MCA Debt Defense in New York

The Debt That Calls Itself By Another Name: MCA Defense in New York

A merchant comes in. He is tired. There is a number being pulled from his account every morning before he wakes, four thousand dollars, five thousand, and the number does not care if yesterday was a holiday, if the store was empty, if it rained for a week. The number arrives like the sun. Indifferent.

And he says: I signed something. They told me it was not a loan.

Listen. This is where everything begins. Not in the courtroom. Here. In the name.

The first lie is in the header

The paper at the top says Purchase and Sale of Future Receivables. Beautiful words. They sound almost spiritual, the future being sold, the unearned being bought, money moving across time.

But why these words? Why not just say loan?

Because a loan in New York is a watched thing. The civil usury cap sits at sixteen percent. The criminal usury cap, Penal Law section 190.40, sits at twenty-five percent per year, and crossing it is not a fine, it is a felony. A loan that charges more than that is not expensive. It is void. Dead. The obligation evaporates.

So the industry needed a different name. If it is a purchase, no usury law touches it. A purchase has no interest rate. A purchase is just a price. You can charge whatever you like for a thing, because a thing has no annual percentage.

This was the whole trick. For years it worked. The header said purchase, and the courts read the header, and went back to sleep.

That sleep is over.

Substance, not the word

Here is the thing the meditators have always known, and the judges have finally remembered: a thing is what it does, not what it is called. You can call a tiger a kitten. The tiger does not read the label.

New York courts no longer ask what the agreement says it is. They ask what it is. They look past the header into the body, into the conduct, into the bank statements. And they have built a test, a simple looking-glass with three windows. It runs through LG Funding and the cases born from it, and now it lives in nearly every contested MCA matter in the state.

The first window, reconciliation. Can the merchant make the morning number bend to reality? When sales fall, does the payment fall with them? Look at the verb in your own agreement. Does it say the funder shall reconcile, or that it may? Shall is a promise. May is a door that is never opened. If reconciliation is real, if the funder actually adjusts when you send the receipts, the risk lives with the funder, and it begins to smell like a true purchase. If reconciliation is a sentence that exists only on paper, a ritual nobody performs, then the fixed daily debit is the truth, and the truth is a loan.

The second window, the term. A purchase of receivables has no clock. The receivables come in when they come in; if the business slows, the funder waits longer; if the business dies, the funder loses. But if the agreement has a finite term, a date by which it all must be repaid no matter what, then repayment was never really tied to your sales at all. It was a schedule wearing a costume.

The third window, recourse. What happens when the business fails? In a true purchase, the funder bought a risk and the risk came due, too bad for the funder, that is what buying means. But most of these agreements have personal guarantees, security interests, the right to come after you and your house and your name when the business closes. If the funder has made it impossible to lose, then the funder never bought anything. It lent. And it must answer to the usury law it was hiding from.

Look through all three windows at once. When two or more show a loan, the costume slips off.

What happens when the costume slips

This is the part the merchant does not believe when he first hears it, so I will say it plainly.

If a New York court finds the agreement is a criminally usurious loan, over twenty-five percent, the agreement is not reduced. It is not renegotiated. It is void. The funder loses the principal, the interest, all of it. The number that arrived every morning like the sun, it stops, and what was taken under a void contract becomes a question the funder has to answer, not you.

In Crystal Springs Capital v. Big Thicket Coin, the Appellate Division looked at fixed daily debits of four thousand dollars, no real reconciliation, full recourse against the merchant in bankruptcy. The court called it a criminally usurious loan. The funder did not even dispute that the effective annual rate blew past twenty-five percent. The judgment against the merchant, vacated.

In MCA Servicing Co. v. Nic's Painting, a trial judge in 2024 refused to enforce the agreement and wrote that the court would not be used as a weapon to enforce what may be an illegal and unconscionable loan. Read that sentence again. That is not a footnote. That is the temperature of the room now.

And in the federal court for the Southern District of New York, Spig Industries v. Novac Equities, late 2025, the agreements were found to be loans, and unenforceable under New York usury law. The bankruptcy courts are doing the same thing, recharacterizing these agreements and clawing back payments as the cases pile up.

The confession that strangles

There is one more instrument you must understand, because it is the one that catches people before they ever see a judge: the confession of judgment.

You signed it at the start, probably without reading it. It says: if there is a default, the funder may walk into a county clerk's office and obtain a judgment against you, no lawsuit, no notice, no chance to argue. You confessed to the debt before the debt was ever disputed. You pleaded guilty to a crime that had not yet happened.

In 2019 New York closed part of this door. The confession of judgment can now only be entered against New York residents and New York entities. The out-of-state merchant being dragged into a Brooklyn courtroom can no longer be ambushed this way.

But hear me, the door is only part closed. Against a merchant who lives in New York, the confession of judgment is still a live blade. The funders still write them into the agreements. The clerks still accept the filings.

And yet, and this is the beautiful symmetry, the confession of judgment is a parasite. It has no life of its own. It only enforces the underlying obligation. So if the underlying obligation is a void usurious loan, the confession falls with it. You vacate it by attacking the thing it stands on. In the counties where these were filed by the hundreds, that is exactly what has been happening.

The day the ground moved

On January 22, 2025, the Attorney General of New York, Letitia James, announced a settlement against Yellowstone Capital and roughly twenty-five connected entities, over one billion dollars. One billion sixty-five million. The largest such enforcement action her office has obtained outside of a multistate matter.

Why does this matter to the tired merchant with the morning debit? Because Yellowstone was accused of exactly the thing the three windows were built to catch, ignoring reconciliation, structuring loans as purchases, charging rates that could not survive the light. When the state's largest funder is broken on this principle, every smaller funder feels the floor tilt beneath them. The presumption has flipped. The funder used to walk in protected. Now the funder walks in suspected.

The federal regulators arrived too. In March 2026 the FTC sent refund money, millions, directly to small businesses harmed in the Yellowstone matter. The first time it has ever returned money to commercial borrowers rather than consumers. A small thing in dollars. An enormous thing in meaning.

And there is now a disclosure law, the Commercial Finance Disclosure Law, in force since the summer of 2023, that forces funders on deals up to two and a half million dollars to state the things they spent years hiding: the amount financed, the finance charge, the annual percentage rate. The number they did not want you to see, in plain print, before you sign. Sunlight, made statutory.

So, what do you actually do

I will not tell you what your paper says. I have not read it. Generic advice is the cheapest thing in the world and worth exactly what it costs.

But I will tell you where to look. Find the reconciliation clause and read the verb. Find the term and ask whether there is a clock. Find the recourse and ask whether the funder ever truly stood to lose. Then take the morning debits, the actual amounts pulled from your actual account, and lay them against your actual sales. The gap between what the agreement promised and what the funder did is where the case lives.

These defenses are real now in a way they were not three years ago. But they do not assert themselves. A right that is not raised, precisely, by someone who knows the doctrine, is a right that does not exist. The funder is counting on your exhaustion. On your silence. On you continuing to believe the word at the top of the page.

Stop believing the word.

Look at the thing.

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.