MCA Lawsuit: Defenses, Disclosure Laws, and Enforcement Actions

A merchant cash advance lawsuit is a court dispute between an MCA funder and a small business, usually set off either when the business stops making payments and the funder sues to collect, or when the business (or a regulator) sues the funder on the theory that the advance is actually a high-interest loan in disguise. Which side files first shapes almost everything that follows, including the defenses available and the speed at which money and accounts can be seized.

MCA agreements are written as purchases of future receivables rather than loans. That label is why funders have historically argued they sit outside state usury caps, state lending licenses, and the federal Truth in Lending Act.¹ The central legal question in nearly every MCA lawsuit is whether that label holds up. If a court decides the deal functions as a loan, usury limits, licensing rules, and fraud statutes all come back into play, and the whole obligation can collapse.

What Happens When an MCA Provider Sues Your Business

Collection activity typically starts within five to ten business days of a missed payment, and the funder has several tools ready before any lawsuit is filed.²

UCC-1 financing statements give the funder a security interest in business assets. Funders often notify payment processors, customers, or vendors to redirect receivables, which can freeze incoming funds without warning.
Once a judgment is in hand, a restraining notice can freeze business and personal accounts (where a personal guarantee was signed) in three to five business days.
The lawsuit itself is usually styled as breach of contract and unjust enrichment. In New York, a business that fails to respond within 20 to 30 days faces a default judgment.³
Most MCA contracts contain a personal guarantee, so funders routinely chase the owner’s personal assets alongside the company’s.

Historically, the fastest tool was the confession of judgment, a document signed at closing that let a funder obtain judgment without notice or a hearing. New York closed that avenue for out-of-state merchants in August 2019 when CPLR § 3218 was amended by Senate Bill 6395.⁴⁵⁶⁷⁸

Defenses a Business Can Raise

The defenses that work in an MCA lawsuit flow from the loan-versus-purchase question, from the contract’s own terms, and from procedural rules about how judgments are obtained.

Argue the Advance Is Actually a Loan

The strongest defense is recharacterization: showing the agreement is a loan subject to state interest rate caps. If it is, and the effective rate exceeds the cap, the entire obligation can be voided. In New York, the civil usury ceiling is 16% and anything above 25% is criminal usury.¹ To get there, the business has to show that genuine risk-sharing was absent, that payments were effectively fixed rather than tied to revenue, or that the contract’s reconciliation mechanism was impossible to actually use.

Breach of the Reconciliation Clause

If the contract requires payments to adjust when revenue drops but the funder ignored reconciliation requests or kept pulling fixed amounts, the business can argue the funder breached first. Courts are increasingly willing to look past the clause on paper and ask whether reconciliation was genuinely available in practice.⁹

Unconscionability and Fraud

Hidden fees, misleading marketing, or contract terms so one-sided they shock the conscience support an unconscionability or fraud defense. In Korea Week v. Got Capital in the Eastern District of Pennsylvania, Korean and Asian business owners alleged they had been targeted on the basis of ethnicity and that their MCAs violated RICO and consumer credit laws. The court denied class certification because the agreement contained an enforceable class action waiver, but let the individual claims proceed.¹⁰

Procedural Defenses

Even where the underlying contract would otherwise hold up, procedural attacks can derail collection. These include challenging a confession of judgment for improper service or a defective affidavit, moving to vacate a default judgment, and contesting personal jurisdiction. In New York, CPLR § 5015 lets a court vacate a confession of judgment for affidavit defects or unconscionability.²

Disclosure Violations

In states with commercial financing disclosure laws, failure to deliver the required disclosures opens a separate line of attack discussed below.

One boundary worth naming: the FAIR Business Practices Act, signed into law in New York on December 19, 2025, expanded the Attorney General’s authority to pursue unfair and abusive conduct (including MCA collection tactics), but it did not expand the private right of action.¹¹ A business cannot sue a funder directly under the FAIR Act’s new provisions.

How Courts Separate a Loan from a True Receivables Purchase

Because recharacterization is the defense that unlocks everything else, it matters how courts actually run the test. They look past the contract’s label and examine economic substance. A 2019 analysis identified ten factors courts weigh, including which party bears the risk of loss, whether there is a fixed repayment schedule, whether the agreement charges or computes interest, and whether reconciliation lets payments adjust with actual revenue.¹² Three features carry the most weight:

Reconciliation. A real MCA ties payments to actual revenue, with a working mechanism to lower them when sales slow. Reconciliation that is “illusory” in practice points toward a loan.¹
Indefinite term. A true MCA has no set maturity date. A 60- or 90-day repayment window looks like a short-term loan.
Risk of loss. The funder must carry the risk the business fails or generates no sales. If the merchant is on the hook no matter what, the “purchase” is a label.

Later decisions, including LG Funding v. United Senior Properties of Olathe and Davis v. Richmond Capital Group, pushed courts deeper into the specific contract language rather than accepting conclusory recitals. The Champion Auto Sales v. Pearl Beta Funding ruling in 2018 found the agreement before it was not usurious, but offered little framework for evaluating specific clauses.¹³

Bankruptcy courts apply a similar analysis with real financial consequences for funders. In In re JPR Mechanical Inc., decided in July 2025, the U.S. Bankruptcy Court for the Southern District of New York held that MCA agreements with Radium2 Capital were “disguised debt” rather than true receivables purchases, found reconciliation “largely illusory,” and ordered Radium2 to return over $3 million in payments as avoidable preferences under Section 547(b) of the Bankruptcy Code.¹⁴ For a business in or near bankruptcy, that same analysis can claw back pre-petition payments.

State Disclosure and Registration Laws

A growing number of states now require MCA funders to deliver standardized pre-funding disclosures and, in some cases, to register with a state regulator. Violations can support a defense or counterclaim depending on how each statute is written.

New York’s Commercial Finance Disclosure Law, with final regulations effective August 1, 2023, applies to commercial financing of $2.5 million or less and requires disclosure of the amount financed, the finance charge, the annual percentage rate, the total repayment amount, and the payment frequency.¹⁵ Civil penalties reach $2,000 per incident and $10,000 for intentional violations.¹⁶

California’s Commercial Financing Disclosure Law (SB 1235) took effect in December 2022 and requires disclosure of total repayment amounts and annualized rates for businesses principally managed from the state.¹⁷ In October 2023, the Department of Financial Protection and Innovation adopted rules prohibiting unfair, deceptive, or abusive practices in commercial financing.¹⁸

Virginia’s House Bill 1027, enacted in April 2022, requires MCA providers to register with the Virginia State Corporation Commission, provide disclosures (without an APR), bans confession-of-judgment clauses, and requires lawsuits to be brought in Virginia.⁷ Kansas Senate Bill 345, effective July 1, 2024, requires disclosures for commercial financing of $500,000 or less and vests enforcement exclusively in the state Attorney General.¹⁹ Texas House Bill 700, signed June 20, 2025, requires MCA providers and brokers to register with the Office of Consumer Credit Commissioner, mandates written disclosures for transactions under $1 million, voids confession-of-judgment clauses, and carries a $10,000-per-incident penalty, with registration required by December 31, 2026.⁸

Utah and Connecticut also have registration and disclosure regimes, and Illinois, Maryland, and Washington maintain varying levels of oversight. Many states still have no MCA-specific rules.¹⁷

Enforcement Actions That Reshaped the Landscape

Three strands of enforcement have changed the leverage in private MCA lawsuits.

The largest was the New York Attorney General’s case against Yellowstone Capital, a New Jersey operation alleged to have targeted more than 18,000 small businesses with fixed daily debits over 60-to-90-day windows at interest rates as high as 820%, well above New York’s 16% civil and 25% criminal usury caps.²⁰ In January 2025, Yellowstone agreed to a $1.065 billion judgment that canceled $534 million in outstanding small-business debt, required at least $16.1 million in cash restitution (rising to $30 million if terms were violated), and permanently banned the companies and executives Isaac Stern and Jeffrey Reece from the industry. Yellowstone did not admit or deny the allegations. Pending lawsuits against merchants were discontinued, and court judgments against affected businesses were vacated, with the final batch vacated in December 2025.²¹ The AG’s case continues against Delta Bridge Funding (also called Cloudfund) and individual defendants who allegedly took over Yellowstone’s operations; in March 2026, a New York County Supreme Court judge denied motions to dismiss and let all six causes of action proceed, including civil usury, criminal usury, unlicensed lending, fraud, and deceptive acts.⁹

The FTC brought a parallel case against RCG Advances (formerly Richmond Capital Group) alleging misrepresentation of advance terms, unauthorized bank withdrawals, threats of violence during collections, and misuse of confessions of judgment.²² In February 2024, a federal court in the Southern District of New York entered a $20.3 million judgment against RCG’s de facto owner, Jonathan Braun, and permanently banned him from the MCA and debt collection industries.²³ A separate settlement banned co-owner Robert Giardina and ordered more than $2.7 million in refunds.²⁴ The FTC also returned over $9.7 million to small businesses harmed by Yellowstone’s practices in 2022.²⁵

The third shift came from the CFPB, which declared in March 2023 that merchant cash advances are “credit” under the Equal Credit Opportunity Act because providers advance funds and grant merchants the right to defer payment over time.²⁶ That classification subjects MCA funders to federal fair-lending and anti-discrimination requirements.

For a business served with an MCA complaint, these actions matter in two ways. They supply authority that a court can and does recharacterize MCAs as loans, and they establish patterns of conduct (illusory reconciliation, fixed daily debits, aggressive collection tactics) that defense counsel can map directly onto a specific contract.

1
Fintech and Digital Assets. NY Attorney General Secures $1 Billion Judgment for Illegal Loans Misrepresented as Merchant Cash Advances
2
NYC Criminal Attorneys. What Happens When You Default on a Merchant Cash Advance
3
Lane Law Firm. What Happens If You Default on a Merchant Cash Advance
4
New York State Senate. S6395 – Confessions of Judgment
5
Moritt Hock and Hamroff. New Limitations on Confessions of Judgment
6
Seyfarth Shaw LLP. New Limitations on Confessions of Judgment in New York
7
Mayer Brown. Virginia Enacts Merchant Cash Advance Registration and Disclosure Law
8
Holland and Knight. Texas Governor Signs Commercial Sales-Based Financing Legislation
9
New York Courts. People v. Yellowstone Capital LLC, Index No. 450750/2024
10
Hudson Cook LLP. Court Upholds Class Action Waiver in MCA Lawsuit
11
Inside Class Actions. New York Passes the FAIR Business Practices Act
12
Orrick. Reducing Regulatory Risk: Merchant Cash Advances
13
New York Courts. Champion Auto Sales v Pearl Beta Funding, 159 A.D.3d 507
14
U.S. Bankruptcy Court, Southern District of New York. In re J.P.R. Mechanical Inc., Case No. 19-23480
15
New York Department of Financial Services. 23 NYCRR 600 – Commercial Finance Disclosure
16
Venable LLP. New York Commercial Financing Disclosure
17
DLA Piper. State Laws Requiring Commercial Financing Providers to Provide Disclosures
18
California Department of Financial Protection and Innovation. Advisory to Small Businesses: Speak Up About Merchant Cash Advances
19
Mayer Brown. Kansas Enacts Commercial Finance Disclosure Law
20
New York Attorney General. Attorney General James Announces $1 Billion Settlement with Predatory Lender
21
New York Attorney General. Yellowstone Settlement
22
Federal Trade Commission. Court Enters $20.3 Million Judgment in FTC Case Against Merchant Cash Advance Operator Jonathan Braun
23
Federal Trade Commission. FTC v. RCG Advances, LLC, Civil Action No. 1:20-cv-04432
24
Federal Trade Commission. FTC Action Results in Ban for Richmond Capital Owner from MCA and Debt Collection Industries
25
Federal Trade Commission. FTC Press Releases – Merchant Cash Advances
26
Goodwin. CFPB Deems Merchant Cash Advances Credit Under ECOA