New York MCA Laws and Borrower Rights: 6 Distinctions That Matter

Let’s say you’re a merchant getting sued by a funder. Your goal is to avoid litigation altogether, but since that’s unlikely, you want the playing field to be as level as possible. Six distinctions determine what rights you have:

• Was it a sale or a loan?
• Are you dealing with criminal or civil usury?
• Was it a defense or a counterclaim?
• If the lender got a confession of judgment, where can it be filed?
• Are they arguing disclosure laws here don’t apply?
• Are you defending the case, or letting it slide into default?

New York Law and Courts

One of the surprising side effects of MCA contracts is that the funders put New York law and courts into the middle of transactions that have no connection to New York at all. Thanks to your agreements with the lender, they can choose to sue you in New York, even if your business is in Texas or Florida, and frequently the case ends up in Kings or Nassau County Supreme Court. Often the suit not only names the business but every owner who has signed a personal guarantee, as well. That way, they have the option of collecting not merely against the business, but the business owner personally too.

The first distinction is sale or loan: an MCA is supposed to buy future receivables, not lend you money. But if it turns out to be a loan, your New York usury laws can apply, depending on how big the loan is. Courts consider three factors in judging whether it’s an MCA or a loan:

• whether there’s a true reconciliation process to deal with inconsistencies in what a merchant delivered versus the estimate;
• whether the deal is for a finite term or a perpetuity;
• and what recourse the funder has if the merchant goes bankrupt.

If usury does come into play, the next question is whether it’s civil usury - lending money above 16% annual interest - or criminal usury, lending knowingly at over 25%. Criminal usury is a Class E felony. One big surprise in usury law is that often a corporation can’t claim usury. A business can raise criminal usury, however: if the loan charged over 25 percent in annualized interest, the company can claim usury as a defense.

That’s why criminal usury matters. Adar Bays changed the legal landscape in 2021. The state’s highest court, the Court of Appeals, held that a corporation could raise criminal usury as a defense to a collection action and that a criminally usurious loan is void from the beginning. Note that loans of $2.5 million or more are exempt from all usury limits.

The third distinction is between a defense and a counterclaim: in LG Funding v. United Senior Properties (2020) the Appellate Division said a business may raise criminal usury as an affirmative defense but not as a counterclaim. If the funder sues you, that’s an action. If you then respond with defenses, pleading your case for why they shouldn’t win, that’s a response to what the other side has done. But if you want damages back, that’s counterclaim.

Fourth, often MCAs make merchants agree ahead of time that, if they default, the lender can file a confession of judgment. What counts in an MCA lawsuit is CPLR 3218(b), which says a confession of judgment can only be filed in a county where the party being sued resided when they signed the agreement or resides when the confession is filed. A business “resides” wherever it has a place of business. Generally, if there’s no place of business in New York it can’t be filed here. And CPLR 3218(b) limits a confession to being filed within three years of when it was signed.

Fifth, New York’s Commercial Finance Disclosure Law treats MCAs as sales-based financing. Since August 1, 2023, a specific offer has to show you the total financing amount, the finance charge, the estimated APR, the total repayment, the estimated term, your payments, any fees, any prepayment terms, and any collateral. Not every commercial lender comes under the disclosure law. It doesn’t apply to a single deal above $2.5 million; or to providers who originate no more than five deals in New York in the previous twelve months. If a funder does fall under the law and fails to make the required disclosures, they can get hit with a fine of up to $2,000 per violation and, if it’s willful, up to $10,000; the superintendent can also order restitution.

Answering Versus Default

The sixth distinction is answering versus default. The rule is usually that you have either 20 or 30 days depending on how you’re served, and generally thirty if it’s outside New York. If a lawsuit names a business and a guarantor and nobody responds, the funder can try for a default judgment against the business and the guarantors. The guarantee itself spells out how far your exposure goes. What the business can say about the funder can matter for you too.

Where you win or lose is often in the small-print procedural requirements under the agreements. Did a default happen as defined? Did the company follow reconciliation requirements? You can challenge whether fees were counted twice; and you can fight whether the funder sent proper notices to your customers or payment processors, along with the timing of those notices.

Many cases end up in a negotiated resolution. Nobody here can promise you what the terms will be; it will depend on your defenses and how strong they are. The difference between a business that responds, gets its defenses into the record and negotiates while litigation is active, versus a business that doesn’t answer on time and faces a default, is vast.