Merchant Cash Advance
You are a merchant or business and need some cash urgently. You turn to what is called a merchant cash advance. A merchant cash advance is not, in theory, a loan – it is a sale of the future receivables of the business. The fund company will take money daily or weekly from the merchant’s account until such time as the amount purchased is fully paid off. For the Kentucky merchant the significant terms of the merchant cash advance may be hidden in the fine print, such as a choice of law provision selecting New York, a forum selection provision selecting New York, a personal guaranty and perhaps a confession of judgment. Because of these additional terms, whether the merchant needs a lawyer will depend on the jurisdiction. In many cases, the lawyer will be admitted to the bar in New York. Once there is a judgment in Kentucky or bankruptcy is an option, then the merchant will want to consult with a lawyer admitted to the Kentucky bar.
Disclosure Laws
There is no Kentucky state commercial financing disclosure law. Pollock filed House Bill 680, which would have created a Kentucky Commercial Financing Disclosure Law in KRS Chapter 286. Providers would have had to register with the Department of Financial Institutions and give cost disclosures on contracts signed from January 1, 2026. HB680 was assigned to the House Committee on Banking and Insurance on February 26, 2025. HB 680 did not pass. New York, California, Virginia, Florida and Texas have disclosure laws. A Kentucky merchant could not have a defense against a lender using a lack of disclosure under Kentucky law (there is no Kentucky law).
Kentucky Usury Law
But, the Kentucky merchant is not relying on the disclosure law but on the usury law. The Kentucky usury law is not as harsh as you think. The default interest rate is 8%, KRS 360.010. However, if the principal amount of the original note is greater than $15,000.00, any rate may be agreed to. Almost all of the advances are for more than $15,000.00. Further, a corporation cannot assert the defense of excessive interest, KRS 360.025. And, a limited liability company and a limited partnership cannot assert the defense, KRS 360.027.
In a consumer medical bill case, a “disguised service charge” was held to be “interest” in Grace v. LVNV Funding, W.D. Ky. 2014. The contract is generally controlled by New York law, not Kentucky law, but that may be to the Kentucky merchant’s advantage. In LG Funding v. United Senior Properties of Olathe (2020), a New York appellate court ruled on three factors to determine if a cash advance is a loan: (1) is the reconciliation clause real?; (2) is there a specified time in the contract?; (3) will the funder be entitled to reclaim the remaining amount if the merchant invokes protections of the bankruptcy code? In Adar Bays v. GeneSYS ID (2021), the New York Court of Appeals held that a loan with an interest rate in excess of 25%, which is criminal usury, is void ab initio, and the defense is available to a corporation. In Fleetwood Services v. Richmond Capital (2023), the United States Court of Appeals for the Second Circuit affirmed civil RICO damages against a funder.
Confession of Judgment
Confessions of judgment: Not in Kentucky. A pre-suit acknowledgment of authority to confess judgment is void under KRS 372.140, and no one may appear in a Kentucky court on such authority for a defendant. Most out of state confessions of judgment are prohibited (as of August 30, 2019, New York has changed CPLR 3218. A confession of judgment can only be filed in the county where the defendant is a resident. A business without a residence in New York has no county. A confession of judgment filed in New York against such business after the date of the change is subject to vacatur.
Some funds file in a state which has allowed confessed judgment such as Pennsylvania. The Kentucky Court of Appeals has not addressed the enforcement of a confessed judgment from another state. The United States Supreme Court has upheld the use of the commercial form of cognovit in D.H. Overmyer Co. v. Frick Co. (1972), if the waiver of due process was knowing and voluntary. The Court of Appeals of New York refused to grant full faith and credit to a cognovit judgment obtained without notice in Atlas Credit Corp. v. Ezrine. The Kentucky registration statute applies to judgments which are required to be given full faith and credit.
Subject to the Following Courts
A Kentucky business that signs an MCA is subject to the following courts: The most common is New York Supreme Court, most often in Nassau County, Kings County or New York County, due to the forum clause in the MCA. A funder can file an action in a Kentucky circuit court. The United States Western District of Kentucky has 53 counties and a district seat in Louisville, Bowling Green, Owensboro and Paducah. A bankruptcy action on the business is filed in the bankruptcy court of the district. In the Western District of Kentucky only the Louisville bankruptcy clerk’s office is staffed.
Uniform Enforcement of Foreign Judgments Act
The judgment of a New York court against an individual will not attach against bank accounts maintained at a bank in Kentucky unless the judgment is registered in the state of Kentucky under the Uniform Enforcement of Foreign Judgments Act, KRS 426.950-KRS 426.975. Under the act, the judgment creditor would file a certified copy of the judgment and affidavit with the clerk of the circuit court in any county in Kentucky, along with the debtor’s last known address. The clerk of the court would serve notice on the debtor. A notice (AOC-160) will advise the debtor that execution of the judgment may be issued 20 days from the date of entry of registration. Once the judgment is registered, it shall be treated as a judgment of the state of Kentucky and may be challenged as such.
In Fairbanks v. Large (1997), the Kentucky Court of Appeals found that the registration grants foreign creditors no more rights than those in Kentucky and that the Kentucky limitations period of 15 years applied. The court shall stay enforcement of the judgment, pending appeal in New York, upon the filing of proper security. KRS 426.965.
After registration, the funder typically garnishes bank accounts with non-wage garnishment under KRS 425.501. The funder files an affidavit (form AOC-145) with the clerk and does not have to file a bond. The garnishment order commands the bank to answer the questions in the order within 20 days after service. A person claiming that the funds are exempt files form AOC-150.2, and the bank has to hold the funds until a judge rules.
A Lawyer Is Not Always Necessary
An honest answer for a Kentucky owner is that a lawyer is not always necessary, and when one is needed, it may not be the local lawyer. A New York lawyer is necessary to answer a lawsuit or a confessed judgment in New York and to petition to vacate or appeal. The law is New York law and the usury arguments are based on New York law.
A Kentucky lawyer is needed when a judgment is registered in a circuit court, when a bank account is garnished or if the funder sues in Kentucky. A bankruptcy lawyer practicing in Eastern or Western District bankruptcy court is needed when you have several advances and can’t pay them. If the debits are coming out but there has been no lawsuit, an experienced debt settlement negotiator may be able to settle the debt without going into court.
