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Strategic Considerations
The merchant who telephones on a Monday has already lost a week. That is the observable pattern.
In cases where a funder has filed a confession of judgment or commenced daily ACH withdrawals against a disputed balance, the first strategic error is not the decision to contest the obligation. It is the interval between recognizing the problem and engaging counsel who can alter the procedural posture before it calcifies. Every day in which the funder’s position remains unchallenged is a day in which the merchant’s options contract, and some of those options, once lost, do not return.
MCA defense is not a single legal argument. It is a sequence of decisions, each one foreclosing or preserving alternatives that the merchant may not yet realize exist. The reconciliation clause, the recharacterization theory, the confession of judgment challenge, the UCC lien dispute, the potential bankruptcy filing: these are not independent strategies selected from a catalogue. They are interdependent moves whose effectiveness depends on when each is deployed relative to the others. What defenses exist is a question of legal analysis. When and in what order to deploy them is a question of professional judgment shaped by observing which sequences produce which outcomes. Those two inquiries occupy different territory, though they are often collapsed into one.
The Three Factor Test
New York courts apply a three factor test to determine whether a merchant cash advance constitutes a purchase of future receivables or a disguised loan subject to the state’s usury statutes. The test, articulated in LG Funding, LLC v. United Senior Properties of Olathe, LLC and adopted by the Second Circuit in Fleetwood Services, LLC v. Ram Capital Funding, LLC, examines three elements: whether a genuine reconciliation provision exists, whether the agreement imposes a finite repayment term, and whether the funder retains recourse against the merchant upon insolvency.
The test appears straightforward.
Its application, across the cases that reach our office, is where the complexity resides. The reconciliation provision is the element on which most agreements falter, though the failure is not always visible from the contract itself. A reconciliation clause on the page and a reconciliation mechanism in practice are, if we are being precise, not the same instrument. The provision typically permits the merchant to request an adjustment to daily payment amounts when revenue declines. In the agreements we review, the clause exists. The mechanism for invoking it is either absent, obstructed, or designed in a manner that renders the right illusory. The funder’s daily debit remains fixed. The merchant’s request for adjustment goes unanswered. In three cases this year alone, the funders we encountered did not respond to reconciliation requests at all.
Courts have examined this gap with increasing attention. In the Yellowstone Capital enforcement action, the New York Attorney General’s office established that reconciliation clauses in the agreements at issue had never been honored. The settlement, announced in January 2025, cancelled outstanding merchant obligations across more than eighteen thousand accounts and permanently barred the principals from the industry. Justice Borrok, in the related People v. Richmond Capital Group proceedings, observed that MCA funders invoking reconciliation clauses either conceded that mandatory reconciliation had never occurred or invoked the Fifth Amendment. The provision appears; the mechanism does not function.
The second element is easier to assess from the document. If the contract specifies a date by which the purchased amount must be returned, or if the daily payment amount and purchased total produce a calculable repayment period, the agreement begins to resemble a loan with a maturity date. The third element turns on whether the funder can pursue the merchant or a personal guarantor even after the business has ceased to generate the receivables the funder purportedly purchased. Personal guarantees, confessions of judgment, and UCC liens that survive the merchant’s closure all indicate recourse inconsistent with a genuine receivables purchase.
When all three factors point toward recharacterization and the effective annual rate exceeds twenty five percent, the transaction violates New York’s criminal usury statute. The agreement is void. Not voidable. Void. A void agreement cannot be ratified, cannot be cured by subsequent performance, and cannot serve as the foundation for a confession of judgment or any other enforcement mechanism. Whether that distinction matters in your case depends on the specific conduct of the funder, not on the contract alone.
Confession of Judgment Defenses
The confession of judgment is the instrument that converts a contractual dispute into a crisis of liquidity. Before the merchant has retained counsel, before the first motion has been drafted, the funder files a pre-signed affidavit with the county clerk and obtains a judgment that restrains bank accounts, attaches liens to property, and initiates garnishment proceedings, all of which accumulate consequences the way a stone accumulates moss in a season no one observes. The merchant discovers the judgment when the account balance reads zero on a Tuesday morning.
CPLR Section 3218 imposes formal requirements on the confession. The affidavit must bear the defendant’s notarized signature. It must identify the county of the defendant’s residence at the time of execution or filing. It must be filed within three years of execution. These are requirements that a careful origination process would satisfy without difficulty, but MCA agreements are produced at volume and originated at speed, and the templates that generate documents do not always account for the specifics of the individual transaction.
I have yet to encounter a confession of judgment filing that could not be improved by the funder’s own counsel. That is not a compliment.
In Porges v. Kleinman, the Kings County Commercial Division held a confession unenforceable because the affidavit failed to identify the signatory’s residence as the statute requires. The defect was formal and the consequence was complete. In Capitalize Group LLC v. Empire Core Group LLC, decided in September 2025 in the Westchester County Commercial Division, the court established that vacatur of a confession requires a plenary action rather than a simple motion. That procedural holding matters: the merchant must commence a separate proceeding, which imposes cost but also confers the full evidentiary machinery of litigation.
The procedural challenge is one layer. Where the underlying agreement is void as usurious, the confession of judgment entered upon that agreement possesses no legal foundation. A confession derives its authority from the obligation it purports to enforce. A void obligation confers no authority.
There is a particular urgency to the vacatur motion that is worth understanding from the merchant’s perspective. The business owner whose accounts have been frozen does not perceive the legal question as one of contract interpretation. The question, from inside the experience, is whether payroll can be met on Friday, whether the vendor who supplies inventory will extend another week of credit, whether the doors will remain open (and the owner who calls us at that stage has usually already attempted to resolve the situation alone, which is the second most common error we observe, after the delay in calling at all). The strategic task is to obtain emergency relief while simultaneously preserving the substantive defenses that will determine the case’s outcome over months rather than days. Those two objectives can conflict. The motion itself runs to something like twenty pages, most of them procedural.
What the Contract Does Not Disclose
The agreement that arrives for signature is, in most instances, between twelve and eighteen pages. The merchant reads, at most, the first page and the signature page.
The terms reveal themselves in stages, most of them after the signature. The reconciliation clause does not explain how to invoke it. The personal guarantee does not clarify the conditions under which it activates. The confession of judgment does not describe what it permitted the funder to do before the merchant receives any notice that a filing has occurred. The UCC financing statement, which the merchant may not realize was filed at all, does not explain that it creates a public lien visible on every credit inquiry for years.
Most MCA funders know what these omissions accomplish. They prefer not to examine the architecture too closely. The contract is a document; the relationship between funder and merchant is a series of actions that can diverge from the document in ways that alter the legal character of the entire arrangement. That architecture is worth understanding before one signs, and worth examining closely after.
Timing and Sequencing
In the cases transferred to this firm from prior counsel during the first nine months of this year, the single most frequent error was not a failure of legal analysis. It was a failure of sequencing.
The legal theories were appropriate. The procedural strategy was not. A usury defense is most effective when it is deployed after the funder’s procedural defects have been identified and preserved. If the confession of judgment contains a formal deficiency, whether an incorrect county designation, a missing residency identification, or a filing outside the statutory window, that deficiency should be challenged first. A vacated judgment on procedural grounds removes the immediate threat to the merchant’s accounts and assets without requiring the court to reach the substantive question of recharacterization. The substantive question can then be litigated from a position of restored cash flow rather than from a position of crisis.
The reverse sequence is not incorrect. But it is slower. Recharacterization requires evidence that the reconciliation clause was not honored, that the effective rate exceeded the statutory threshold, and that the funder retained recourse inconsistent with a genuine purchase of receivables. That evidentiary burden takes time. The procedural challenge, by contrast, can often be assessed from the face of the filed documents. The statute is not entirely settled on every point, which is part of why sequencing matters more than most counsel appreciate.
Whether to file for bankruptcy protection is a separate calculation that interacts with both the procedural and substantive tracks. A Chapter 11 filing triggers the automatic stay, which halts all collection activity. It also introduces the bankruptcy court as the forum for all disputes, including the recharacterization question. Some merchants benefit from that forum. Others do not. There are exceptions, though in practice they tend to confirm what the funder already suspected. Whether the merchant who calls on a Monday in March needed to have called in January is a question this article cannot answer, though the answer is usually yes. The determination depends on considerations that no article can resolve in the abstract.
The Regulatory Shift
New York’s FAIR Business Practices Act took effect on February 17, 2026. The statute amends GBL Section 349 to prohibit unfair and abusive acts and practices in commerce, not merely deceptive ones, and it removes the prior requirement that enforcement actions demonstrate a consumer oriented dimension. The statute now reaches conduct that is unfair or abusive, not merely deceptive, and it applies to commercial transactions including those involving small businesses and non-profits.
For merchants defending against MCA enforcement, the Act expands the Attorney General’s authority to challenge collection practices that were previously difficult to reach under the older, narrower statute. The implications for individual cases remain to be tested; the first wave of enforcement actions under the new standard has not yet arrived. But the direction is legible. California’s SB 362, effective January 2026, imposes new APR disclosure requirements on commercial financing providers. Maryland’s Small Business Truth in Lending Act requires similar disclosures. Texas HB 700 restricts ACH debits and voids confession of judgment clauses in commercial financing contracts.
The weather has changed, though not every funder has noticed.
Where This Begins
Before any of the preceding analysis can be applied, the facts must be assembled. The contract must be read in its entirety. The funder’s conduct must be documented: when the daily debits commenced, whether reconciliation was requested and denied, whether the personal guarantee was executed under conditions that support a challenge. The confession of judgment, if one has been filed, must be retrieved from the county clerk’s office and examined for the formal deficiencies that appear with regularity in these filings.
- Retrieve and review the complete MCA agreement, including all riders, amendments, and guarantees.
- Document the funder’s ACH withdrawal history and any reconciliation requests.
- Obtain the confession of judgment filing from the county clerk, if applicable.
- Assemble bank statements, correspondence, and broker communications.
A consultation at this firm assumes nothing and costs nothing; it is the point at which the sequence begins to take its shape. The sequence, once it begins, rewards those who commenced it before the alternatives contracted.