The default has already occurred. What remains is a question of whether the instrument that produced it was lawful in the first instance.
A merchant cash advance is not a loan. That is the sentence every MCA funder recites when confronted with regulation, with litigation, with the suggestion that annual percentage rates of 350 or 400 or 820 percent demand some form of legal restraint. The distinction between a purchase of future receivables and a loan is not academic. It determines whether usury statutes apply, whether confession of judgment clauses survive scrutiny, whether one possesses the protections that centuries of lending law were constructed to provide.
In January 2025, the New York Attorney General secured a $1.065 billion settlement against Yellowstone Capital and its network of 25 affiliated entities, cancelling $534 million in outstanding MCA obligations for over 18,000 small businesses. The office demonstrated that the transactions were loans in substance, carrying interest rates as high as 820 percent per annum. The largest single-state restitution in New York history.
That settlement did not appear from the atmosphere. It followed from a legal architecture that has been assembling itself for years.
The Distinction Between Purchase and Loan Is the Entire Case
Courts in New York apply a three-factor test to determine whether an MCA agreement constitutes a true purchase of receivables or a disguised loan. The agreement must contain a meaningful reconciliation provision. The repayment term must be indefinite. The funder must bear genuine risk of loss if the merchant ceases operation.
Where any of these elements is absent or illusory, the transaction may be recharacterized. In Funding Metrics, LLC v. D&V Hospitality, Inc., the Westchester County Supreme Court vacated a confession of judgment and voided the entire MCA agreement as criminally usurious, examining the funder's actual servicing practices rather than the contractual language alone. The reconciliation clause permitted adjustment only at the funder's sole discretion. That word, sole, converted a purchase into a loan.
The question is never what the contract says. The question is what the funder does.
In Crystal Springs Capital, the Appellate Division, Second Department, held that a similar agreement was void as a matter of law for constituting criminal usury. The pattern is consistent. Where the funder collects a fixed daily amount irrespective of revenue, where reconciliation is discretionary or absent, where the merchant bears all risk of loss, courts will look through the form to the substance.
A Confession of Judgment Is Not a Conviction
Embedded within most MCA agreements is a confession of judgment, a pre-signed document that permits the funder to obtain a court judgment without notice, without hearing, without the merchant's participation. For businesses operating in states other than New York, the enforcement of such instruments has been curtailed. New York's 2019 amendments to CPLR 3218 prohibited the filing of confessions of judgment against out-of-state defendants.
But even for New York merchants, a confession of judgment is not irrevocable. A court may vacate it upon a showing of fraud, duress, unconscionability, or material misrepresentation. The procedural mechanism matters. One must commence a plenary action, not merely a motion, to challenge the judgment. This is the kind of distinction that separates counsel who understand MCA litigation from those who do not.
Consider the sequence. A business owner in February signs an agreement containing a confession of judgment. By October the revenue has declined. The funder files the confession. A judgment appears on the record without a single communication to the merchant. Bank accounts are restrained. Operations cease. The entire architecture of default, judgment, and asset seizure unfolds in a matter of days.
That architecture is vulnerable.
The UCC Lien Is a Claim, Not a Seizure
Upon execution of an MCA agreement, most funders file a UCC-1 financing statement, establishing a security interest in the merchant's receivables and, in many cases, all business assets. The filing operates under Article 9 of the Uniform Commercial Code. It gives the funder priority in the collateral. It does not authorize the physical seizure of property. It does not permit the funder to enter premises. It does not grant the right to drain a bank account without a court order.
And yet the lien accomplishes something perhaps more damaging than seizure. It prevents the merchant from obtaining new financing. It signals to every subsequent creditor, every prospective lender, every SBA loan officer that the business is encumbered. The UCC-1 filing is not a weapon of collection. It is a weapon of isolation.
Removal requires either satisfaction of the underlying obligation, a court order, or a determination that the filing was unauthorized. Where the MCA agreement itself is found to be a usurious loan, the UCC-1 filing may be terminated as a consequence.
New York's FAIR Business Practices Act Alters the Calculus
Effective February 17, 2026, the FAIR Business Practices Act amended General Business Law Section 349 to prohibit unfair, deceptive, or abusive acts or practices in any business transaction, extending protections that were previously reserved for individual consumers to small businesses and nonprofits. The amendment abrogated the old consumer-oriented requirement for Attorney General enforcement.
For merchants who have defaulted on MCA agreements, this represents a substantial expansion of available defenses. Aggressive demand communications, improper UCC-1 filings, refusal to honor reconciliation provisions, misrepresentation of contract terms at origination. Each of these may now constitute an abusive practice subject to enforcement under GBL Section 349.
Only the Attorney General may enforce the unfair and abusive prohibitions. The private right of action remains limited to deceptive acts. But the signal is unmistakable. The regulatory posture toward MCA collection has shifted.
California Requires Disclosure of What Was Always Concealed
California Senate Bill 362, effective January 1, 2026, requires providers of commercial financing to disclose the annualized percentage rate for transactions of $500,000 or less and prohibits the deceptive use of the terms rate or interest in communications with applicants. The Department of Financial Protection and Innovation holds enforcement authority.
The significance is not in the disclosure itself. It is in what the disclosure reveals. An MCA transaction that appeared to involve a factor rate of 1.4 or 1.5 translates, when expressed as an APR over a repayment period of three to six months, into an annual rate that no reasonable borrower would accept if presented with the figure. The concealment was the product. The disclosure is the remedy.
Texas HB 700 established parallel requirements, including confession-of-judgment prohibitions and restrictions on ACH debits unless the provider holds a first-priority perfected security interest. The legislative movement is not confined to a single jurisdiction.
What Default Activates and What It Does Not
A default under an MCA agreement may trigger several consequences. The funder may accelerate the remaining balance. It may exercise any confession of judgment. It may enforce its UCC-1 lien. It may pursue the personal guarantor. It may initiate ACH debits at an accelerated rate or commence litigation.
What it may not do is act outside the boundaries of the agreement or the law governing it. Where the agreement is itself unlawful, the remedies it purports to grant are void. Where the confession of judgment was procured through fraud or concerns an out-of-state defendant, it may be vacated. Where the daily debit amount bears no relationship to the merchant's actual receivables, the fundamental premise of the transaction has been abandoned by the funder, not the merchant.
There is a particular cruelty in the structure of MCA default. The merchant's revenue declines. The fixed daily debit remains constant. The decline accelerates. The default materializes not from the merchant's failure of effort but from the funder's refusal to reconcile. The instrument creates the very condition it penalizes.
Settlement Remains the Most Frequent Resolution
Most MCA disputes conclude through negotiation rather than adjudication. Funders prefer settlement to the risk of recharacterization, which would expose them to usury penalties and potential voiding of the agreement. Merchants prefer settlement to the uncertainty and expense of litigation.
A settlement typically converts the remaining balance to a fixed monthly payment at a reduced amount, eliminates accrual of additional fees, and terminates daily ACH withdrawals. The discount from the stated balance varies. Forty percent is not uncommon. Sixty percent is achievable in circumstances where the funder's legal exposure is substantial.
The presence of counsel alters the settlement calculus. A demand letter from an attorney who understands the recharacterization framework, who can articulate the specific deficiencies in the reconciliation provision, who can identify the usury exposure, produces a different response than a telephone call from a distressed business owner.
For merchants confronting MCA default, the consultation with experienced counsel is not a preliminary step. It is the determination that shapes every outcome that follows. We represent business owners in MCA disputes throughout New York and provide the legal analysis necessary to identify which rights and defenses apply to a particular agreement.
The contract on your desk is not necessarily the contract a court will enforce.