Owners who fall behind on several merchant cash advances at the same time usually picture the worst. You rarely get to see details out in the public record about how a single business with a bunch of MCAs and a corporate bankruptcy gets handled, so one bankruptcy court decision from Montana, In re Shoot the Moon, LLC, is worth walking through. It involved a restaurant group that signed eighteen deals with a single funder, and it really shows a different way things can work out.
Kenneth Hatzenbeller and two investors launched a restaurant business in the early 2000s. Over time it expanded to nineteen LLCs located in Idaho, Montana, and Washington, operating sixteen restaurants. Card sales were processed through Heartland Payment Systems. Following the 2007-2009 recession, the companies borrowed from secured lenders and later turned to merchant cash advance firms once the former’s funds ran out. Between October 2014 and September 2015 they signed eighteen agreements with CapCall alone. A merchant cash advance is an advance of cash in exchange for a percentage of future receivables, with the promise of paying back substantially more than the original amount. UCC‑1 financing statements were filed.
In October 2015, all nineteen of the entities combined to form Shoot the Moon, LLC. And then, the next day, Shoot the Moon filed for chapter 11 bankruptcy. So, out comes a chapter 11 trustee, who decides to sell substantially all the assets for a whole lot less than what the secured creditors were owed (including creditors whose liens were senior to CapCall’s). In the meantime, Heartland was still holding credit card payments processed before the bankruptcy filing that had not reached the restaurants’ accounts. The trustee went after that money, and he and CapCall agreed to deposit the money into an account and wait for their fight to be resolved. And CapCall filed a claim against the chapter 11 estate for conversion of receivables that they said they owned, admitting their claim was unsecured.
CapCall then went on the offensive. It demanded a declaration that it owns the set-aside fund, a money judgment against the trustee for converting post-filing receivables, and fees, costs and interest. The trustee answered with counterclaims of his own: that the deals were actually loans not sales, that the set-aside account belonged to the estate free and clear, that the money paid to CapCall before bankruptcy can be clawed back as a preference, and that the money paid to CapCall was usurious.
The first of those questions decided almost everything else. CapCall wanted New York law and the trustee wanted Montana law, but the court concluded that it makes no difference which law applies to whether these were sales or loans. It weighed a list of eight factors, and three of them weighed heavily in favor of treating these as de facto loans. Recourse means CapCall could demand the money back from restaurants and others. Mixing of funds means the money was put in an operating account, and CapCall signed off on that. The contracts and the way everyone acted was like a loan, not a purchase of receivables. The court said the whole package looks like a loan, not a sale.
That opened the door to usury. Eleven of the agreements were with a Shoot the Moon company formed under Montana law, and those contracts picked New York law, which has no law like Montana’s that dings you with penalties for usurious loans. But the court held that Montana law did indeed apply, because the Montana borrowers were Montana entities owned by Montanans, run from a Montana office, and the sole nexus to New York was CapCall’s place of business. Montana’s usury rules are meant to protect borrowers like these restaurants, and choosing New York law could not let CapCall dodge that. In the end, the effective rates on the eleven loans that were governed by Montana law exceeded Montana’s legal ceiling, and the trustee’s usury claim succeeded.
Then came the preference claim. Because the deals were treated as loans, payments in the 90 days before bankruptcy are the debtor’s property used to pay pre‑bankruptcy debts, and the restaurants’ insolvency was not in dispute. CapCall ended up getting more than it would have received in chapter 7, where its claim would have been unsecured and worth, well, nothing, because the senior secured creditors weren’t paid in full. The trustee won there too.
Last came the fees. CapCall’s Montana contracts let it recover legal fees to enforce the contracts, and Montana’s reciprocal fee law means that one‑sided clause works both ways in any action on the contract. The court held that everything the trustee won fell into that category. CapCall owes the trustee its attorney’s fees. So CapCall recovers nothing and is exposed to millions in liability to the estate.
So what should an owner with a stack of advances take from all this? Start with a caution. This was one case, in one bankruptcy court, on its own facts, and not necessarily representative of what will happen in other bankruptcies. Put simply, this case does not say that all advances are loans, or that bankruptcy is a get out of jail free card for MCA debt. “Is my MCA a loan?” No, and yes. It depends. Each deal is like its own neighborhood. Similar, but different enough to trip you up if you don’t pay attention.
Still, a few things stand out. First, just because the contract says the advance is a sale of receivables doesn’t mean it’s treated as such. Here it was treated as a loan because of the elements of recourse, commingling and the agreements and their execution. It’s the substance that matters. Second, the New York choice of law in the agreement didn’t trump Montana’s usury law because the location of the borrowers and their offices, and the owners were all in Montana, and all of that mattered more than the funder’s location. Third, a funder’s place in line matters. CapCall was behind secured creditors who were never paid in full, so it had little to fall back on once its deals were treated as loans. And it’s a case where the result was driven by an interpretation of the deals that didn’t favor the cash advance funder.
Whether any of this fits your own advances is a question for a lawyer, not a blog post. We’re a business debt settlement company, not a law firm. If bankruptcy, including Subchapter V, appears to be the appropriate path, we recommend it on the first call and refer you to an independent attorney. When it doesn’t, our senior advisors negotiate with your funders and lenders for less than the full balance owed, and we don’t sell you another loan to do it. If you’re dealing with multiple MCAs or other business debt, let’s talk. The first consultation is free and confidential.
