MCA Debt in Bankruptcy: 6 Ways Courts Have Treated the "Purchase of Receivables"

No bankruptcy judge has treated the words "purchase of future receivables" as the end of the inquiry, and none has treated them as meaningless. The Code supplies no test of its own. As the Montana bankruptcy court wrote in Shoot the Moon, "Neither the Bankruptcy Code nor any other federal statute prescribes how to differentiate true sales from loans, which means bankruptcy courts must turn to state law."

What grew out of that sentence is a small body of decisions pointing in more than one direction, and an owner who reads only one of them will carry a distorted picture into every later conversation with a funder. Six treatments recur. A single case can contain three of them at once, and a funder can prevail on one while losing on the next.

1. A True Sale, Read From the Paper Itself

In November 2018 the bankruptcy court in Nebraska took an LG Funding agreement at its word. Applying New York law in the Cornerstone Tower preference action, the court found none of the recourse language that had turned an invoice purchase into a loan in an earlier Eighth Circuit case, read the clause declaring a sale, and held that the agreement "is properly classified as a sale rather than a loan." The merchant's own collection of the receivables changed nothing, because under New York law a seller who keeps servicing the accounts does not thereby take back the risk.

Three months earlier, the Illinois court trying Gecker v. LG Funding had leaned on New York decisions holding that obligations conditioned on the merchant's receipt of receivables are not loans. This is the funder's best body of bankruptcy authority, and it is real.

It is also the oldest.

2. A Loan, Once the Court Followed the Recourse

The Montana case reached the opposite result after a trial. Between October 2014 and September 2015 a group of restaurant companies signed eighteen agreements with CapCall, each accompanied by confessions of judgment, personal guaranties and UCC filings, and when the trustee challenged them the court held in September 2021 that "the transactions at issue are loans." The security interests were "significantly broader than those associated with a sale," and the parties' course of dealing, which had the merchants rebuying receivables only to resell them, was "deeply inconsistent with true sales of receivables." The court applied Montana usury law despite a New York choice of law clause. It also conceded, in a line funders rarely quote, that "the evidence is not entirely one-sided."

A contract can call itself a sale on every page and still leave the risk exactly where a lender would leave it.

In October 2025 a bankruptcy court in Orlando, weighing the familiar three factors (a finite term, a reconciliation clause, recourse on default or bankruptcy) under Florida law, treated them as "only a guide," gave the greatest weight to whether risk had moved at all, and found that an owner guaranty styled as a guaranty of performance, while securing payment in substance, meant each of the two agreements before it "reflects a loan transaction and not a sale" (a conclusion the funders had resisted by pointing to recitals that they bore the risk of the business declining or failing, recitals the court set against the guaranty and found wanting).

The state courts have not settled the matter for the bankruptcy courts, because they have not settled it for themselves. The Fourth Department in Bridge Funding (July 2025) held that one funder "established as a matter of law" a revenue purchase, since its reconciliation clauses lacked any "sole discretion" language; a concurring justice would have tested whether reconciliation worked in practice, and that test is not the court's. The First Department in February 2026 held that the Richmond Capital agreements, "although styled as MCAs, are properly characterized as loans subject to restrictions on usury," then vacated the money judgment and remanded. The Second Circuit's 2023 summary order in Fleetwood, which carries no precedential weight, pointed the same way as Richmond.

3. A Debt, Whichever Label Survives

The Illinois court in Gecker refused to call the LG agreements loans and still found something the funder had argued against. "While New York law does not define the Agreements as loans," the court wrote, "the transactions created a debt that Network Salon owed to LG Funding." LG had insisted it held a right to debit the account. The Code's definition of a claim, at 11 U.S.C. 101(5), reaches any "right to payment," whether "contingent," "disputed," "secured, or unsecured," and a debt is "liability on a claim."

The funder won that case, or, to be precise, it won every count while losing the threshold point that it was no creditor at all. The distinction matters more than the scoreboard. A funder with a claim is a funder inside the case: bound by the stay, subject to objection, and exposed to every avoidance rule the Code attaches to creditors.

4. Receivables That Never Left the Estate

The Nebraska court's finding of a true sale did not end its analysis. "Regardless of whether the transaction is a true sale or a loan arrangement," it wrote, LG's "failure to perfect its security interest means the debtor retained its rights and title to the accounts, so they are property of the bankruptcy estate." The funder had also never acted to pull any receivables out of the estate. It was listed in the confirmed plan as an unsecured creditor.

Receivables that do not yet exist are a difficult thing to have sold.

The Orlando court made that point in doctrinal form: "A hope of future receivables is not property" within the Article 9 provision the funders invoked, and the funders "neither own nor have a security interest in the Debtor's post-petition receivables." Section 552(a) keeps a prepetition security agreement from reaching property the estate acquires after filing, subject to the proceeds exception in 552(b). In Montana the postpetition card receipts CapCall claimed as its own went to the trustee. The pattern, if a pattern exists, is that the word sale protects a funder only as far as its own filings and conduct will carry it.

5. A Preference Defendant, Judged on Its Own Payment History

Where the payments sit inside the ninety days, the label argument becomes a defense to a clawback suit. In Gecker the trustee proved every preference element and lost anyway, because the salon had been taking merchant cash advances since January 2013 and the court found those transactions had become ordinary for it. In May 2025 the Southern District of New York went the other way on a record of deemed admissions, holding the Radium2 agreements to be loans and avoiding a single transfer of $1,470,102.02 that was "more than 100 times larger than the routine transfers required by their contract." That decision is unpublished.

6. A Debt the Company May Be Unable to Discharge

On April 6, 2022, Avion Funding gave GFS Industries $190,000 "in exchange for $299,800 of GFS's future receivables," and GFS represented that it did not anticipate a bankruptcy. It filed under Subchapter V two weeks later. Avion sued to have the debt declared nondischargeable as money obtained through a materially false written statement, and the bankruptcy court dismissed the complaint on the ground that the discharge exceptions of section 523(a) apply only to individuals.

The Fifth Circuit reversed in April 2024, holding that "in Subchapter V proceedings, both corporate and individual debtors are subject to the list of § 523(a) discharge exceptions" when a plan is confirmed without consent under section 1191(b). The court agreed with the Fourth Circuit (and acknowledged that several bankruptcy courts, and later a bankruptcy appellate panel in the Ninth Circuit, had read the statute the other way, which leaves the rule dependent on where a company files). Nothing in the opinion found that GFS lied. It decided only that a funder may ask.

What the Record Leaves for an Owner

These six treatments do not reduce to a forecast. They reduce to a list of documents a court will read: the agreement, the guaranty, the UCC filings, the daily debit history, and whatever the business told the funder before it signed. Delancey Street does not file bankruptcy cases and is not a law firm; it negotiates merchant cash advance debt outside of court, reads exactly those papers without charge and in confidence, and coordinates with independently licensed counsel when a legal question surfaces. A company whose position depends on avoiding a transfer, reclassifying a claim or confirming a plan over a funder's objection needs bankruptcy counsel, and Delancey Street will say so. Courts have been teaching funders for eight years that what a document calls itself and what it does are separate questions. Owners are entitled to learn the same lesson before they sign the next one.