Dischargeability Complaints Against Owners: 5 Allegations Funders Actually File

The complaints funders file against owners resemble one another more closely than the contracts that produced them. A funder whose merchant cash advance has gone unpaid, and whose guarantor has filed a personal case, has a short menu under section 523 and a deadline of sixty days after the first date set for the meeting of creditors, and the public examples of those pleadings return to the same five accusations.

Two public documents show the pattern better than any summary. The Western District of Virginia posted, with its 2025 bankruptcy seminar materials, a redacted nondischargeability complaint filed by an MCA servicer against an owner in chapter 13, and the Fifth Circuit's 2024 opinion in Avion Funding v. GFS Industries describes a funder's complaint against the business itself. Neither document proves anything about the owners involved. Allegations are what they record.

1. "You Told Us There Were No Other Advances"

The stacking allegation came first in the Virginia complaint. In the Virginia filing, the application asked whether the business had "any open MCA or loan accts," the owner listed two, and on a recorded funding call he disclosed one. The business's own chapter 11 schedule of secured creditors, filed later, showed balances with at least three other merchant cash advance companies and at least five creditors holding blanket liens. The complaint set out those schedules beside the application and asked the court to treat the difference as fraud.

The funder pleaded the same facts twice, once under section 523(a)(2)(A) and once under (a)(2)(B), and the reason is structural. Paragraph (A) covers false pretenses, false representations and actual fraud "other than a statement respecting the debtor's or an insider's financial condition." Paragraph (B) covers exactly those statements, but only when they are in writing and only when the creditor "reasonably relied."

A statement about what else a business owes is, on a fair reading of Lamar, Archer & Cofrin, LLP v. Appling (2018), a statement respecting financial condition; the Supreme Court held there that even a statement about a single asset qualifies. If that reading holds, the recorded call carries less weight than a funder would like, because an oral statement about financial condition falls outside both paragraphs, and the written application becomes the whole case. The application, then, is where the argument lives, and it is also where the owner's own signature sits, beside a question the owner may have answered in haste, from memory, at the end of a long week, which is an explanation and not, by itself, a defense.

Reliance is the other contest. A funder that pulled the business's bank statements, or ran a lien search that would have shown the blanket filings, must still show that its reliance on the application was reasonable, and the owner's counsel will want the underwriting file to find out what the funder already knew.

2. "The Bank Statements Did Not Show the Business as It Was"

The second allegation treats the documents behind the application as the false statement. The Virginia agreement had the merchant represent that its bank and financial statements "fairly represent the financial condition of Merchant," and the complaint alleged that the documents "did not accurately reflect" that condition. Under (a)(2)(B) the funder must show material falsity, reasonable reliance and an intent to deceive, all by a preponderance of the evidence.

But a statement that was accurate on the day it was printed does not become false because revenue fell afterward. The dates on the statements, and the date they were sent, decide more of this allegation than the adjectives in the complaint.

3. "You Never Meant to Perform"

The third allegation concerns intent at signing. GFS Industries represented to Avion Funding that it did not anticipate filing for bankruptcy; it received $190,000 in exchange for $299,800 of future receivables and filed chapter 11 two weeks later. Avion's complaint alleged that the financing was obtained by misrepresenting that intention. The bankruptcy court dismissed it on the ground that section 523(a) reached only individuals, and the Fifth Circuit reversed, holding that corporate Subchapter V debtors are also subject to the list. The appellate court decided who can be sued under the paragraph. It did not decide that GFS had lied.

The Virginia complaint made a similar charge by another route: that the owner "did not intend to perform," that the business changed its approved deposit account after the first debit, and that later debits came back because "the bank account had been closed." Justifiable reliance, the standard Field v. Mans set for paragraph (A), is easier for a funder to meet than reasonable reliance. Proof of what an owner intended on a particular afternoon is harder, and a court asked to find it will look at what the owner did next, which is why the timing of the account change matters more than the owner's recollection of why it happened.

4. "The Receivables Were Ours, and You Spent Them"

The fourth allegation borrows the vocabulary of theft. The Virginia complaint invoked section 523(a)(4), alleging that the owner misappropriated the advance or the purchased receivables "as an owner, shareholder, officer and / or director." The Virginia seminar materials summarize a 2023 Northern District of Illinois decision, In re Daddosio, finding a debt nondischargeable under both (a)(4) and (a)(6) where the debtor sold assets covered by an MCA company's blanket lien and kept the proceeds.

The mental-state requirements are demanding, if we are being precise about what the Supreme Court has required. Bullock v. BankChampaign demands knowledge or gross recklessness for defalcation, and Kawaauhau v. Geiger demands a deliberate injury for (a)(6), not merely a deliberate act that caused one. The theft theory rests on the funder's own description of the advance as a purchase of receivables (a description New York courts test agreement by agreement, looking at reconciliation, term and recourse rather than at the label), and the owner's lawyer will test it before conceding that anything belonged to the funder at all.

5. "You Drained the Company Before It Failed"

The fifth allegation needs no misstatement at all. In Husky International Electronics v. Ritz (2016), a director and part owner moved money from an indebted company to other entities he controlled, and the Supreme Court held that "actual fraud" in paragraph (A) reaches fraudulent conveyance schemes "even when those schemes do not involve a false representation." A funder that can trace transfers from the merchant to an owner's affiliate has a theory that does not depend on the application.

The theory does depend on personal liability existing in the first place. In Husky that liability came from state law; for most MCA owners it comes from the guaranty.

What an Owner Can Do With a Complaint in Hand

The fee-shifting rule in section 523(d), which lets a debtor recover costs from a creditor whose position "was not substantially justified," applies only to consumer debts and gives a business guarantor nothing. Defense costs are the owner's own. Delancey Street, a debt settlement company and not a law firm, does not defend adversary proceedings; once a complaint is on file, the owner needs bankruptcy counsel, and any settlement of that complaint runs through the case. Before a filing, or where an owner is still weighing one, Delancey Street offers a free, confidential review of the merchant cash advance contracts, bank activity and UCC filings that these complaints are built from.

The application sits in the funder's file, signed and dated. So, often, does the recording.