How to Legally Break a Merchant Cash Advance Contract

The contract is not the obstacle. The obstacle is the assumption that the contract is what it claims to be. A merchant cash advance agreement describes itself as a purchase of future receivables, a commercial transaction between consenting parties, a thing apart from lending. That description, in a growing number of courtrooms, has been found to be a fabrication.

What follows from that finding is severe. If the instrument is not a purchase but a loan, then the entire architecture of the agreement collapses under the weight of statutes it was constructed to circumvent. Usury ceilings apply. Licensing requirements attach. The reconciliation clause one was told would protect the business in lean months reveals itself as ornamental language, never intended for activation.

In Crystal Springs Capital, Inc. v. Big Thicket Coin, LLC, the Appellate Division held that a merchant cash advance agreement constituted a criminally usurious loan. The funder had purchased $140,000 in future receivables for $90,000. The court applied a three-factor test: whether the payment amount adjusts with actual revenue, whether the repayment schedule is fixed, and whether the funder retains recourse against the merchant in bankruptcy. On each factor, the agreement failed. It was a loan. It was void.

That three-factor framework, sometimes called the LG Funding test, has become the instrument by which courts dismantle the fiction. A reconciliation clause that permits the merchant to request adjusted payments means nothing if the funder never honors the request. A finite repayment term with fixed daily withdrawals resembles an installment loan, not a contingent purchase. And a personal guarantee that survives the business itself eliminates the risk a true purchaser of receivables would bear.

The question is not whether the contract says it is a sale. The question is whether any merchant, under any financial condition, could have avoided repayment in full.

New York's criminal usury statute prohibits interest in excess of 25 percent per annum. The effective annual rates embedded in merchant cash advance agreements have been calculated by courts at 101 percent, 200 percent, 350 percent. In the Williams Land proceeding, the court found a rate of 101.1 percent and declared the agreement void ab initio, permitting the debtor to recover payments already rendered.

Void ab initio. Not voidable. Not subject to reformation. Gone, as though the instrument had never existed.

That language appeared in a Rockland County decision refusing to enforce a merchant cash advance. The sentence carries more doctrinal weight than it may appear to at first. Courts are no longer treating these agreements as presumptively valid commercial contracts that the merchant bears the burden of defeating. The burden is shifting.

Procedural unconscionability concerns the circumstances of formation. High-pressure commercial tactics. Inequality of bargaining position. A merchant who needed capital within 48 hours and was presented with a 37-page agreement containing a confession of judgment clause, a personal guarantee, a waiver of jury trial, and a reconciliation provision that read like consumer protection but functioned like camouflage.

Substantive unconscionability concerns the terms themselves. An effective interest rate that exceeds the criminal threshold by a factor of four is a substantive problem. A daily payment mechanism that withdraws a fixed amount irrespective of revenue is a structural impossibility dressed in the language of flexibility.

A court requires both. And in the merchant cash advance context, both are present with a regularity that should concern any funder still relying on the old presumption.

Since August 30, 2019, New York's amended CPLR Section 3218 prohibits the filing of confessions of judgment against out-of-state borrowers. The instrument that once permitted a funder in Manhattan to obtain a default judgment against a restaurant owner in Florida without notice, without hearing, without the possibility of defense, is no longer available for that purpose. But the prohibition applies only to non-residents. In-state merchants remain exposed to this mechanism.

And the confession of judgment clauses that were filed before the prohibition remain in effect unless vacated by court order. Hundreds of such judgments sat in Rockland County alone, artifacts of a period when the filing was automatic and the clerk's office asked no questions. Some of those judgments have now been vacated as part of the Yellowstone Capital settlement. Others persist.

In January 2025, the New York Attorney General announced a $1.065 billion settlement with a network of 25 entities controlled by Yellowstone Capital. Over $534 million in merchant debt was cancelled. Legal actions against merchants were vacated. Liens were terminated upon request. Restitution of $16.1 million was distributed to impacted businesses, of which more than 18,000 existed across the country.

That settlement did not arise from a single merchant's complaint. It arose from an investigation that found loans disguised as merchant cash advances, with interest rates the Attorney General characterized as astronomical. The word is not the Attorney General's alone. It appeared in the court's analysis.

For a merchant seeking to dissolve an existing agreement, the Yellowstone matter establishes that the state itself regards certain merchant cash advance structures as fraudulent lending operations. This is not a fringe position.

On February 17, 2026, New York's FAIR Business Practices Act took effect. The statute amends General Business Law Section 349 to protect small businesses and nonprofits from unfair or abusive acts. The Attorney General may now scrutinize collection tactics, including aggressive demand correspondence and improper UCC-1 filings, under standards once reserved for consumer debt.

The implications for merchant cash advance enforcement are considerable. A funder that files a blanket lien against a merchant's assets, contacts the merchant's bank to freeze accounts, or initiates collection proceedings with language designed to intimidate rather than inform, may now face state enforcement under the abusive-acts provision. This was not possible 14 months ago.

Legislation takes years to arrive. Its application, once it arrives, does not.

When a merchant files for bankruptcy protection, the court may recharacterize the merchant cash advance as a loan. The consequence of recharacterization is that the funder's claim is treated as an unsecured debt, subordinated to other creditors, and subject to full discharge. The funder purchased nothing. The funder lent money at an illegal rate. The funder stands in line.

In In re Anadrill Directional Services Inc., decided in January 2026, the bankruptcy court supported voiding a merchant cash advance on recharacterization grounds. The opinion examined the same factors courts apply outside of bankruptcy: the reconciliation clause, the finite term, the recourse provisions. It reached the same conclusion through a different procedural door.

For merchants who have exhausted negotiation, who have requested reconciliation and been denied, who have watched daily withdrawals consume operating capital while the funder refused to adjust, bankruptcy recharacterization represents a mechanism of dissolution that the funder cannot contractually prohibit, regardless of what the agreement's forum-selection clause or arbitration provision may state.

The Federal Trade Commission obtained a $20.3 million judgment against Jonathan Braun, who controlled RCG Advances, for deceiving small businesses and employing collection practices that included threats of physical violence. Braun received a permanent ban from the merchant cash advance and debt collection industries. The court noted his "utter disregard and contempt" for the merchants he purported to serve.

That case involved conduct more extreme than the typical dispute. But the FTC's willingness to pursue it, and the magnitude of the judgment, signals an institutional posture. Federal regulators have determined that the merchant cash advance industry contains participants who operate outside the boundaries of lawful commerce. One does not receive a permanent industry ban for aggressive negotiation. One receives it for fraud.

A merchant seeking to dissolve a merchant cash advance agreement should anticipate a sequence, not an event. The first step is a formal request for reconciliation under the terms of the agreement itself. Most agreements contain such a provision. Most funders will ignore or deny the request. That denial becomes evidence.

The second step is an examination of the agreement's effective interest rate, its recourse provisions, and its treatment of the merchant's obligation in the event of business failure. If the obligation survives bankruptcy through a personal guarantee, if the daily payment amount is fixed regardless of revenue, if the reconciliation clause has never been honored, the agreement is susceptible to recharacterization.

The third step depends on jurisdiction, on the funder's litigation posture, and on the merchant's financial condition. It may involve a declaratory judgment action. It may involve a bankruptcy petition. It may involve a complaint to the Attorney General under the FAIR Act. In certain cases, it may involve all three, coordinated to apply pressure from multiple directions against a structure that was designed to withstand challenge from only one.

We have represented merchants at each of these stages. The agreements dissolve. Not without friction. Not without cost. But the legal architecture that once protected these instruments is eroding, and the merchants who understand that erosion are the ones who act before the daily withdrawals consume what remains.

An agreement that cannot withstand judicial examination was never an agreement at all. It was an imposition that relied on the merchant's silence. That silence is no longer the default condition.