Merchant Cash Advance Defense: How to Fight Back Against Predatory Lenders
March 1, 2025·14 min read
Contents
The merchant cash advance industry was built on a legal theory that its products are not loans. That is changing. Courts in New York, California, and several other states have developed legal frameworks for challenging MCA contracts. This article explains the primary legal theories that MCA defense attorneys use.
The Foundation of MCA Defense
Every significant MCA defense argument starts with the same question: is this contract actually what it claims to be? When MCA contracts include reconciliation provisions but lenders systematically refuse to honor them, courts have found these arrangements to look far more like fixed-obligation loans than purchases of future sales. New York courts have articulated a three-factor test. An MCA that fails this test can be recharacterized as a loan.
Confession of Judgment Challenges
New York's 2019 reform prohibits enforcement of COJ judgments against out-of-state residents in New York courts. The confession of judgment article on this site covers this in detail.
Usury and Rate Cap Arguments
If the MCA is recharacterized as a loan, its effective annual interest rate is calculated. If that rate exceeds the applicable state usury cap, the loan is usurious. The $534 million Yellowstone Capital settlement demonstrates the scale that usury-related exposure can reach.
Deceptive Practice Claims
State consumer protection laws prohibit unfair and deceptive acts and practices. California's SB 1235 creates a specific statutory basis for deceptive practice claims when lenders fail to provide required disclosures. The Yellowstone Capital case included deceptive practice allegations alongside the COJ and reconciliation claims.
UCC Lien Abuse Claims
Abuse arises when lenders file blanket UCC-1 liens that claim an interest in all of a business's assets. A lender that refuses to file a termination statement after the obligation has been satisfied can be compelled to do so through legal action.
What Makes an MCA Defense Case Strong
Cases with the strongest defense positions typically have multiple overlapping arguments. Documentation is critical.
How to Find an Effective MCA Defense Attorney
Ask specifically about MCA experience, fee structures, and geographic jurisdiction. Be cautious of any fee structure that takes a percentage of debt forgiven or settled.
Frequently Asked Questions
How much does MCA defense cost? Costs vary from a few thousand dollars for straightforward negotiations to significantly more for complex multi-lender litigation.
Can I defend myself without an attorney? In practice, MCA lenders use experienced commercial litigation counsel. The risk of an adverse outcome from self-representation is high.
This article is for educational purposes only and does not constitute legal or financial advice.
Independent research and analysis from Debtura's team of commercial lending analysts.
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