The brokers will tell you that MCA’s are not loans. It is the purchase of receivables. Next, it is common for the funder to take daily or weekly bank account debits. When an Arizona company “defaults” on the MCA, it is unlikely that the action will be maintained here. Most Merchant Cash Advance agreements choose New York law and New York courts. When you have a disagreement with an MCA lender in New York, the one lawyer you want on your side is one who can practice in New York. When would a business owner in Arizona need the services of an Arizona MCA attorney? When the funder is collecting in Arizona or when bankruptcy is being contemplated.
The Bottom Line From a state law perspective, an Arizona merchant is in a pretty bad situation before the ink is even dry on the deal. First, Arizona hasn’t adopted the commercial financing disclosure laws that exist in California, New York, Florida, Utah and Georgia that apply to sales-based financing. In other words, there is no Arizona law that requires the funder to disclose an estimated annual interest rate to the merchant before he signs the deal. Second, Arizona’s usury law is pretty friendly. A.R.S. 44-1201 says the default rate of interest is 10% per year, unless otherwise agreed upon in writing. So, essentially, the parties can agree in writing to pay whatever interest rate they want. Third, even if the deal was treated as a loan, a usury defense would be pretty weak under Arizona law. Most of the cases establishing that MCAs are disguised loans have been New York cases.
Criminal Usury
MCA contracts typically contain a choice-of-law clause providing that the transaction is subject to the laws of the State of New York, and the bulk of the case law also resides there. The Appellate Division, Second Department of New York considered the substance of the transaction rather than just its form in LG Funding v. United Senior Properties of Olathe (2020). In Principis Capital v. I Do, Inc. (2022), the New York Appellate Division asked the following three questions: (1) Does the contract contain a reconciliation clause? (2) Does the contract provide for a fixed term? (3) Does the funder have a recourse in the event of the merchant filing for bankruptcy? Typically, a corporate borrower will not have a civil usury defense under New York law. But criminal usury – interest above 25% a year – can be used as a defense under General Obligations Law 5-521. New York’s highest court ruled that a criminally usurious loan is void per se in Adar Bays v. GeneSYS ID (2021).
Direct Action Against Funders
Several other federal courts in New York have followed this rule. In Fleetwood Services v. Richmond Capital Group (2023), the Second Circuit Court of Appeals upheld the district court’s determination that the MCA agreement was a usurious loan. In Fleetwood Services, the Second Circuit Court of Appeals upheld the district court’s award of damages to the MCA borrower (Merchant) against the MCA funder under the federal Racketeer Influenced and Corrupt Organizations Act (“RICO Act”). Direct action against funders by New York’s Attorney General In 2025, New York Attorney General announced a $1.065 billion judgement against Yellowstone Capital and related companies for interest rates as high as 820% annually. New York Attorney General cancelled over $534 million in debt for over 18,000 small businesses and ordered companies to vacate outstanding judgments in court.
Judgment by Confession
This is a different confession of judgment world for an Arizona business owner. Under Arizona law, A.R.S. § 44-143, no judgment by confession shall be entered upon any written promise to pay any money unless a statement of authority to confess a judgment is signed and acknowledged after the time the debt becomes payable. Generally, a confession signed at the time of funding could not be entered in Arizona.
Before August 30, 2019, a fund provider could enter a confession of judgment signed by an out-of-state business owner in any county in New York as specified in the contract. But as of August 30, 2019, New York amended CPLR 3218, so a confession of judgment can only be entered in the New York county where the signer lived. For example, a confession of judgment signed by an Arizona business owner who never lived in New York after August 30, 2019, cannot be entered in New York.
Fund companies have learned how to sidestep the impact of the change to CPLR 3218. A fund company can sue in New York and ask the court to consider it an expedited case. Express Trade Capital v Horowitz (2020) held that CPLR 3213 could be applied against foreign defendants. CPLR 3213 allows courts to enter summary judgment in lieu of complaint based on an instrument for the payment of money only, and the court in Express Trade Capital held that a settlement agreement and confessions could be used as the instrument. A forum selection clause is generally valid, unless the party who signed the contract was defrauded or overreached into agreeing to the forum selection clause. An Arizona owner who agreed to be sued in New York will likely not be allowed to block a lawsuit in New York because it will be too inconvenient for them to travel to New York.
Arizona merchants involved in MCA disputes are sued most often in (1) the New York Supreme Court, the state’s general jurisdiction trial court, in the county specified in the contract. Next is (2) the Arizona Superior Court, where the funder registers the New York judgment to collect on it or sometimes brings an original action. The third venue is (3) federal court in Arizona, usually the U.S. Bankruptcy Court for the District of Arizona, which has branch offices in Phoenix, Tucson and Yuma, and hears cases in Flagstaff and Bullhead City as well.
Uniform Enforcement of Foreign Judgments Act
A New York judgment does not attach automatically to an Arizona merchant’s bank account. Under A.R.S. § 12-1702, part of the Arizona version of the Uniform Enforcement of Foreign Judgments Act, the funder files an authenticated copy with the clerk of any Arizona superior court, and the clerk thereafter treats it as a judgment of the court where filed. Under A.R.S. § 12-1703, the funder must mail notice to the merchant and file an affidavit showing that the mailing was done, and no writ of garnishment shall issue until 20 days after such mailing. The funder may then serve the merchant’s bank with a writ of garnishment, but the writ will attach only the amount on deposit in the account on the date the writ is served. A merchant who wishes to object must do so within 10 days after the merchant has received the bank’s answer, and the hearing is generally required to be held within 10 days of the request.
Homestead Exemption
In 2022, the voters in Arizona approved Proposition 209 to increase the Arizona homestead exemption to $400,000 and increase the exempt bank deposits in Arizona to $5,000 (from $300). This is indexed for annual increases for cost of living every year. This is important if the funder wants to sue the owner directly under the guarantee. If the funder decides to take this route, it must consider the following somewhat obscure community property law in Arizona. Some of Arizona’s community property laws are very strange with respect to guaranties. A.R.S. 25-214(C) is one such law. It provides that “[t]he community is bound only if the guaranty is made by both spouses of the community joined in the making of the guaranty.” Thus, if the owner’s spouse did not sign a guaranty, the owner may have an argument that the community property is exempt.
Whom an Arizona Owner May Want to Call First
This makes a difference with respect to whom an Arizona owner may want to call first. If the funder has already sued in New York or is about to obtain a judgment in New York, the owner may need a lawyer who can conduct that action in New York, because all the Principis factors, the criminal usury defense and all the opposition to a motion under CPLR 3213 must be raised in that action. An Arizona lawyer is much more important for the next step, namely, fighting the judgment in superior court once it has been entered, and opposing a garnishment within the 10 days and asserting the homestead and deposit account exemptions and the spousal joinder requirement for community property.
An Arizona collection defense lawyer, or even a New York litigation attorney, might not be the right lawyer to call at this stage. If you are still operating and have not been sued yet, it might be prudent to get a negotiator that can negotiate a lower payoff amount or set up a payment plan, especially if there is no reconciliation clause in the contract. If the business is getting hit up by multiple funders simultaneously, debiting accounts, it might be worth it to call an Arizona bankruptcy lawyer. A bankruptcy court has determined that an MCA is a loan, and recently a Washington bankruptcy court ordered CapCall to give back more than $2.7 million. However, bankruptcy is risky because the funders can potentially argue that the debt cannot be discharged due to fraud, and trustees will potentially be able to examine any transfers made within two years before the bankruptcy filing.
