How Courts Are Recharacterizing MCAs as Usurious Loans in Practice

The purchase label settles nothing before a court reads the payment terms.

A funder that calls the transaction a purchase of future receipts collects a fixed sum from the account each business day while the heading says purchase, and a judge asked to decide whether the agreement is a loan will look past the heading to the question whether repayment was absolute in substance.

In LG Funding v. United Senior Properties of Olathe, a New York appellate court kept criminal usury defenses alive and denied the funder summary judgment after examining reconciliation, finite duration, and bankruptcy recourse.

The Substance Test Courts Apply

New York courts measure the obligation the parties created rather than the product name on the signature page. The full appellate opinion discussing MCA characterization kept the usury defenses alive on exactly that basis. Risk decides the matter, since a funding party that shares the hazard of slow receipts stands in a different position from one that collects the full sum from empty receipts, a distinction I have yet to see a funder concede without a fight.

The contract was, if precision matters, a set of payment commands dressed as a sale. Daily debits of fixed amounts, backed by recourse when the business fails, leave the funder with the economics of a lender under a different name.

Collect and preserve the funding agreement, the payment authorization, the guarantee, and any amendment that altered the arithmetic of collection. A funder structures automatic debits in order to remove collection from the realm of monthly choice, so the file the owner assembles at the start often determines the arguments available at the end.

Reconciliation Terms and the Allocation of Risk

A reconciliation clause promises adjustment when receipts fall, and courts treat the procedure behind the promise as more instructive than the promise itself. The clause earns attention in direct proportion to the detail it supplies about relief.

The questions that matter concern timing and burden: what information the business must supply before an adjustment issues, how many days pass between request and response, and whether past requests met with adjustment or with demands for records the business could not assemble while the debits continued.

A denied request proves less than an owner hopes, since the stated reason may cite missing bank statements, a missed notice window, or a balance computation the owner has not checked against the daily ledger, and each of those explanations points toward a different response, from curing the paperwork defect to contesting the computation with counsel present.

Most funders understand the economics of their paper better than their marketing admits. Often we encounter the decisive condition buried where a tired signer would miss it. A fourteen page agreement can hide the operative condition in a single paragraph near the back (our own files on this point are thinner than the argument deserves), which is why counsel reads to the end.

Keep every request and every response in the order they occurred. The paper trail shows what the business supplied and what the funding party did, and a court that must decide whether risk was genuine will prefer that extremely consequential record to any later reconstruction.

The Later Appellate Discussion

The later appellate discussion of reconciliation terms returned to the same questions without settling them for every contract in the market. The opinion contains a dissent, and the dissent carries no authority beyond its reasoning.

The disagreement is extremely technical and entirely practical, a peculiar feature of this corner of the docket. Whether the analysis travels outside New York is a question counsel in another state must answer from the local authorities.

The dissent proposes a test. The majority decides a case. Counsel should know which one binds the next court.

A split court leaves the next case to be argued on its own record rather than decided by quotation. Quotations from the opinion will be used against any owner who deploys them without reading the disposition. Read the disposition before the reasoning. A denial of summary judgment preserves issues for trial without awarding anything to either side.

What a Single Opinion Can Carry

No opinion about one funder cancels the contract with another.

The holding binds the parties and persuades within its jurisdiction. Rarely does one opinion decide the next case. Its value elsewhere lies in the framework it offers counsel, which prefers substance to labels, weighs risk above recital, and leaves the outcome to turn on the paper the business preserved.

Review Before Recharacterization Becomes Strategy

The funder will answer (as funders in these cases tend to answer) that the business accepted daily debits with eyes open, and the answer deserves a response grounded in the ledger rather than the sales presentation. The steps the owner takes, or does not take, before counsel reviews the file will shape the posture of every later discussion.

Counsel should review and analyze the terms, identify the deficiencies, and construct a response that addresses the contractual claims together with the practical reality of the ledger. Resist the urge to answer the demand letter before counsel has read the guarantee. Do not discuss the account with the financing party, even casually, before that review.

Delancey Street offers a free confidential initial review for owners weighing whether an MCA balance deserves settlement discussion. The company acts as a settlement company, not a law firm, and legal questions go to independent counsel to ensure the strategy rests on advice the company itself does not provide. Simply bring the agreement and the payment history to the first conversation, and ensure nothing leaves the file room before counsel has seen the complete set.

Contracts outlive the circumstances of their signing. The question that remains is whether the paper describes the transaction with accuracy.