MCA Fraud Allegations in Bankruptcy: 5 Questions About Section 523

Claim of Fraud

Creditor claims of fraud can put your bankruptcy discharge at risk. But only if the funder files a legal action (adversary proceeding) in the bankruptcy court on time and proves fraud by presenting supporting evidence. The MCA funder’s lawsuit is called a complaint to determine dischargeability. An accusation of fraud, alone, is insufficient to exempt an MCA debt from discharge. The bankruptcy judge will make the determination.

The funder still has to carry the ball down the field, by proving up the details necessary to make a real-world case for nondischargeability. That means the creditor must prove you obtained money or assets through false pretenses, false promises, or misrepresentations that were fraudulent when you made them. The MCA funding company who alleges fraud must prove, by preponderance of evidence that you knowingly made fraudulent, false statements, with the intention of deceiving. And the company must prove that you obtained funds via the fraudulent representations (of inaccurate or false information).

Even if an MCA customer did break a promise to repay, that may not be fraud. In 2013, a Texas bankruptcy court considered an adversary proceeding to prevent discharge of a debt under Bankruptcy Code section 523(a)(2)(A). The court ruled that merely breaking a promise to repay did not show by itself that the debtor never meant to repay when the promise was made. And in the 1991 case of Grogan v. Garner, the Supreme Court said only preponderance of evidence was needed to prove a claim of fraud - not clear and convincing evidence.

Generally speaking, statements about your financial condition do not prevent the dischargeability of a debt. An MCA debt may be nondischargeable under section 523(a)(2)(B) only if four elements are met. First, the debtor must have made a statement in writing. Second, the statement must have been materially false. Third, the funder must have reasonably relied on the statement. And fourth, the debtor must have intended to deceive the funder. When only part of a written statement is false, only the debt that is connected to the false portion will survive a bankruptcy. If a renewal or refinancing is involved, the funder may only be able to claim as nondischargeable the difference between what you originally owed and the new, bigger amount.

In Lamar, Archer & Cofrin, LLP v. Appling, the Supreme Court held that a statement about a single asset can be considered to be a statement about the debtor’s financial condition. If that statement was never put in writing, the debt can be discharged even if false.

Another way that your MCA provider may attempt to bar you from discharging the debt is by showing that you “willfully and maliciously” injured the creditor. Willful means deliberate or intentional. In Kawaauhau v. Geiger (1998), the Supreme Court ruled that “willful” requires a deliberate or intentional injury, not just an intentional act that leads to an injury. So negligence and recklessness count as “nonwillful,” meaning that a debt for reckless harm to property or people can be discharged.

Challenge the Discharge of the Debt

The creditor who wants to challenge the discharge of the debt has to do it by a certain deadline. Rule 4007(c) of the Federal Rules of Bankruptcy Procedure requires that the creditor must file the lawsuit within 60 days of the first date set for your meeting of creditors. This meeting is sometimes called a 341 hearing. The bankruptcy court can extend the time limit only after a motion (formal request) filed before the 60 days run out. If the creditor misses this deadline, it is stuck. In that case the funds advanced to you via the MCA will be discharged. The three grounds for challenging discharge that are subject to a hard deadline are: fraud (a)(2), fiduciary fraud/embezzlement (a)(4), and willful and malicious injury (a)(6). The bankruptcy court rules on the dischargeability of the debt only after a full hearing where both sides have the chance to present their evidence.

The rules are different between Chapters 7 and 13. In Chapter 7, debts from fraud and misrepresentation (523(a)(2)(A)) and willful and malicious injury (523(a)(6)) can both survive discharge if proven. But in a full-payment Chapter 13, only debts from fraud are (11 USC 1328(a)(2)). In Avion Funding v. GFS Industries (2024), the U.S. Fifth Circuit Court of Appeals held that a business debtor who files under Subchapter V of Chapter 11 can cram down a repayment plan over the objection of creditors but can still face Section 523(a) fraud claims. Avion had made an MCA advance of $190,000 to GFS only two weeks before the bankruptcy filing.

In Bartenwerfer v. Buckley (2023), the Supreme Court said that a debtor whose business partner got money by fraud couldn’t discharge the debt, because the debtor was personally liable for it, even without taking part in the fraud.

Include each and every MCA account in the list of creditors for your bankruptcy. A debt that you left out can keep you on the hook for repayment if the creditor never knew about the case and had no chance to protect its interests.

In section 523(d), the debtor in consumer bankruptcy gets costs and legal fees from creditors who fail to block discharge of their debt and did not have substantially justified reasons for thinking that they would succeed. This is supposed to discourage creditors from using lawsuits to push honest debtors to settle just to avoid legal fees. Be aware that the legal fee award is for consumer debts only.

Review the Creditor’s Claims with a Lawyer

What you should do depends on how likely the company is to file a complaint and win. If you are sued by an MCA funder in a bankruptcy dischargeability adversary proceeding, it is important to review the creditor’s claims with a lawyer. An attorney can help you assess the legal basis for your MCA funding debt. They can help you determine the most effective strategy in the bankruptcy process and whether the creditor has the necessary proof to prevent discharge.

Even so, you have to take the matter seriously.