What to Do if Your MCA Funds Were Mishandled or Misused

The money was supposed to arrive in the operating account. It did not arrive in full, or it arrived and was immediately redirected by a mechanism the business owner did not authorize, or the disbursement itself was structured in a manner that contradicted the terms of the receivable purchase agreement. These are not uncommon circumstances. They are, in the merchant cash advance industry, something closer to a pattern.

A merchant cash advance is not, in its contractual form, a loan. It is a purchase of future receivables. The distinction has been litigated in New York courts with increasing frequency, and the characterization of any particular agreement depends on its specific terms, including whether the reconciliation provision is genuine or illusory. But the characterization question is separate from the mishandling question. Even a lawful MCA transaction can be executed in a manner that constitutes breach, fraud, or conversion.

In a standard MCA transaction, the funder purchases a specified amount of future receivables and, in exchange, provides the merchant with a lump sum. The agreement specifies the purchase price, the purchased amount, the daily or weekly remittance, and the method of collection. What the agreement does not always specify, or specifies in language the merchant does not examine with sufficient care, is the net amount the merchant will receive after fees, origination charges, and broker commissions are deducted from the purchase price.

A business owner who signs an agreement for $200,000 in funding and receives $147,000 has not been the victim of a clerical error. The $53,000 difference represents fees that were disclosed, if they were disclosed at all, in the purchase agreement's fee schedule or in a separate broker compensation document that the merchant may never have seen. In the Yellowstone Capital matter, the New York Attorney General demonstrated that deductions of this nature were standard practice, with interest rates that, when the transactions were properly characterized as loans, reached 820 percent.

The most frequent form of mishandling occurs after disbursement. The funder, through its payment processor or ACH authorization, withdraws amounts from the merchant's bank account that exceed the agreed-upon daily remittance. Or the funder continues withdrawals after the purchased amount has been fully remitted. Or the funder debits the account on days when the business generated no receivables, in contradiction of the reconciliation provision that ostensibly ties remittance to revenue.

Each of these actions constitutes a potential claim. Under New York law, the unauthorized taking of funds from another's account is conversion. It is also a breach of the purchase agreement, because the agreement defines the amount and timing of permissible withdrawals, and any withdrawal outside those parameters exceeds the funder's authorization.

In Richmond Capital Group, the Attorney General established that the defendants had engaged in a practice of debiting excess amounts from merchant accounts. The resulting $77 million judgment reflected not merely the aggregate overcharges but the systematic nature of the conduct. The court did not treat each individual overcharge as an isolated event. The court treated the pattern as evidence of the enterprise's method of operation.

One is entitled to the terms of the agreement one signed. That principle, elementary in its statement, becomes complicated in the MCA context because of the reconciliation clause. The clause provides that if the merchant's receivables decline, the daily remittance will be adjusted downward to reflect the actual percentage of receivables specified in the agreement. This provision is the primary reason courts have characterized certain MCAs as purchases of receivables rather than loans. Without it, the fixed daily payment obligation resembles a loan repayment. With it, the funder's return fluctuates with the merchant's revenue, which is the hallmark of a receivable purchase.

But what happens when the merchant requests reconciliation and the funder refuses. Or delays. Or imposes documentation requirements so onerous that the request becomes impractical. Or simply continues the same daily withdrawals without acknowledgment.

This is the point at which the characterization question and the mishandling question converge. A reconciliation provision that the funder will not honor is not a reconciliation provision. It is a contractual decoration. And a court that examines the funder's conduct, rather than the funder's contract, may conclude that the agreement was a loan from inception, subject to New York's usury statutes, which cap civil interest at 16 percent and criminal interest at 25 percent under General Obligations Law Sections 5-501 and 5-511.

The appellate court's decision in Crystal Springs Capital v. Big Thicket Coin, LLC confirmed that such agreements can constitute criminally usurious loans. That holding did not emerge from abstract analysis. It emerged from the funder's own behavior.

Many MCA transactions are originated through independent sales organizations or brokers who receive commissions from the funder. The broker is the party the merchant speaks with, the party who describes the terms, the party who may represent that the funds can be used for any business purpose, that the daily payment will be manageable, that reconciliation is automatic. The broker may also be the party who stacks multiple MCAs on the same business, each with its own daily withdrawal, until the aggregate remittance exceeds the business's daily receipts.

The funder does not escape liability because the broker made the representation. Under agency principles, a funder who authorizes a broker to originate transactions on its behalf is bound by the broker's representations to the extent those representations fall within the scope of the broker's apparent authority. The merchant who was told by the broker that daily payments would be $500 and discovers that the agreement provides for $900 has a claim against the funder, not merely against the broker who may lack the resources to satisfy a judgment.

And the broker who diverted a portion of the funding to a separate account, or who charged an undisclosed fee that reduced the merchant's net proceeds, has exposed the funder to a conversion claim that the funder's compliance department should have prevented.

In January of any given year, approximately 14 percent of the MCA disputes that reach our office involve merchants who took corrective action before preserving evidence. They revoked the ACH authorization. They closed the bank account. They stopped accepting calls from the funder. Each of these responses is understandable. None of them is premature in principle. But each of them, if taken before the merchant has secured copies of the purchase agreement, the daily withdrawal records, the bank statements, and any communications with the funder or broker, reduces the merchant's capacity to establish the predicate facts of the claim.

The purchase agreement is the instrument. The bank statements are the proof. The discrepancy between what the agreement authorizes and what the bank statements reflect is the claim.

Before revoking any authorization, obtain twelve months of bank statements showing every withdrawal by the funder. Obtain the complete purchase agreement, including any addenda, fee schedules, and broker disclosure documents. Obtain any written communications, including text messages and emails, between the merchant and the broker or funder. If the funder provided an online portal, capture the transaction history before access is revoked.

This is not legal strategy. This is preservation. The strategy follows.

A merchant whose funds were mishandled holds, depending on the circumstances, a breach of contract claim, a conversion claim, a claim under New York's deceptive business practices statute (General Business Law Section 349), a potential usury defense to any collection action the funder initiates, and, if the funder failed to comply with the Commercial Finance Disclosure Law effective August 2023, a regulatory complaint to the Department of Financial Services that creates additional pressure in any negotiation.

The breach of contract claim addresses the gap between the agreement's terms and the funder's conduct. The conversion claim addresses the unauthorized taking of funds. The Section 349 claim addresses the deceptive practices in the origination or servicing of the transaction. The usury defense addresses the fundamental character of the agreement. And the CFDL complaint addresses the funder's failure to disclose the true cost of the instrument in the manner the law now requires.

These claims do not exist in isolation. They exist in relation to one another, and the strength of one reinforces the viability of the others. A funder facing a usury challenge is more inclined to resolve a breach of contract claim. A funder facing a CFDL complaint is more inclined to return excess withdrawals without litigation.

Most MCA agreements require a personal guarantee from the business owner. Some require a confession of judgment executed by the guarantor. The guarantee transforms a business obligation into a personal one, and the confession of judgment, where it remains enforceable, permits the funder to obtain a judgment against the individual without commencing a lawsuit.

But the guarantee is a separate contract, and it is subject to its own defenses. If the underlying agreement is void as usurious, the guarantee of a void obligation is itself unenforceable. If the funder breached the agreement through unauthorized withdrawals or failure to reconcile, the guarantor may assert the funder's prior breach as a defense to enforcement of the guarantee. If the confession of judgment was obtained from an out-of-state guarantor after 2019, it is voidable under the amended CPLR Section 3218.

The personal guarantee is the instrument that keeps business owners awake. It should not be the instrument that prevents them from asserting claims they are entitled to assert.

There is a particular silence that follows the moment a funder receives a detailed demand letter identifying specific overcharges, citing the applicable statutory provisions, and requesting an accounting of all withdrawals against the purchased amount. The silence lasts between seven and twenty-one days. When the response arrives, the tone has changed.

That change reflects a calculation. The funder's business model depends on volume, speed, and the merchant's ignorance of remedies. A merchant who has retained counsel, who has documented the discrepancies, who has identified the statutory violations, is no longer a receivable to be collected. The merchant is a liability to be resolved.

We represent merchants whose MCA funds were mishandled, whose accounts were debited without authorization, whose reconciliation requests were ignored, and whose agreements, upon examination, reveal terms that the law does not permit. The remedies are specific and they are available, and a consultation with our firm is the mechanism by which they become operative.