MCA Defense Attorney: 7 Defenses Courts Have Actually Weighed

Most of what circulates about merchant cash advance defenses describes arguments. Fewer sources describe what judges did with them, and the difference matters, because a defense that has survived a motion to dismiss and a defense that has won at trial are not the same asset, however similar they sound in a consultation.

The seven below have each been weighed by a court or by the State in a reported proceeding. Several won. Several lost. The procedural posture of each ruling is part of the holding, and an MCA defense attorney reads it that way.

1. Recharacterization Survives the Pleadings When the Funder Kept the Discretion

In March 2020 the Appellate Division, Second Department, decided LG Funding, LLC v. United Senior Properties of Olathe. The funder had moved to dismiss the merchant's defenses and for summary judgment. The court asked whether repayment was "absolute or contingent," looking to reconciliation, the term, and recourse in bankruptcy, and it found the agreement troubling on each: the funder could adjust payments "at [its] sole discretion," a written admission of inability to pay, or a bankruptcy, was a default, and a bankruptcy obligated the merchant to deliver a confession of judgment.

The defenses survived and the funder's summary judgment motion failed. That is all LG decided. It did not hold the agreement a loan; it held that a factfinder could. The court also dismissed the merchant's counterclaim, because criminal usury may be asserted as a defense but not as the basis for a counterclaim.

2. The Same Test Has Produced a Win for the Funder as a Matter of Law

Five years later the Fourth Department applied the same three considerations in Bridge Funding Cap LLC v. SimonExpress Pizza and reached the opposite conclusion. That agreement contained two reconciliation provisions requiring adjustment on request, no finite term or payment schedule, and an acknowledgment that the funder bore the risk of slowdown, failure, or bankruptcy. The majority held it a revenue purchase agreement as a matter of law, and it noted that the reconciliation clauses were not illusory because they did not give the funder sole discretion.

Two justices concurred only in the result. In their view the three factors are "insufficient," the first two being "different sides of the same coin," and the question should turn on whether a valid reconciliation provision actually let the merchant reduce payments when revenue fell. Their test is not the law of the Fourth Department. It is a map of where the argument may go.

3. Criminal Usury Is a Defense a Corporation May Raise, and a Heavy One to Carry

New York bars corporations from pleading usury at all, with one exception. General Obligations Law 5-521(3) lifts the bar when the corporation "interposes a defense of criminal usury as described in section 190.40 of the penal law," which sets the line at 25 percent a year. In October 2021 the Court of Appeals decided in Adar Bays, LLC v. GeneSYS ID what follows when that defense succeeds: the loan is void, and neither principal nor interest can be collected.

The court was equally clear that it altered nothing about the borrower's burden, and that usurious intent is typically a question of fact. The dissent went further, invoking the older rule that usury must be established by clear evidence. The case concerned a convertible note, not an advance. Its consequence reaches an MCA only after the first question, loan or purchase, has been answered for the merchant.

4. A Reconciliation Clause That Never Operated Has Been Weighed Against the Funder

The most detailed treatment so far arrived in an enforcement proceeding rather than a private lawsuit. The New York Attorney General sued Richmond Capital Group and related parties under Executive Law 63(12), and in February 2026 the First Department, in People v. Richmond Capital Group LLC, held that the agreements, "although styled as MCAs, are properly characterized as loans subject to restrictions on usury."

The reasoning deserves attention because it moves from the text to the practice. The agreements did contain mandatory reconciliation provisions. The court found that "no reconciliation was performed in practice," that the daily payments were fixed and "did not represent a good faith estimate of receivables," that ad hoc requests were subject to the funder's "sole discretion" and were denied, and that nonpayment or an interruption of the business accelerated the balance and triggered personal guaranties. It found usurious intent clear as a matter of law, because the rates could be calculated from the face of the agreements once reconciliation was set aside.

The court affirmed findings of fraud as well, including misrepresentations "to courts in affidavits filed to obtain judgments," and held the agreements procedurally and substantively unconscionable, adding that it was "not dispositive" that many merchants were sophisticated and had used MCAs before.

Two limits belong beside the holding. The First Department vacated the monetary part of the judgment and remanded, because the State had made no attempt to exclude repayments of principal from its restitution figure. And the case was brought by the State on a record of those respondents' conduct (a private merchant defending a single collection suit starts without the testimony, the expert affidavits, or the adverse inference drawn from a principal's invocation of the Fifth Amendment that the State brought to that record, and must build the practice evidence alone, from bank statements and correspondence, one request at a time).

5. A Federal Appeals Court Has Weighed the Same Question, Briefly

The First Department cited, among its authorities, Fleetwood Services, LLC v. Richmond Capital Group LLC, a Second Circuit summary order of June 8, 2023 (No. 22-1885-cv), which affirmed a judgment for a merchant, including civil RICO damages, on the view that the agreement there was in substance a usurious loan. A summary order does not carry precedential weight in the Second Circuit.

It is evidence of direction, not a rule.

6. Confessed Judgments Have Been Attacked Through the Statute and Through the Affidavit

Since the 2019 amendment, CPLR 3218(b) restricts filing to a county of the defendant's residence, a company being resident wherever it has a place of business. Relief from an entered judgment runs through CPLR 5015(a), whose grounds include fraud or misconduct of an adverse party and lack of jurisdiction. The Attorney General's separate settlement with Yellowstone Capital, entered January 16, 2025, produced vacatur of the final batch of covered judgments on December 18, 2025, though that relief was confined to Yellowstone and its named subsidiaries, and it came by settlement rather than by a ruling on the merits.

7. The Funder's Own Proof Has Failed Often Enough to Count as a Defense

Bridge, which the funder won on characterization, ended in reversal anyway. The manager's affidavit and the verified complaint stated different damages, nothing explained the gap, and the court held that the motion should have been denied "regardless of the sufficiency of defendants' opposing papers." A Kings County court in 2024 denied summary judgment to a funder doing business as Arsenal Funding despite no opposition, because the proof of the funder's own performance conflicted.

These are not glamorous defenses. They are the ones that require the least from the merchant and the most from the funder, which is the order in which a careful lawyer tends to raise them, though there are cases where the order should be reversed, for reasons that depend on the forum.

Whether the courts will eventually settle on the two-justice test from Bridge, or on the practice-based reading from Richmond, or on something neither panel proposed, is a question the reported decisions leave open.

Where a Negotiator Stops

None of the defenses above can be raised by Delancey Street, which is a settlement company and not a law firm. What it provides is a no-cost, confidential assessment of the agreements and payment history for settlement purposes, coordinated where needed with attorneys licensed on their own. A business already in litigation needs a defense attorney, and some businesses with strong characterization facts may reasonably prefer to litigate rather than negotiate. A business that is not yet sued may find the settlement route worth weighing first, knowing that no funder is obliged to accept it.