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New York MCA Loan Attorney: When the MCA Is Recharacterized as a Loan

NY courts have a specific test for when an MCA is recharacterized as a loan. Here's what that means, the appellate cases that define the test, and how a NY attorney uses it.

By Bar Alezrah15 min readPublished April 16, 2026 · Updated April 16, 2026

The single most important legal question in New York MCA litigation is whether the advance is a true sale of receivables or a disguised loan. The answer determines whether the contract is enforceable as written or whether New York's usury caps apply. Every serious NY MCA defense turns on this question, and every skilled NY MCA attorney spends significant time understanding the test, the appellate authorities, and the evidentiary record needed to win it. This article covers the recharacterization doctrine in depth: the test itself, the key appellate cases, what recharacterization means for your debt, how a NY attorney builds the argument, and the usury caps that apply when the argument wins. For the broader NY legal context see MCA Attorney New York and MCA Laws in New York. For defense mechanics see New York MCA Defense Attorney.

The NY True Sale vs Loan Test

New York courts approach the true sale versus loan question by looking at the economic substance of the transaction, not the contractual label. A contract that calls itself a purchase of receivables but operates as a guaranteed-payment loan will be recharacterized. A contract that is carefully structured as a true purchase and performed that way will stand.

The factors that NY appellate courts weigh include the following.

Reconciliation mechanism. Does the contract provide a real right to adjust the daily or weekly pull when revenues drop, and does the funder honor that right in practice? A meaningful reconciliation mechanism is the single strongest indicator of a true sale. It means the funder's recovery depends on actual receivables, which is the defining feature of a purchase. A contract with reconciliation language that is never honored, or a contract with no reconciliation at all, looks like a guaranteed-payment loan regardless of what the paper says.

Finite term versus indefinite collection. A true purchase of future receivables accepts the risk that slow sales will lengthen the collection period. The funder bought receivables and gets paid when receivables materialize. A contract that operates as if it has a definite payoff date (daily pulls calibrated to hit a specific number by a specific date regardless of sales) looks like a loan with a specific maturity.

Recourse and personal guarantee scope. A true purchase includes the funder accepting the risk of the business's failure. A personal guarantee that converts business failure into personal liability, or a guarantee that is triggered by any decline in receivables, undermines the "risk of collection" premise and tips toward loan characterization. A narrow guarantee limited to fraud or breach of covenants is more consistent with a true sale.

Right to cease collection. A true purchase accepts that collection ends when receivables end. A contract that gives the funder continuing rights against the merchant after the business ceases operations looks like a loan.

Whether the recovery is contingent or essentially guaranteed. The overarching question. If the funder's recovery is substantially guaranteed by the contract structure and performance, the transaction is a loan. If the recovery genuinely depends on the merchant's business performance, it is a sale.

Individual factors are not dispositive. A court weighs all of them and reaches a conclusion about the transaction's economic substance. A contract can be strong on some factors and weak on others. The defense attorney's job is to marshal the evidence on each factor and connect it to the legal standard.

Key NY Appellate Cases

The New York recharacterization doctrine is built on a specific line of appellate decisions. A qualified NY MCA attorney works with these cases fluently and cites them by name in any serious brief.

Champion Auto Sales, LLC v. Pearl Beta Funding, LLC. This Appellate Division decision is often cited as the first major articulation of the factor-based test in the MCA context. The court looked at reconciliation mechanics, term structure, and recourse scope, and held that the specific contract at issue was a true sale rather than a loan. The significance of the case is not the outcome (the funder won) but the framework. The court made clear that MCA transactions are subject to a factor-based analysis and that the label on the contract does not control.

LG Funding, LLC v. United Senior Properties. This line of cases addressed similar factors with some variations in outcome depending on the specific contract structure. The LG Funding decisions are sometimes cited for the proposition that a contract with weak reconciliation and strong personal guarantee triggers is more vulnerable to recharacterization than a contract with the opposite structure.

Davis v. Richmond Capital Group LLC. This line of cases, including related appellate decisions, further refined the factor analysis. Courts in this line looked more closely at the funder's actual practices, not just the contract text. Systematic reconciliation refusals, inflated default amounts, and broker misrepresentations became relevant factors in the characterization analysis. The Davis line is often cited by defense counsel in cases where funder conduct (not just contract structure) supports recharacterization.

Subsequent decisions. The NY First and Second Departments have issued additional decisions refining the doctrine, some favorable to funders and some to merchants. The body of authority is large enough that most defense briefs can find supporting precedent for specific factual patterns.

A NY MCA attorney does not just cite these cases. They read the factual records, compare the contract structures, and build an argument that the client's case fits the pattern of whichever line supports recharacterization. The factual details of these appellate records are often the difference between a strong brief and a weak one.

What Recharacterization Means for Your Debt

If a NY court recharacterizes your MCA as a loan, the consequences are immediate and significant.

Usury caps apply. New York's 16% civil usury cap under General Obligations Law §5-501 and 25% criminal usury cap under Penal Law 190.40 only apply to loans, not to true sales. Once recharacterization occurs, both caps become live. The effective annual rate on most MCAs is well above both, often 50% to 300% or higher depending on the contract.

Criminal usury voids the contract. Under longstanding New York case law, a contract charging criminal usury (over 25% APR) is void. Void means unenforceable. The funder cannot sue on the contract, cannot enforce the personal guarantee, and cannot recover the contractual amount. The merchant's obligation under the written contract disappears.

Civil usury is more nuanced. Civil usury (16% to 25% APR) does not automatically void the contract but can result in forfeiture of interest, reduction to the legal rate, or other remedies. The treatment varies by case and court.

Quantum meruit recovery is sometimes available. Even when a contract is voided for criminal usury, the funder may argue for equitable recovery of the principal advanced, on the theory that complete forfeiture would unjustly enrich the merchant. NY courts vary on whether to allow this recovery, and when they do, it is typically limited to the net principal minus what has already been collected, which often results in a refund to the merchant or a zero-dollar recovery for the funder.

Personal guarantees fall with the contract. If the underlying contract is void, the personal guarantee that secures it is also generally unenforceable. This is significant for merchants who signed personal guarantees on large advances and face personal exposure.

Prior payments may be recoverable. In some cases, payments already made under a voided contract may be recoverable by the merchant, though the legal grounds for recovery (restitution, unjust enrichment) are fact-specific and not guaranteed.

The practical upshot is that winning recharacterization in a strong case can convert a demand for $200,000 into an obligation of zero to $50,000, depending on the court's equitable determination. This is why recharacterization is both a defense and a settlement lever. The cluster sibling New York MCA Debt Attorney covers the settlement leverage angle in detail.

How a NY Attorney Builds the Recharacterization Argument

A recharacterization argument does not win on the contract alone. It wins on a fact-intensive record that includes the contract, the performance history, the reconciliation correspondence, and sometimes the funder's pattern of practice. Here is how a qualified NY attorney builds that record.

Step one: contract analysis. The attorney reads the contract with the factor test in mind. The reconciliation clause is examined for whether it creates a real right or just empty language. The term structure is analyzed for whether collection is genuinely contingent or effectively guaranteed. The personal guarantee is parsed for whether it reaches routine performance issues or only specific breaches. The attorney documents each factor with a specific contract citation.

Step two: performance history. The attorney pulls the merchant's bank statements and compares actual ACH pulls to contract terms and to the merchant's actual revenue. Large pulls during low-revenue periods support a "guaranteed payment" finding. Consistent pulls unrelated to revenue fluctuation are strong evidence of loan economics.

Step three: reconciliation correspondence. Every reconciliation request the merchant ever made, the funder's response, and the surrounding communications are gathered and organized. Systematic refusal is powerful evidence. Granted reconciliations are evidence the other way. If no reconciliation was ever requested, the attorney may draft one and send it now to create a current record.

Step four: broker and origination. Communications with the broker who originated the MCA are reviewed for any representations about effective cost, reconciliation, or default consequences. Misrepresentations by the broker can support fraud defenses in addition to supporting recharacterization.

Step five: discovery of funder records. In litigation, the attorney serves document requests targeting the funder's internal handling of reconciliation requests across multiple merchants. Systematic refusal as a matter of funder practice is strong evidence that the "reconciliation" language is pretextual. Some NY courts allow broad discovery on this; others limit it.

Step six: expert testimony. In closer cases, defense counsel may retain an expert on commercial finance or MCA industry practice to testify about what a true sale looks like versus what a loan looks like, and where the specific contract falls. Expert testimony is expensive and not always worth it, but in summary judgment and trial postures it can be decisive.

The final brief or pre-trial memorandum integrates all of this into a coherent argument that the contract's label does not match its economic substance. The appellate authorities provide the legal framework. The evidentiary record provides the facts. The conclusion is that the transaction is, in substance, a loan.

NY Usury Caps That Apply If You Win

If recharacterization succeeds, the next question is what usury treatment applies. New York has two tiers.

Civil usury: General Obligations Law §5-501. The civil usury cap for most business loans to non-corporate borrowers is 16% per year. Loans to corporate borrowers for business purposes have historically been exempt from civil usury for amounts over $250,000, with variations. The specific applicability to an MCA-turned-loan depends on the borrower's entity type, the loan amount, and the purpose. Civil usury does not automatically void the loan but can result in interest forfeiture or reduction.

Criminal usury: Penal Law 190.40. The criminal usury cap is 25% per year. It applies to all loans regardless of purpose or amount, with limited exceptions. A loan charging criminal usury is generally void under New York case law, and the funder cannot recover the contractual amount.

The MCA math almost always crosses criminal usury. A typical MCA that pays back $130,000 on $100,000 advanced over 6 months computes to an annual rate well above 25%, often 60% to 100% or higher on an APR basis. Short-term MCAs with higher factor rates can reach APRs of 200% to 400%. Every contract that is recharacterized is therefore also criminally usurious.

Practical consequences of criminal usury.

• The contract is void. The funder cannot enforce it.
• The personal guarantee is generally void.
• The funder's judgment (if already entered) may be vacatable.
• UCC liens securing the void contract may be removable.
• Payments already made may be recoverable in some cases.
• The funder's equitable recovery (if any) is usually limited to principal minus collections.

The depth of the remedy depends on the court, the case, and the equities. A case with a sympathetic merchant, a documented pattern of funder misconduct, and a clean factual record for recharacterization can result in complete contract voidance with no equitable recovery. A case with less sympathetic facts may result in voidance plus a quantum meruit award to the funder.

The cluster sibling New York MCA Loan Restructure Attorney covers the workout and restructuring angle as an alternative to full litigation. The pillar MCA Attorney Complete Guide covers the attorney framework generally. If you are already served, MCA Lawsuit Being Sued Playbook is the response playbook.

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