For years, merchant cash advance (“MCA”) companies have defended lawsuits by arguing that their products are not loans at all. Instead, they claim to be purchasing a percentage of a business’s future receivables. Because usury laws generally apply only to loans, this distinction has allowed MCA companies to avoid challenges based on excessive interest rates.
A recent New York appellate decision, however, demonstrates that courts are increasingly willing to look beyond the labels used in MCA contracts and examine the economic reality of the transaction.
The Richmond Capital Decision
In People v. Richmond Capital Group LLC, the New York Appellate Division affirmed findings that a merchant cash advance company engaged in illegal and predatory lending practices through thousands of MCA transactions. The case was brought by the New York Attorney General, who alleged that the company’s MCA agreements were actually usurious loans disguised as purchases of receivables.
The appellate court agreed.
Although the agreements were labeled as merchant cash advances, the court found that the company operated in a manner consistent with a traditional lender rather than a purchaser of future receivables. The court emphasized several facts that are common in MCA litigation:
- Daily payments were effectively fixed.
- Reconciliation provisions existed on paper but were rarely, if ever, honored.
- Merchants remained obligated to make payments regardless of actual business performance.
- Personal guarantees were routinely enforced.
- Default provisions accelerated the entire balance upon events unrelated to receivable collections.
- In practice, the MCA company bore little or no risk that future receivables would fail to materialize.
Based on those facts, the court concluded that the transactions were loans subject to New York usury laws rather than true purchases of receivables. The court further found evidence of fraud and unconscionability arising from the company’s practices and representations to merchants.
Why This Case Matters
The Richmond Capital decision is significant because it reinforces a growing judicial trend: courts are increasingly focused on substance over form.
Historically, many MCA companies drafted agreements specifically to satisfy the three factors commonly used to distinguish an MCA from a loan:
- A meaningful reconciliation provision.
- No fixed repayment term.
- No absolute right to repayment in the event of bankruptcy.
If those features existed in the contract, MCA companies often argued that the transaction could not be usurious.
Richmond Capital shows that courts may no longer stop their analysis at the written agreement. Instead, they are willing to ask whether the reconciliation process actually works, whether payments truly fluctuate with revenue, and whether the funder genuinely assumes the risk of business failure. When those protections exist only on paper, a court may recharacterize the transaction as a loan.
How Merchants Can Use This Decision
For businesses facing aggressive MCA collection efforts, Richmond Capital provides a roadmap for potential defenses.
Merchants and their attorneys should carefully examine:
- Whether reconciliation requests were honored or ignored.
- Whether daily ACH withdrawals were effectively fixed payments.
- Whether bankruptcy, business interruption, or other events triggered automatic defaults.
- Whether personal guarantees eliminated any meaningful risk to the funder.
- Whether the effective annualized cost of financing exceeds applicable usury limits.
Evidence showing that the MCA company expected repayment under virtually all circumstances can support an argument that the transaction is actually a loan rather than a sale of receivables. If successful, that argument may create defenses based on usury, fraud, unconscionability, or unfair business practices.
What About Massachusetts?
Massachusetts courts have not yet produced the same volume of MCA decisions as New York. Nevertheless, Massachusetts courts generally apply substance-over-form principles when evaluating financial transactions.
As a result, Richmond Capital may be persuasive authority in future Massachusetts litigation involving merchant cash advances. Business owners facing MCA lawsuits should not assume that a contract labeled as a “purchase of future receivables” is immune from legal challenge.
Conclusion
The Richmond Capital decision represents one of the most significant recent judicial criticisms of the MCA industry. While legitimate receivables-purchase transactions remain lawful, courts are showing an increasing willingness to scrutinize whether an MCA is truly a purchase of future revenue or simply a high-interest loan operating under a different name.
For merchants struggling under the weight of daily ACH withdrawals, stacked advances, or aggressive collection tactics, the decision provides important support for challenging MCA obligations and asserting defenses that may not have received serious consideration just a few years ago.