Merchant Cash Advance

A merchant cash advance is usually structured as a “purchase” of the business’s future receivables rather than a loan. This is how funders justify why loan shark laws do not apply. So in New York City if you own a business and are faced with paying back an MCA, and you ask a defense lawyer if you need one, the answer might be “yes” but the “local” reference has a peculiar meaning. Nearly every MCA contract already points disputes to New York court. The store owner, the chosen forum, and the real-world enforcement apparatus are all located in the same state. All that extra ‘localness’ eliminates a lot of protections that out-of-state merchants have. In the end, a lawyer licensed in New York is the one who matters.

Commercial Finance Disclosure Law

New York also has a commercial financing disclosure law. The Commercial Finance Disclosure Law, governed by the Department of Financial Services regulation, 23 NYCRR Part 600, took effect on August 1, 2023. It covers offers of financing of $2.5 million or less to New York residents and to businesses managed or directed principally from New York. Which includes a typical New York City merchant. Merchant cash advances qualify under the law’s “sales-based financing.” The offeror is required to provide the annual percentage rate and the finance charge prior to funding. Penalties to the offeror are up to $2,000 per violation. If the violation is willful, that increases to $10,000. This law does not appear to provide merchants with a private right of action, so an omitted disclosure has negotiation value and is a basis for a complaint to the Department of Financial Services.

Criminal Usury

Also, New York has a usury law. It’s a defense that bifurcates into two parts. First, there is a civil cap at 16% per annum. See Gener. Oblig. Law 5-501. Second, a corporation cannot assert a defense of civil usury. But a corporation can assert a defense of criminal usury which is, in part, 25%. See Gener. Oblig. Law 5-521. In Adar Bays v. GeneSYS ID, 2021 (Court of Appeals of the State of New York) the court held that a criminally usurious loan is void ab initio. It also held that a corporate borrower under a loan of less than $2.5 million can assert a defense of criminal usury in a civil action. This only helps a merchant if a court finds that a cash advance is a loan.

Three Criteria to Consider

New York courts have a history of finding certain MCAs to be disguised loans. In LG Funding v. United Senior Properties of Olathe (2020) the Appellate Division, Second Department identified three criteria to consider in determining whether the cash advance was a loan. First, does the contract have a true reconciliation clause, that is, one that modifies the required repayments in proportion to actual sales? Second, is there a fixed end date for the transaction? Third, can the funder still take collection action if the merchant files for bankruptcy? A contractual right for the funder to adjust payments “at its sole discretion” was one of the factors indicating that the advance was a loan. Fleetwood Services v. Richmond Capital Group (June 2023) is a recent decision of the federal Court of Appeals for the Second Circuit applying the test and finding an MCA to be a usurious loan. The trial courts found an implied annual interest rate of 278.5%.

$1.065 Billion Verdict

The NY Attorney General has now used these principles to obtain substantial verdicts. On February 19, 2026, the First Department upheld liability against Richmond Capital Group in People v. Richmond Capital Group, a case involving more than 3,000 transactions. The court held that the transactions were loans for the purpose of the usury laws and were also unconscionable. It held that the reconciliations were never in fact performed. It did vacate the money award of $77,289,631 because the principal payments were not credited. In January 2025 the Attorney General announced a $1.065 billion verdict against Yellowstone Capital. It wrote off $534.5 million in debts owed by more than 18,000 businesses. The rates were alleged to be up to 820%. The Attorney General can now proceed under the FAIR Business Practices Act (in effect February 17, 2026), which makes unfair and abusive practices against businesses unlawful.

CPLR 3218

Confessions of Judgment are the biggest differences between New York City merchants and the rest of the world. CPLR 3218 in its present form, as amended August 30, 2019, requires that the confession state the county of the state of New York in which the signer of the judgment of confession resided at the time he or she signed it. The confession can only be filed in the same county or the county where the person signing the confession resides at the time of filing. The amendment took away the funders’ right to file confessions against out of state residents but did nothing to help New York City residents.

A confession of judgment from a Queens restaurant owner can still be filed with the clerk of the county of Queens, and the funder can enter judgment against the merchant without filing a lawsuit. Most of the time, the only way the merchant can get the judgment set aside is to commence a plenary action as the Second Department decided in Regency Club at Wallkill v. Beinish (2012). The only other way is to demonstrate that he or she was deprived of due process of law.

The vast majority of the time, a funder will file suit in the state trial court of the state in which it is filing suit – the New York Supreme Court. Most funding contracts specify a county and a party in which to file suit (usually Kings County, New York, Nassau County, New York, Westchester County, New York, and many upstate counties routinely see these MCA cases, but the federal courts in New York are divided by borough. For example, the Southern District of New York encompasses Manhattan and the Bronx. The Eastern District of New York encompasses Brooklyn, Queens, and Staten Island. There have been federal racketeering actions against funders (filed by merchants) in those courts as well. The Fleetwood case was filed in the Southern District of New York. A New York City based business wishing to file for bankruptcy may file in the bankruptcy court in either the Southern District of New York, or the Eastern District of New York, depending on which borough the business is located in.

In order to enforce the debt of a NYC merchant, there is no need to domesticate because a NY judgment is good statewide. Plaintiff then files a transcript of the judgment under CPLR 5018 in any county in New York State. The transcript becomes a lien on real property for 10 years. The funders then serve restraining notices to banks for garnishment. If an individual guarantor is served with the CPLR 5222-a exemption notice, he or she then has 20 days to mark the protected funds. To actually take cash or property, the creditor files an execution with the City Sheriff (who has offices in all five boroughs), or to a City Marshal. City Marshals are appointed by the Mayor and they are paid a percentage of the proceeds they collect.

The Critical Lawyer Is the New York Lawyer

Thus, for a merchant in New York City, the critical lawyer is the New York lawyer with experience in MCA cases. He/she can oppose a restraining notice, move in the plenary action on the confessed judgment, and argue the LG Funding factors in Supreme Court. There is no need for a domestication fight because the forum and assets are in New York, so a merchant does not need two firms. It is also a benefit to know the practice of levy by the Sheriff and Marshal and local property liens in the boroughs. A merchant with assets in New Jersey or another state may also need local counsel in the state where the assets are.

A merchant who has assets in NJ or elsewhere in the country may have to be represented by counsel where the assets are located. A merchant who is current or a bit behind and not yet being sued may not need to retain a litigator, but rather someone who is willing to negotiate. The negotiator’s advantage is the law, the fact that the lender has not complied with every single requirement of the disclosure law, the discretionary reconciliation clause, the criminal usury rates. A merchant who has had accounts frozen, has had multiple advances, has more than one confessed judgment is a different person and it may be a better idea to call the bankruptcy attorney, because that’s where all of the creditors can be dealt with at the same time. If you happen to be in the Southern District or the Eastern District, you want to be referred to the local bankruptcy attorney.