A business debt lawsuit is not a foregone conclusion. The funder has to prove its case. The contract has to be enforceable. The accounting has to be accurate. Each is a point of attack, and an independent attorney handling MCA defense has a menu of strategies depending on the facts.
| Defense Strategy | How Often Raised | Difficulty | Settlement Impact |
|---|---|---|---|
| 1. Standing / Chain of Title | HIGH | Low | Standing question for the court |
| 2. Usury / Recharacterization | MEDIUM | High | Loan recharacterization question |
| 3. Unconscionability | MEDIUM | Medium | Terms struck or reformed |
| 4. Reconciliation Breach | HIGH | Medium | Funder reconciliation conduct at issue |
| 5. Accounting Challenges | HIGH | Low | 10-25% balance reduction |
| 6. Improper COJ Execution | HIGH | Medium | COJ procedure question for the court |
| 7. Choice of Law / Venue | MEDIUM | Medium | Shift to favorable forum |
1. Standing and Chain of Title
The plaintiff has to be the actual owner of the debt. If the original funder sold or assigned the debt, the plaintiff needs documentation of every step. Debt buyers frequently cannot produce complete chains, especially for older debts that passed through multiple hands. Whether a standing argument fits a particular case is something a licensed attorney you retain evaluates.
2. Usury and Recharacterization
Many merchant cash advances are structured as receivables purchases to avoid being classified as loans subject to state usury caps. Independent counsel can argue that the actual economics, including fixed daily payments, personal guarantees, and reconciliation clauses that rarely get honored, mean the transaction is a disguised loan.
Whether an MCA could be recharacterized as a loan, and what would follow if it were, is a fact-intensive legal question only a licensed attorney can assess for a specific contract.
3. Unconscionability
Contracts so one-sided that no reasonable person would have agreed can be set aside as unconscionable. The doctrine has two parts: procedural, meaning the way the contract was formed, and substantive, meaning the terms themselves.
MCA contracts can show both. Procedural issues include hidden COJ clauses and adhesion terms. Substantive issues include effective rates of one hundred to four hundred percent, blanket UCC liens, and personal guarantees on receivables purchases.
4. Breach of the Reconciliation Clause
Most MCA contracts require the funder to adjust payments to actual receipts. If receipts drop, the payment is supposed to drop. In practice, funders often refuse or delay reconciliation. Independent counsel can argue that the funder’s breach of the reconciliation clause is a defense to the borrower’s alleged breach.
5. Accounting Challenges
The funder has to prove the balance. Many cases include charges not supported by the contract: improperly calculated default fees, layered returned-item fees, accumulated interest on amounts that should not bear interest. Discovery demands for full payment history often reveal errors. Even a ten to fifteen percent reduction changes the settlement math significantly.
6. Improper COJ Execution
If the engagement is post-judgment via confession, the COJ itself can be attacked. Common grounds:
- COJ signed without proper notarization or attestation
- Supporting affidavit contains material misrepresentations
- COJ filed in a jurisdiction that no longer accepts COJs against out-of-state debtors
- Service of judgment failed under applicable rules
- COJ amount exceeds what was actually due at the time of filing
If a confession of judgment is set aside, the matter generally returns to the underlying claim. Whether that path is available, and what it would involve, is a question for a licensed attorney you retain.
7. Choice of Law and Venue
MCA contracts often specify New York or Delaware law and venue regardless of where the borrower is located. Borrowers sometimes question these clauses on grounds of fairness, lack of meaningful connection, or home-state public policy. Whether a venue or choice-of-law argument is available in a given case is something a licensed attorney you retain evaluates.
Each defense requires the right facts, the right court, and the right timing. Independent attorneys from an MCA-experienced referral network know which combinations work in which jurisdictions.
Defense as Settlement Leverage
Not every defense has to win at trial to be useful. Each viable defense is leverage. The funder calculates the cost of defending the defense versus the cost of settling. An engagement with three credible defenses settles at a far lower number than an engagement with none, even if the borrower never expects to reach verdict.
Defenses are strongest when raised early. Waiting until discovery to identify a usury argument is too late. The full menu needs to be in the answer or raised by motion in the first round. Senior advisors at Delancey Street handle the financial negotiation; independent attorneys from our referral network handle defense and motion practice, coordinated so the tracks reinforce each other.
Delancey Street is a business debt-relief company, not a law firm. When a matter requires legal work, we refer you to an independent attorney from our referral network; the attorney–client relationship is between you and that attorney.
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