The merchant cash advance agreement on your desk is not what it claims to be. That is the premise on which affirmative litigation against an MCA funder proceeds, and in a growing number of jurisdictions, it is a premise courts have accepted. The question is no longer whether these instruments can be challenged. The question is whether the particular instrument in front of you contains the deficiencies that make a challenge viable.
A Purchase That Behaves Like a Loan Is a Loan
The legal architecture of a merchant cash advance rests on a single classification: the transaction is a purchase of future receivables, not a loan, and therefore falls outside the reach of state usury statutes. For years, that classification held. At least 49 New York decisions concluded that MCA agreements constituted genuine purchases. The funder bore the risk of nonpayment. The merchant owed nothing beyond a percentage of actual revenue. The instrument, whatever its effective cost, was not a loan.
Then the instruments changed. The reconciliation clauses that once gave the classification its factual basis became vestigial, present in the contract language but inoperative in practice. The daily remittance amount did not fluctuate with revenue. The funder's "sole discretion" over any adjustment rendered the merchant's right to reconciliation illusory. In Fleetwood Services LLC v. Richmond Capital Group LLC, the Second Circuit examined such an agreement and concluded that the absence of genuine risk to the funder transformed the transaction into a loan subject to usury limitations.
A bakery owner in Queens signs a document. The document states that she is selling $78,000 of her future credit card receipts in exchange for $50,000 today, and that her daily remittance will be $650, or will be adjusted if her sales decline. Six months later, her revenue has fallen by forty percent. The daily debit remains $650. She requests reconciliation. The funder does not respond. She requests again. The funder threatens litigation. What she signed was a purchase agreement. What she received was a high-interest loan at an effective annual rate exceeding 300 percent. The contract's label does not survive its own contradictions.
The Three Factors Courts Examine
In the framework established by the LG Funding line of cases, courts consider three elements when determining whether an MCA is a true sale or a disguised loan. Whether the payment amount adjusts based on actual revenue. Whether there exists a fixed repayment schedule. Whether the funder retains recourse against the merchant in bankruptcy. An agreement that fails on all three factors will be recharacterized. An agreement that fails on two, with the reconciliation clause among them, faces the same outcome in most circumstances.
The consequences of recharacterization are not incremental. They are categorical. The instrument, now classified as a loan, becomes subject to the full apparatus of state lending regulation. In New York, the civil usury cap is 16 percent. The criminal usury cap is 25 percent. An MCA carrying an effective rate of 200 percent, or 400 percent, or the 820 percent documented in the Yellowstone Capital matter, does not merely exceed those thresholds. It exceeds them by an order of magnitude that transforms a civil dispute into a potential criminal referral.
The agreement said one thing. The conduct said another. Courts have learned to read conduct.
Affirmative Claims Worth Pursuing
The merchant who elects to sue, rather than merely defend against a funder's collection action, may assert several causes of action, and the viability of each depends on the specific deficiencies in the agreement and the funder's post-execution behavior.
Usury. Where the instrument has been recharacterized as a loan, the effective interest rate determines exposure. New York's criminal usury statute renders the obligation void. The merchant owes nothing. The funder forfeits principal. This is not a technical defense. It is an extinction event for the funder's claim.
Fraud in the inducement. The merchant was told the agreement was not a loan. The merchant was told the daily amount would adjust. The merchant was told the agreement carried no interest rate because it was a purchase, not a lending instrument. Each representation, if the agreement functions otherwise, constitutes a material misrepresentation on which the merchant relied to her detriment.
Breach of contract. The reconciliation clause, however attenuated, remains a contractual obligation. The funder who refuses to adjust the daily remittance when revenue declines, who treats the reconciliation provision as a nullity, breaches the agreement's own terms. The irony is structural: the clause the funder included to preserve the instrument's classification as a sale becomes the clause the funder violates in practice.
Unjust enrichment and tortious interference. Where the funder has debited amounts exceeding the contractual percentage, or has contacted the merchant's customers, vendors, or banking institutions for the purpose of disrupting the merchant's commercial relationships, separate causes of action arise independent of the agreement itself.
The Yellowstone Precedent Widened the Aperture
In January 2025, the New York Attorney General secured a judgment exceeding $1.065 billion against Yellowstone Capital and its affiliated entities. Over $534 million in outstanding merchant obligations were cancelled. The entities were permanently barred from the sales-based financing industry. That outcome did not emerge from a single legal theory. It emerged from the accumulation of evidence across 18,000 transactions, each exhibiting the same structural deficiency: an instrument that purported to be a purchase of receivables but that functioned, in every material respect, as a predatory loan.
March arrived and the settlement's implications became apparent. The Yellowstone matter established that the Attorney General would not treat individual MCA disputes as isolated commercial disagreements. The pattern was the point. The $77 million judgment against Richmond Capital Group, secured on similar grounds, reinforced the principle. The FTC's permanent ban of Richmond's principals from the MCA and debt collection industries confirmed that federal regulators had reached the same conclusion by a different path.
Building the Evidentiary Record
The case against an MCA funder is built from documents the funder itself produced and communications the funder itself initiated. That is both the advantage and the discipline of this litigation. The agreement, with its reconciliation clause. The bank statements, showing invariant daily debits. The correspondence, showing denial or silence in response to reconciliation requests. The call logs, showing the escalation pattern. The UCC-1 filings, which in some instances were recorded against assets unrelated to the merchant's receivables.
In seven of the past nine cases our firm has litigated against MCA funders, the funder's own internal communications, obtained in discovery, contained references to the instrument as a "loan," to the daily debit as a "payment," to the effective rate as "interest." No amount of contractual draftsmanship survives the funder's own nomenclature in an unguarded email sent on a Wednesday afternoon.
That is the case. Not the merchant's characterization of the transaction. The funder's.
Jurisdiction and the Forum Question
Most MCA agreements contain a forum selection clause designating New York as the exclusive venue for disputes. For the merchant in Georgia or Arizona or Oregon, this clause presents an obstacle. But the obstacle is not immovable. Courts have declined to enforce forum selection clauses where the clause was procured through fraud or where enforcement would contravene the public policy of the merchant's home state. The merchant who files an affirmative action in her own jurisdiction, asserting usury and fraud claims under her state's laws, places the burden on the funder to establish that the forum selection clause should be honored despite the underlying illegality of the agreement.
And there is this. The New York FAIR Business Practices Act, effective February 17, 2026, expanded the Attorney General's enforcement authority to encompass unfair and abusive acts in any business transaction, abrogating the prior limitation to consumer-oriented conduct. A merchant need not wait for the Attorney General to act. But the statutory framework now provides a template for the claims a merchant can assert independently, and it signals to courts that the legislature has identified these practices as warranting institutional intervention.
The Calculation Before Filing
Litigation against an MCA funder is not a gesture. It is an allocation of resources toward a defined objective: the voiding of an unconscionable obligation, the recovery of amounts improperly extracted, the cessation of unlawful collection activity. The merchant who proceeds must be prepared for discovery, for motion practice, for the possibility that the funder will assert counterclaims on the original agreement. The merchant must also understand that the recharacterization argument, while increasingly successful, is not automatic. It requires a factual record demonstrating that the agreement's operative terms, not merely its formal language, functioned as a lending arrangement.
We have represented merchants at every stage of this process. The initial consultation often begins with a single question, one the merchant has carried for months without articulation: is what they did to me legal. The answer, with increasing frequency, is no. From that answer, a case is constructed, not from indignation but from the agreement's own internal contradictions, from the funder's own conduct, from the growing body of law that refuses to permit a label to override a reality. That construction is the work we do.