obtaining a termination order restores the merchant’s ability to access new financing while the litigation proceeds.
Seek a Temporary Restraining Order Against ACH Debits
When daily ACH debits are depleting operating accounts to the point of business failure, the merchant has grounds to seek emergency injunctive relief. The showing requires demonstration of irreparable harm — which the account depletion itself provides — and a substantial question on the merits, which the usury or unconscionability argument supplies. Courts have granted TROs in this posture, particularly where the daily debits would render any eventual monetary judgment meaningless.
Assert UDAP Claims Under State Law
Most states have Unfair, Deceptive, or Abusive Acts or Practices statutes that apply to commercial transactions. Where the MCA company misrepresented the effective cost of the advance, failed to disclose the annualized rate, or used deceptive language in the reconciliation process, a UDAP claim provides a damages theory independent of usury. California’s Unfair Competition Law and New Jersey’s Consumer Fraud Act have both been invoked in MCA litigation with some success.
Use Discovery to Document the Pattern
MCA litigation changes character once discovery opens. Production of the funder’s reconciliation request logs, internal communications about the risk-transfer question, and records of how other merchants’ reconciliation requests were handled can supply the factual predicate for multiple claims simultaneously. Funders who have operated with confidence that their agreements were bulletproof are often surprised by what internal communications reveal about how the product was designed and sold. Consultation is the first step. The second step is understanding what the record looks like before the other side has organized it.
