MCA Defense Attorney: 7 Defenses Courts Have Actually Weighed

If you get sued by a merchant cash advance funding company, the worst thing you can do is ignore the papers. Several defenses to these lawsuits have been raised in court - that the advance is a loan, that it involves criminal usury, that the funder didn’t reconcile, that the confession of judgment was defective, that the service was defective, and that fraud occurred - but none of these are automatic or easy to win. Trying them alone can be a mistake. Ignoring the papers almost always will be.

Defenses and Counterclaims

The MCA is sold as an advance against your business’s future receivables. In New York’s appellate division, Second Department, LG Funding v. United Senior Properties of Olathe (2020) came up with a three-part test:

• whether the funder reconciles;
• whether it runs for a fixed term; and
• whether the merchant remains responsible if the merchant goes bankrupt.

Courts have decided these cases individually, so results are somewhat uncertain.

In LG Funding, the court agreed that the merchant had a right to argue that the funder was making a loan and was usurious. The funder’s agreement’s reconciliation was left to the funder’s discretion, and the agreement had a default on bankruptcy. The court in that case did not decide the usury claim; it simply said that the case could go to trial because there were facts in issue.

Labels matter because while a corporation cannot raise civil usury (GOL 5-521), a corporation can raise criminal usury. NY Penal Law 190.40 makes it a felony to lend money at a rate higher than 25% per year. The reason why this point matters is that in Adar Bays v. GeneSYS ID (2021), New York’s highest court said that if the agreement is criminal usury, the whole thing is void, and the lender can’t collect anything. Not every MCA is a loan, and this point is not automatic, but you can’t raise it if you don’t respond to the summons.

It has worked. The Second Department vacated a default judgment against the merchants in Crystal Springs Capital v. Big Thicket, finding that the daily automatic debits of $4,000; the agreement’s failure to require the lender to reconcile; and its full repayment requirement upon bankruptcy showed that the agreement was a criminally usurious loan.

One of the more interesting arguments has been that the funder defaulted because it ignored the agreement’s reconciliation clause. The same conduct (fixed daily amounts regardless of revenue) points to the MCA’s being a loan. In January 2025, New York’s Attorney General got a $1.065 billion judgment against Yellowstone Capital over allegedly disguising loans as MCAs.

The next argument questions the confession of judgment. New York law since 2019 bars filing them against non-New York residents. It must be filed in the county where the defendant resided at the time of the agreement or at filing. If defendant is a business, it must be where it has a place of business. It must be filed within three years of the affidavit. Texas’ Finance Code 398.055, since September 1, 2025, voids COJ clauses in covered commercial sales-based financing transactions. Elsewhere, a lawyer will check the affidavit, compliance with any statute, and amount claimed. Procedural defects and calculation errors are often the fastest way to a defense.

Next, there are procedural defects in the lawsuit. If the summons and complaint were improperly served, or the plaintiff’s affidavit of service in the case file doesn’t match the papers you received, that can be grounds to get a default vacated or the case dismissed. Getting rid of a judgment is much harder than getting rid of the original claim.

The contract may say that New York courts will decide disputes even if your business is in Florida, Texas, or California. Usually, that is enforced, but not always. A challenge creates leverage.

Funders’ contracts often set disputes for arbitration with a named company. Once the arbitrator delivers an award, the funder goes back to court to have it turned into a judgment. You should challenge the arbitration clause itself. In New York, you get 90 days after the award is delivered to move to vacate it. On June 8, 2026, New York’s Attorney General sued arbitration service Rapid Ruling. The suit alleged that 97% of about 3,000 arbitrations went ahead without the small business appearing, and MCA companies won almost all.

The last defense is that the funder or the broker had committed fraud. If a funder knew that your business was already so overextended that you couldn’t afford this new advance, that could raise defenses and counterclaims. Raising it is complicated, and you should have a lawyer before claiming it.

By contrast, sovereign citizen or pseudo-legal arguments fail. Copy-and-paste form letters that people can find online have no legal weight. If you tell a bank that authorized automatic debits were unauthorized and block them, that backfires, because you risk new liability for damages. Creating new entities to keep the cash that would normally be taken by a judgment may expose you to fraudulent transfer claims.

Settling the Matter or Filing Bankruptcy

Sometimes the defenses discussed earlier may not apply. In that case, settling the matter or filing bankruptcy may be better options. Many disputes are resolved through negotiation, with a reduced payoff, restructured terms, or a lien release. An automatic stay in a bankruptcy case normally halts collection efforts, but a business bankruptcy doesn’t automatically resolve a personal guaranty.

Have a Lawyer Review Your Papers

If you’re having trouble repaying a merchant cash advance, pull together

• your original agreement and any amendments;
• the ACH authorization form;
• your last 90 days of bank statements; and
• any letters you’ve received from the funder, its lawyers or brokers.

Don’t sign new advances, amendments, or settlements without a lawyer. Check the papers for confession of judgment or an arbitration clause. Save all emails, texts, and voicemails.

Not every lawyer handles this kind of litigation. Ask how much of their practice it is, where they’ve appeared, and whether they’ve contested confessions of judgment or arbitration awards. Get the fee in writing, and be sure they can act fast if a bank restraint order comes through. Have a lawyer review your papers before any deadline passes.