Being Sued Does Not Mean Standing Still
The MCA company’s decision to file against you is also the moment your right to assert counterclaims attaches. A lawsuit is not a one-way proceeding. Where the funder’s agreement is usurious, its collection practices unlawful, or its representations fraudulent, the merchant who files a well-pleaded counterclaim transforms the economics of the litigation and often the outcome. The counterclaims described below have been successfully asserted in MCA cases, and each carries its own damages calculus.
1. Usury and Void Contract
Where the MCA constitutes a criminally usurious loan under New York law, the counterclaim seeks a declaration that the contract is void and an order requiring the return of any amounts the funder collected above the principal advanced. The Second Circuit affirmed this theory in an MCA case, and the 2024 Appellate Division ruling in Crystal Springs Capital supplied the doctrinal framework that makes the claim viable at the pleading stage. A successful usury counterclaim does not merely defeat the funder’s claim; it reverses the money flow.
2. Civil RICO
The collection of an unlawful debt — which includes collection of interest on a criminally usurious loan — constitutes a predicate act under 18 U.S.C. Section 1962. Where the funder engaged in a pattern of such collections across multiple merchants, the civil RICO claim alleges that the funder operated as a RICO enterprise. Civil RICO carries treble damages and attorney’s fees, which makes it the most economically significant counterclaim available. The pleading burden is real — specific facts, specific predicate acts, specific enterprise structure — but the factual predicate in MCA cases often exists in the agreement itself.
3. Fraudulent Inducement
If the funder, its broker, or its agents misrepresented the effective cost of the advance, the reconciliation mechanism, or the legal character of the transaction, the merchant has a fraudulent inducement claim. This claim requires showing a material misrepresentation, knowledge of its falsity, intent to induce reliance, actual reliance, and resulting damages. The effective-rate misrepresentation is often the strongest factual basis: where the funder described the advance as a purchase of receivables at a fixed factor rate, while knowing it was operating as a lender, the misrepresentation is both material and provable.
4. Breach of the Reconciliation Clause
If the agreement contains a reconciliation provision and the funder failed to perform reconciliation adjustments when properly requested, the merchant has a breach of contract claim independent of the usury defense. This claim is especially powerful where the funder sent written acknowledgment of reconciliation requests and then took no action — the documentary record of that inaction speaks directly to the counterclaim. Recovery includes the difference between what the merchant paid and what the adjusted amount would have been had the clause been honored.
5. UDAP Claims Under State Law
Unfair, Deceptive, or Abusive Acts or Practices statutes in California, New Jersey, New York, and most other states provide a damages claim for deceptive business practices in commercial transactions. The UDAP claim in MCA cases typically rests on the same misrepresentation facts as the fraudulent inducement claim, but carries different elements and different remedies — some statutes provide statutory minimum damages, attorney’s fees, and multipliers that make small claims economically viable to pursue.
6. Wrongful Levy and Account Freeze
Where the funder served a restraining notice, obtained a bank freeze, or executed a levy on accounts before a valid judgment was entered — or where the judgment was subsequently vacated — the merchant has a claim for wrongful execution. This includes recovery of actual damages from the freeze period, including lost business, defaulted obligations, and banking fees incurred as a consequence of the restraint.
7. Abuse of Process
Where the MCA company used legal process — a confession of judgment, a restraining notice, a lawsuit — as a collection device without a good-faith basis in law, the merchant may assert an abuse of process claim. This counterclaim is harder to sustain than the others and requires showing that the legal process was used primarily to coerce payment rather than to vindicate a genuine legal right. It is most viable where the agreement is clearly void on its face and the funder’s knowledge of that infirmity can be shown.
