MCA Debt Defense in New York

If a funder is suing you in New York, you may have grounds to challenge or even stop the lawsuit. Was the contract that formed the subject of the lawsuit a loan or not? What might sound like an incredibly complicated question sometimes comes down to a very basic set of New York state laws.

Criminal Usury

A person who loans money to someone else in New York with the understanding that the interest will be higher than 25 percent per year is committing a crime. New York business corporations usually cannot raise the defense that they were the victim of a usurious loan. But if a lawsuit is for a contract that is more than 25 percent interest annually, the loan is criminally usurious under New York law, and therefore, the loan is also void. New York’s 2021 Court of Appeals opinion, in Adar Bays v. GeneSYS ID, found that a loan to a corporation that is criminally usurious is void from the start. In criminal usury, the loan is a complete nullity and nothing can be collected on it.

This is why some funders try to write the contract like the transaction is not a loan. They insist that the merchant is not buying money with the promise to repay that money, but rather the merchant is selling some of their future receipts or receivables. A funder, called the Purchaser, pays a business, called the Seller, a lump sum of money for a portion of the business’s future receivables. These merchant cash advances tend to come fast, but they also tend to come with a very high price tag. The funders hope that saying it is not a loan will protect them from usury laws and prevent the defense of unenforceable loan being raised in court.

But courts don’t take the lender’s assurance that something is not a loan at face value. Over the years New York courts have identified three aspects that they weigh in assessing whether a transaction should be considered a loan, or is a genuine sale of some of the business’s future revenues. What courts look for in assessing this question are whether the agreement has a reconciliation clause, whether the agreement has a fixed term, and whether the funder can collect even if the merchant goes bankrupt. A fixed term, the ability to collect even if the receivables crash, and lacking a reconciliation clause are all signs it is a loan.

But these factors are only examples and not a hard line. At the heart of the situation is not so much what the funder calls the transaction but what actually happened. The key question here is whether the funder is absolutely entitled to repayment no matter what. Because in the end that is what a sale is all about: the transfer of risk.

For example, the contract in Spig Industries v. Novac Equities contained effective interest rates ranging from about 91% to over 800%. The court found that what was supposed to be an agreement to buy future receivables was really an illegal loan far in excess of the 25 percent a year which state law allows.

On July 27 2026, a federal bankruptcy court in Manhattan ruled that 19 MCA agreements were usurious loans in disguise. In In re Kossoff PLLC the court found that the agreements contained an illusory reconciliation clause, one that gives the funder sole discretion over adjustments and allowed for no actual refunds of any overcollections. But because this is only one court, it would be irresponsible for you to rely on the declaration that these agreements are invalid.

Confessions of Judgment

Besides the defense that the contract was void as a criminally usurious loan, New York law also limits confessions of judgment. Starting August 30, 2019 the clerks of the courts in New York state can no longer enter a confession of judgment against an out-of-state person or business which does not have a place of business in New York. If someone sends a confession of judgment against someone in New York it has to be filed within three years of signing, and only in a county where the defendant lives or does business in New York.

Regulators also sometimes take notice and take action, as well. And in January 2025 New York’s Attorney General’s Office announced a settlement agreement with Yellowstone Capital that cancels about $534 million owed by merchants and even the personal guarantors.

Exactly What Their Obligations Are Under the Agreement

Whatever defense you raise, you ought to know exactly what your obligations are under the agreement itself. Each of these agreements has its own peculiarities, and its own risks. Read it for the presence or absence of a reconciliation clause, a fixed ending date, and the funder’s ability to enforce even if the business fails. If you have already defaulted or will likely default soon, one good route might be to attempt to litigate the question of whether the agreement is enforceable. For you this could mean the whole debt being voided. But this would be a case of either winning big or losing big.

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.