Preference Actions Against MCA Funders: 5 Rules for Recovering 90 Days of Debits

The debits a funder collected in the ninety days before a petition are, on paper, the easiest money in a failed business to recover, and in court they are among the most contested. Whether a trustee gets them back depends less on the calendar than on who sues, what the funder says it bought, and how each withdrawal compares with the ones before it.

What follows is written from the plaintiff's chair: the trustee, the debtor in possession or the committee standing in its place. The rules are drawn from the statute and from the handful of written decisions in which merchant cash advance preferences were actually tried or decided on the record.

1. The Claim Belongs to the Estate, and Diligence Precedes the Complaint

A business owner cannot sue a funder to recover preferences in the owner's own name. The power sits with the trustee, and in chapter 11 with the debtor in possession under section 1107(a). The reported cases show the range of plaintiffs: a chapter 7 trustee in Illinois and another in the Southern District of New York, a chapter 11 trustee who became trustee of a liquidating trust in Montana, and an official committee of unsecured creditors suing in Nebraska "in its capacity as assignee of Debtor in Possession."

Before filing, the plaintiff has a statutory homework assignment. Section 547(b) allows avoidance "based on reasonable due diligence in the circumstances of the case and taking into account a party's known or reasonably knowable affirmative defenses." That language arrived with the Small Business Reorganization Act of 2019; the Montana court noted it "was not effective until after the relevant time period" in its case. A complaint filed today should show the funder's likely defenses were weighed before the summons issued. The trustee then carries the burden on the elements of 547(b), and under 547(g) the funder carries the burden on any defense in 547(c).

2. The Funder Will Say It Owned the Money, and the Definitions Answer

A funder's first move is usually to deny that it was a creditor at all: it bought receivables, so the debits paid for property that was already its own. In Gecker v. LG Funding, decided in Illinois in 2018, LG raised exactly that threshold argument. The court held that even though New York law did not treat the agreements as loans, "the transactions created a debt that Network Salon owed to LG Funding," because LG insisted on a right to debit the account and the Code defines a claim as any "right to payment."

A funder that says it bought the receivables is also saying it had a right to be paid them. The Code has a word for that right.

The property element yields to the same pressure. The Montana court in Shoot the Moon adopted the Supreme Court's formulation that "property of the debtor" for preference purposes is "that property that would have been part of the estate had it not been transferred," and it brushed aside an anti-assignment clause, since a preference claim is not a right "arising under or pursuant to" the agreement. In Nebraska, a funder that won the sale argument still lost the property point, because it had never perfected and the accounts stayed in the estate. And in the Southern District of New York in 2025, once the court found the Radium2 agreements to be loans, the transfers were made on account of an antecedent debt as a matter of course.

3. Ordinary Course Is Proved Transfer by Transfer, and the Funder Must Prove It

Section 547(c)(2) protects a transfer "in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee," if the transfer itself was made in that ordinary course or "according to ordinary business terms." Two tests, not one. Funders lose when they forget the second.

The clearest loss is O'Toole v. Radium2 Capital, an unpublished May 2025 decision from the Southern District of New York. Radium2 argued that because the agreements were ordinary, the repayments were too. The court called that an error of law: the defendant must show the agreement was ordinary "and" that each challenged transfer was, and "proof of the first element does not prove either of the latter two alternative elements." The facts did the rest. One transfer of $1,470,102.02 was "more than 100 times larger than the routine transfers required by their contract"; a second agreement called for daily payments of $107,142.86 and produced a single payment of $750,002.50; an affiliate made five payments of $400 before a transfer of $850,000. Radium2 offered nothing on industry terms, and its unanswered requests for admission conceded the rest.

The funder's clearest win came on the opposite record. In Gecker, the trustee proved every element of a preference and still lost, because the salon had been taking merchant cash advances from various companies since January 2013, "nearly two years" before signing with LG, and the LG agreements were then performed "in large part, according to their terms over the span of a few months." The court borrowed the Seventh Circuit's rule that ordinary course "may be established by the terms of the parties' agreement, until that agreement is somehow or other modified by actual performance." It noted that fraud would have disqualified the defense. There was none.

Between those poles sits the Nebraska court, which refused summary judgment for either side in 2018 because the agreement had been signed about two and a half months before the petition and the question required "a peculiarly factual analysis." It also observed that "Even first-time transactions can qualify." The lesson for a plaintiff drifts somewhere unexpected here. A steady daily debit that matched the contract for months is the funder's best exhibit, and the plaintiff's best exhibit is usually whatever the funder did when the steady debits stopped working (the sweep, the lump sum, the renewal that paid off the old balance), which is to say the funder's own collection pressure near the end is what breaks its defense, or, more exactly, what the plaintiff must find in the bank records to break it.

4. Small Transfers Have a Floor, and Small Suits Have a Home

Since April 1, 2025, section 547(c)(9) bars avoidance in a case filed by a debtor whose debts are not primarily consumer debts if "the aggregate value of all property that constitutes or is affected by such transfer is less than" $8,575. Whether a string of daily debits is measured one withdrawal at a time or together is a question that matters a great deal to a merchant cash advance case, though the answer belongs to counsel reading the local decisions.

Venue is the other small rule. Under 28 U.S.C. 1409(b), a trustee's suit to recover "a debt (excluding a consumer debt) against a noninsider of less than" $31,425 may be brought only in the district where the defendant resides. Hypothetically, a funder that took $400 a day for sixty business days received $24,000, and a suit for that amount goes to the funder's home district.

5. The Judgment Runs Against the Funder, and Its Claim Waits

Once a transfer is avoided, section 550(a) lets the trustee recover it from "the initial transferee" or the entity for whose benefit it was made. In Montana the trustee avoided $1,129,071 in transfers to CapCall, subject to a reduction so the estate would not recover the same dollars twice through its usury judgment. The court then held CapCall's proof of claim "presently disallowed" under section 502(d) until it paid, with leave to file an amended claim within 30 days after satisfying the judgment. In the New York case, all three of Radium2's claims were disallowed on the same basis. In Illinois the point never arose; LG had filed no claim to disallow.

The recovered money belongs to the estate and is distributed through the case. The check is made out to the trustee.

Where Settlement Ends and the Statute Begins

A lump sum paid to settle with one funder in the months before a filing is itself a transfer, and the same statute that reaches the funder's debits can reach it. Delancey Street, a negotiator of merchant cash advance debt outside of court and not a law firm, does not bring or defend avoidance actions, and when bankruptcy is a live possibility the timing of any settlement payment should be reviewed by bankruptcy counsel first. Its free and confidential review of the agreements, the UCC filings and the debit history can show whether a negotiated resolution or a filing better serves the business, and Delancey Street coordinates with independently licensed attorneys when the answer is a filing. Preference law was written to keep the last creditor through the door from leaving with everything. The daily debit was designed, in a sense, to make every creditor the last one.