5 Defenses to Raise When Answering an MCA Lawsuit

Businesses that enter an MCA agreement often do so because they need immediate cash. But the requirement to remit a fixed amount daily or weekly puts pressure on the operating account, especially if sales slow. As businesses struggle to meet repayment obligations, some stop paying altogether - and the MCA company files suit, as a breach of contract claim, often seeking damages, attorney's fees, and other costs that add up quickly. If you've been served with a complaint from an MCA funder, these are the defenses to consider.

1. The advance may be a criminally usurious loan

The foundation of many defenses is the argument that the advance is not a true purchase of future receivables but a disguised loan subject to criminal usury laws. New York Penal Law 190.40 sets the criminal usury ceiling at twenty-five percent per annum. Many MCAs, when the origination fee and factor rate are annualized, can exceed one hundred percent effective interest. New York businesses are entitled to raise this as an affirmative defense, even if they cannot assert civil usury under the General Obligations Law.

New York courts have established criteria for determining whether an MCA agreement is a purchase or a loan. In LG Funding, LLC v. United Senior Properties of Olathe, LLC, the Second Department outlined three primary factors: the presence and meaningful operation of a reconciliation provision, the open-ended nature of the repayment term, and the genuine assumption of business risk by the funder. If an agreement lacks a reconciliation provision, or contains one that is not functional, it may be recharacterized as a loan. This analysis often reveals the agreement is, in operation, an unsecured loan with a high effective interest rate.

2. Lack of a written agreement or signature

The funder, as plaintiff, must establish that a binding contract exists - a signed and complete MCA agreement outlining the terms. If the agreement is unsigned, lacks a critical page, or is otherwise defective, it cannot form the basis for a breach of contract claim. Examine the copy attached to the complaint; it may be unsigned or missing critical terms. These defects support a motion to dismiss or summary judgment, depending on the stage of the proceedings.

3. No proof of damages

The funder bears the burden of proving damages. While MCA lawsuits are frequently presented as simple collection actions seeking the entire unpaid balance, they are subject to the same standards of proof as any other commercial dispute. A common issue: the funder does not properly account for payments the merchant made before the alleged breach. The funder must present detailed payment histories showing the amount received and applied to the advance. Without this evidence, the plaintiff has failed to meet their burden.

Immediately demand full accounting, challenging every penny claimed due. Forcing the plaintiff to prove every element - including the total amount owed - frequently exposes flaws in their calculations, weakening their position and opening the door for negotiation or dismissal.

4. Improper acceleration and excessive fees

Many agreements include clauses that purport to accelerate the entire balance upon alleged default, making the full amount immediately due regardless of whether the merchant was otherwise in compliance with the repayment schedule. The validity and enforceability of these clauses are subject to challenge, especially when they conflict with the terms of the original agreement.

Attorney's fee clauses between business parties are subject to a standard of reasonableness under New York law. Even if the provision appears unambiguous, a court will often determine that fees in the range of $400 to $800 per hour are reasonable and reject requests that exceed these amounts. If the acceleration clause or fee provision is found unenforceable or unreasonable, the court can limit recovery to amounts in line with the actual harm suffered.

5. The performance guarantee wasn't triggered

Performance guarantees - also known as "bad boy" or "validity" guarantees - secure payment from the business's principal under specific circumstances. The guarantee may only apply in cases of intentional misconduct, such as providing false information to the funder, or if the business makes certain changes: changing bank accounts, closing the merchant account, diverting receivables to an undisclosed account.

The funder must prove that an event of default occurred that triggers personal liability under the guarantee. Without that proof, the claim against the principal can be defeated. Review the guarantee's scope carefully; it must not be overly broad or ambiguous, and the triggering event is where the fight is.

Practical points from the FAQ worth keeping

Challenge the plaintiff's standing by demanding documentation proving they own the claim - an unbroken chain of assignments from the original funding party to the current plaintiff, executed and clearly identifying the specific advance at issue.

To prove the funder failed to reconcile: gather all correspondence regarding reconciliation requests - certified mail receipts, emails, portal messages, bank statements. A pattern of ignored requests or unreasonable delays strengthens the defense, and if the funder breached the reconciliation clause by failing to adjust remittances, that itself is a defense against claims of default.

If a personal guarantee was signed, a judgment can lead to wage garnishments, liens, and other actions against personal assets, and the default may be reported to business credit agencies.