Potentially Illegal or Unenforceable Clauses in MCA Contracts in Practice

The harshest clause is not always the unenforceable one. Enforceability is a question of language, transaction, and forum rather than tone.

An MCA agreement rewards a clause by clause reading under the law that governs it. Some provisions fail for want of statutory procedure. Others fail only for certain contracts in certain states. The owner who treats every aggressive term as void stands on ground no firmer than the owner who treats every term as binding.

Counsel begins with the document as signed and continues through the statutes that touch it. Only after both are understood do remedies come into view.

Confession of Judgment Under New York Procedure

New York law governs confession of judgment through a procedure that demands specific formalities, a quaint insistence in an industry built on speed. The statute requires a signed sworn affidavit containing specified information about the debt, and residency and county restrictions control where the paper may be entered.

The confession of judgment procedure in CPLR 3218 sets those requirements out in text worth reading before any conclusion. A company resides in any county where it holds a place of business, not only at its principal office, and counsel checks dates, residence, and affidavit validity against the file rather than against memory.

The statute should not be described as a universal ban on every confession or as a bar on ordinary collection suit. It restricts a procedure. The lawsuit remains available to the creditor, and the owner who confuses the two overestimates the protection by exactly the margin the funder hopes for.

The Texas Rule for Covered Contracts

Texas takes a different path for covered sales based financing. Enacted HB 700 provides that a covered contract containing a confession of judgment or similar provision is void and unenforceable, a remedy stated in the statute rather than inferred from policy.

Coverage decides everything here. The chapter reaches specific offers under $1 million with specified disclosures, carries exemptions for banks and certain transactions, and gives existing operators a registration transition through December 2026. Whether a given agreement falls inside that frame is a question of dates, amounts, parties, and exemptions that counsel must read and work through line by line, since earlier drafts of the bill carried different thresholds and only the enrolled version controls.

The enrolled Texas text on sales based financing also states that the chapter creates no private right of action, a limitation that changes what follows from a violation. A void confession provision and a damages claim are different relief, and the owner needs the relevant section with the applicable facts rather than a general claim that any violation permits recovery.

Simply retain the affidavit and all related papers. An extremely consequential document can sit outside the principal funding agreement (funders in these cases tend to place execution exhibits where a hurried signer will not connect them to the promise they secure), which makes review of the contract alone incomplete.

Arbitration and Forum Provisions

Arbitration clauses answer a different question from the confession: where the fight happens rather than whether it happens. Federal law provides for enforcement of covered written arbitration agreements in most cases, subject to contract revocation grounds of general application and to statutory exceptions.

The text of Federal Arbitration Act section 2 states the rule in a single sentence that courts have spent a century applying. Formation, scope, delegation, and waiver each present a separate inquiry, and an arbitration provision is not proof that the whole MCA is enforceable any more than a dispute over the MCA proves the clause invalid.

Read the forum terms with the arbitration terms rather than apart from them. A contract that sends disputes to a distant forum under unfamiliar rules, drafted in order to raise the price of defense before the merits receive a hearing, alters the economics of the case at the outset, and the owner should price that burden with counsel before signing anything else.

Whether any particular clause yields to challenge is a question this article leaves to the file and the forum.

The Clause and the Remedy

A statute can impose a duty, restrict a procedure, or address enforceability, though enforceability is perhaps too grand a word for what most sections accomplish, without supplying the same remedy for every violation.

The funder will answer (as counsel for the trade tends to answer) that each provision was negotiated by sophisticated parties, and the answer deserves measurement against the signing record, an extremely revealing record where one exists, rather than acceptance at face value.

A Review Clause by Clause

The agreement deserves a slow reading with the statutes at hand. An owner questioning MCA terms should have counsel review and analyze the confession papers, the reconciliation mechanics, the arbitration and forum terms, and any choice of law provision that points away from home, since provisions interact and a defect in one can affect the posture of the rest. Counsel should ensure the choice of law provision receives the same attention as the payment terms.

Most funders draft for the strongest possible position. Their papers receive less pushback than their confidence suggests. The steps the owner takes, or does not take, to challenge terms at the outset will shape what remains negotiable in the months that follow, and the record of what was signed, when, and under what explanation carries more weight than any later characterization, and every concession will be used against the owner who made it.

Delancey Street offers a free confidential initial review for owners concerned about MCA contract terms. The company provides debt settlement services as a settlement company and coordinates legal matters with independent counsel, since it is not a law firm. Simply bring the complete signed set with any exhibits, and ensure counsel sees the confession papers first, even briefly, since those papers travel through the courts ahead of all other issues. Resist the urge to ignore a filing because the underlying clause looks unenforceable.

Paper signed in haste governs at leisure. The question that remains is which clauses deserve their confidence.