New York is where most MCA litigation begins and where the law has shifted most dramatically in favor of the merchant. Between the Yellowstone Capital enforcement action, the rising success rate of recharacterization arguments, and the FAIR Business Practices Act that took effect in early 2026, the legal terrain has changed in ways that many funders have not yet absorbed. A business owner carrying MCA debt in New York today has more defenses available than at any point in the industry’s history.
Recharacterization as a Usurious Loan
The single most consequential defense in New York MCA law is the argument that the advance is not a purchase of future receivables but a loan subject to the state’s usury statutes. New York imposes a civil usury cap of sixteen percent and a criminal usury threshold of twenty-five percent per annum. When an MCA is reclassified as a loan, and the effective annualized rate exceeds that criminal threshold, the entire agreement becomes void. Not voidable. Void.
Courts examine three factors to determine whether reclassification is warranted: whether the agreement contains a genuine reconciliation mechanism that adjusts payments to match actual revenue, whether the repayment term is truly indefinite or functionally fixed, and whether the funder retains full recourse against the merchant regardless of business performance. If the reconciliation provision exists only on paper, if the term is effectively determined by the repayment schedule, and if the merchant bears the entire risk of nonperformance, the transaction resembles a loan in substance regardless of its label.
The success rate of this argument has climbed from roughly twelve percent in the 2023 to 2024 period to something approaching forty percent in the first quarter of 2026. That trajectory tells you where the courts are heading.
The Yellowstone Precedent
In January 2025, Attorney General Letitia James announced a settlement against Yellowstone Capital and its network of affiliated entities that cancelled outstanding merchant obligations of enormous scale. The settlement represented the largest consumer enforcement action the Attorney General’s office had obtained outside of a multistate proceeding. It confirmed what practitioners had long suspected: the state’s chief law enforcement officer regards certain MCA practices as predatory, and the resources of the Attorney General’s office are available to pursue them.
The Yellowstone action did not create new law. But it created a factual record and a public signal that shifts the environment in which individual MCA disputes are resolved. A funder pressing a collection action in 2026 does so in the shadow of that enforcement action, and competent defense counsel will ensure the funder knows it.
Confession of Judgment Challenges
New York reformed its confession of judgment statute in 2019, prohibiting COJ filings against out-of-state businesses. For New York-based merchants, however, the exposure remains. A confession of judgment allows the funder to obtain a judgment without filing a lawsuit, without providing notice, and without giving the merchant an opportunity to present defenses. It is the most efficient collection tool in the MCA industry, and it is the tool most susceptible to challenge when the underlying agreement is defective.
Where the MCA agreement has been recharacterized as a usurious loan, the confession of judgment falls with it. A judgment predicated on a void agreement is itself void, and a motion to vacate that judgment becomes available. The analysis is sequential: establish that the agreement is a loan, demonstrate that the loan exceeds the usury threshold, and then challenge every enforcement action, including the COJ, that flows from the void agreement.
“I received a notice that a judgment had been entered against my business. I did not know what a confession of judgment was. My bank account was frozen by the time I called an attorney.”
The FAIR Business Practices Act
Effective February 2026, the New York FAIR Business Practices Act amended General Business Law Section 349 to extend protections against unfair and abusive acts to small businesses and nonprofits. Before this amendment, Section 349 applied only to consumer transactions. The expansion means that MCA practices that constitute unfair or deceptive business conduct, including misrepresentation of terms, concealment of the true cost of capital, and coercive collection tactics, now give rise to claims under a statute that provides for treble damages and attorney fees.
This is new ground. The case law has not yet developed, and the boundaries of what constitutes an “abusive” act under the amended statute remain unsettled. But the statutory language is broad, and the legislative intent is clear. For defense counsel, it provides an additional theory of liability that did not exist a year ago.
Commercial Financing Disclosure Violations
New York’s Commercial Financing Disclosure Law, which reached full enforcement between 2023 and 2026, requires MCA funders to provide Truth in Lending style disclosures, including the estimated annualized cost of financing, before the merchant executes the agreement. Funders who failed to provide compliant disclosures face regulatory exposure and provide merchants with a defense in enforcement proceedings.
The disclosure requirement operates independently of the recharacterization argument. Even if the MCA is treated as a true purchase of receivables rather than a loan, the funder’s failure to provide mandated disclosures creates a separate basis for challenging the agreement’s enforceability and strengthens the merchant’s position in settlement negotiations.
ACH Debit Revocation
The daily ACH debit is the mechanism through which most MCAs collect. In New York, the merchant’s ability to revoke the ACH authorization has been the subject of significant litigation. Funders argue that the authorization is irrevocable under the terms of the agreement. Merchants argue that federal banking regulations allow the account holder to revoke any preauthorized debit by notifying the bank.
Revoking the ACH authorization does not eliminate the debt. It does eliminate the funder’s ability to collect passively by reaching into the merchant’s bank account every day. That shift, from automatic collection to active collection, changes the dynamics of the dispute and provides the merchant with breathing room to assess options and negotiate from a position that is not defined by the daily hemorrhage of operating capital.
Negotiated Settlement
Most MCA disputes in New York resolve through settlement. The current environment favors merchants with demonstrable defenses. Funders facing a credible recharacterization argument, a disclosure violation, and competent opposing counsel have strong incentive to resolve the matter at a discount rather than risk an adverse ruling that could affect their broader portfolio.
Settlement terms vary with the strength of the defense and the funder’s appetite for litigation. The merchant who retains counsel before the dispute escalates to judgment or account freezing retains more leverage than the one who waits.
Bankruptcy Protection
For businesses carrying multiple MCA obligations that have made continued operation unsustainable, Chapter 11 provides an ordered process for restructuring the debt while maintaining operations. The automatic stay halts all collection activity, including ACH debits, and the reorganization plan may reduce MCA obligations to amounts the business can service.
Bankruptcy is not the first option. It is the option that exists when the alternatives have been exhausted or when the volume of MCA debt makes individual negotiation impractical. A consultation establishes where you stand before that determination is made, and in New York, the law provides more ground to stand on than it did even twelve months ago.
