MCA Debt Defense in New York

The merchant cash advance industry in New York has entered a period of sustained legal deterioration for funders. Between 2023 and 2025, a sequence of appellate rulings, attorney general enforcement actions, and proposed legislation has recast the MCA agreement from a protected commercial instrument into a transaction subject to criminal usury statutes and judicial rescission. Business owners carrying MCA obligations now possess defenses that did not exist three years ago. Those defenses require precise assertion.

Recharacterization and the Collapse of the Receivables Fiction

MCA funders have long maintained that their agreements constitute purchases of future receivables rather than loans. That distinction matters because New York’s civil usury cap of 16% and criminal usury threshold of 25% per annum apply only to loans, not to bona fide asset purchases. For years, the distinction held. It no longer does in most contested proceedings.

What the courts now ask is not whether the agreement says “purchase of receivables” in its header. The operative question is whether the funder bore genuine risk. In Crystal Springs Capital, Inc. v. Big Thicket Coin, LLC, the Second Department of the Appellate Division examined an agreement requiring fixed daily debits of $4,000, with no obligation on the funder to reconcile those payments to actual sales volume, and full recourse against the merchant in the event of bankruptcy. The court found the agreement constituted a criminally usurious loan. The funder did not dispute that the effective annual interest rate exceeded 25%. The judgment against the merchant was vacated.

That ruling did not arrive in isolation. In September 2024, the Third Department reached the same conclusion in a separate MCA enforcement action. Justice Andrew Borrok of the Commercial Division had already held, in People v. Richmond Capital Group LLC, that the agreements at issue were usurious loans. The analytical framework across these decisions is consistent. Courts examine three factors: whether the agreement contains a reconciliation provision, whether it imposes a finite repayment term, and whether the funder retains recourse upon the merchant’s insolvency. Where reconciliation is absent or illusory, where the term is fixed, and where recourse survives bankruptcy, the transaction is a loan.

The word “illusory” carries particular weight. Many MCA agreements include reconciliation clauses in their text. The clause appears. The mechanism does not function. Funders continue withdrawing fixed daily amounts regardless of actual revenue. Merchants who request adjustment receive no response, or receive denial under criteria never disclosed at origination. In MCA Servicing Co. v. Nic’s Painting, LLC, a 2024 ruling from the Supreme Court, the judge denied summary judgment and wrote that the court “will not be used as a cudgel to enforce potentially illegal and/or unconscionable loans.” That sentence reflects the present judicial posture across New York’s trial courts.

The Yellowstone Judgment and Its Procedural Aftermath

On January 22, 2025, Attorney General Letitia James announced a $1.065 billion settlement against Yellowstone Capital and its network of 25 affiliated entities. The settlement remains the largest consumer enforcement action ever obtained by the Office of the Attorney General outside a multistate proceeding. It cancelled over $534 million in outstanding merchant obligations. More than 1,100 judgments against New York businesses were vacated. Over 18,000 merchants nationwide received debt discharge. The principals of the Yellowstone entities received permanent bans from the MCA industry.

Eight hundred and twenty percent. That was the annual rate on some Yellowstone agreements. The underlying facts deserve attention. The Attorney General’s complaint, filed in March 2024, alleged that Yellowstone had been issuing short-term loans at rates as high as 820% per annum since 2009, disguised as purchases of future receivables. The agreements were structured to avoid the classification of loan. The servicing practices made that classification unavoidable. Fixed daily debits. No reconciliation. Full personal guarantee enforcement. Confession of judgment filings across multiple counties.

Before Yellowstone, the Attorney General had already secured a $77 million judgment against Richmond Capital Group, Ram Capital Funding, and Viceroy Capital Funding in February 2024, following a lawsuit initiated in 2020. The pattern of enforcement is accelerating rather than contracting.

These actions have produced a secondary effect that individual merchants can use. Where a funder’s practices have been adjudicated as predatory in an enforcement action, the evidentiary record from that proceeding becomes available to other defendants. A merchant sued by a Yellowstone affiliate in 2023, for instance, now has a $1 billion judgment confirming the nature of the agreement. That confirmation alters every pending collection matter involving those entities.

Confession of Judgment: Restricted but Not Eliminated

In August 2019, Governor Cuomo signed an amendment to CPLR Section 3218 prohibiting the filing of confessions of judgment against out-of-state defendants in New York courts. The reform responded to reporting by Bloomberg Businessweek that documented MCA funders filing COJs in New York against business owners in Texas, Florida, and California who had no connection to the state. After the amendment, a confession of judgment filed against a non-New York defendant is voidable.

The restriction applies to defendants. It does not prohibit COJs against New York-domiciled merchants. For businesses operating within the state, the confession of judgment remains a live instrument. Funders continue to include COJ provisions in their agreements, and New York county clerks continue to accept filings against in-state merchants. The defense against a COJ filed without proper basis is a motion to vacate. Where the underlying agreement has been recharacterized as a usurious loan, the COJ falls with it. The instrument depends on the validity of the obligation it purports to enforce.

Hundreds of COJ-based judgments in Rockland County alone faced vacatur proceedings in 2025, a direct consequence of the Yellowstone settlement. The geographic concentration is not incidental. MCA funders filed COJs in counties with high-volume clerks’ offices and limited judicial scrutiny as a matter of established practice. That practice is producing a concentrated wave of reversals.

UCC Liens and Personal Guarantees

A UCC-1 financing statement gives the funder a security interest in the merchant’s business assets. It does not authorize seizure. The distinction is critical and misunderstood. A UCC lien encumbers assets for purposes of priority in the event of liquidation or sale. It does not permit the funder to enter a place of business, remove equipment, or freeze accounts without a court order. Merchants who receive UCC lien notices often believe their assets have been taken. They have not.

Liens can be challenged. Where the underlying agreement is recharacterized as a usurious loan, the security interest derived from that agreement becomes unenforceable. A motion to terminate the UCC filing follows from the same legal theory that voids the agreement itself. The lien is derivative. It possesses no independent authority once its source contract is rescinded.

Personal guarantees present a different problem. Most MCA agreements require the business owner to sign a personal guarantee, exposing individual assets to collection. The guarantee survives the business entity. The LLC dissolves. The funder pursues the person. Defenses to personal guarantee enforcement exist but are narrower than defenses to the underlying agreement. Misrepresentation at origination, failure to disclose material terms, and absence of proper execution can invalidate a guarantee. The more potent defense remains the usury argument applied to the underlying obligation. A guarantee of an illegal loan is a guarantee of nothing.

The End Loan Sharking Act

Senate Bill S1726, known as the End Loan Sharking Act, advanced through the Senate Judiciary Committee in May 2025. The bill proposes to amend the General Obligations Law, Banking Law, and Penal Law to extend New York’s usury protections to all financing arrangements. The current statutory framework permits MCAs, litigation funding agreements, and rent-to-own contracts to operate outside usury caps by characterizing their transactions as something other than loans. The bill would close that distinction. Every amount payable in connection with a financing arrangement would be classified as interest for purposes of the usury statutes.

The legislation applies on a prospective basis. It will not void existing agreements. Its passage would, however, eliminate the structural argument that has shielded MCA funders from usury challenges since the industry’s formation. The bill represents recognition by the legislature that judicial recharacterization, case by case, is insufficient to address a systemic practice.

For merchants with existing MCA obligations, the bill’s progress carries an indirect benefit. Its advancement signals the political environment in which current disputes are being adjudicated. Judges read legislation, and they read the room. The direction of statutory reform informs the exercise of judicial discretion, even before a bill becomes law.

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What Defense Requires

An MCA agreement that imposes fixed daily withdrawals, provides no functional reconciliation mechanism, retains full recourse upon insolvency, and charges an effective annual rate exceeding 25% is, under current New York precedent, a criminally usurious loan. The agreement is void. The confession of judgment is vacatable. The UCC lien is terminable. The personal guarantee is unenforceable.

Reaching that result requires litigation. Funders do not concede recharacterization without compulsion. The merchant must raise the defense in a responsive pleading or in a motion to vacate a default judgment. The factual record must establish the absence of genuine reconciliation and the presence of recourse. Expert testimony on effective interest rate calculation is often necessary. The defense is available. It is not automatic.

Settlement remains the resolution in most MCA disputes. Funders holding positions of $200,000 or more will accept $80,000 to $120,000 rather than absorb litigation costs that can exceed $50,000 with uncertain enforcement outcomes. That calculus, which once favored the funder in every respect, has shifted. The Yellowstone judgment, the appellate rulings, and the pending legislation have reduced the funder’s expected recovery in contested proceedings. That reduction increases the merchant’s settlement position.

Spodek Law Group represents business owners in MCA defense matters across New York and in federal proceedings nationwide. The firm’s attorneys have experience with recharacterization arguments, COJ vacatur motions, UCC lien challenges, and personal guarantee defense. A consultation establishes the specific terms of the agreement, the funder’s servicing conduct, and the available grounds for relief.

Contact the firm at (888) 535-3686 or at info@spodeklawgroup.com.