If your business is sliding toward bankruptcy and a merchant cash advance funder has been pulling money out of your account right up to the end, you have probably wondered whether any of it can come back. The trustee might be able to claw back the payments the MCA company got just before the owner filed for bankruptcy, but it depends on whether the MCA was really a sale of future sales or a loan. The words “sale” in the contract don’t control; the court looks at what the agreement really was and how it worked. Many contracts call it a “purchase” to try to avoid that, but courts are starting to look past the labels and see what really happened.
Recent Example
The clearest recent example is J.P.R. Mechanical, a May 2025 decision from the Bankruptcy Court for the Southern District of New York. Two debtors got cash advances against their future sales in a way that was supposed to be a “sale” of that future income. The court, using New York law, said it was really just a loan, so when they paid it back just before filing for bankruptcy, the bankruptcy trustee could get that money back. The amount was not small: the Chapter 7 trustee could recover as a preference over $3 million paid under three separate MCA agreements.
To see why the label mattered so much, you have to understand what the funder was arguing. If it was a true sale, then the money coming back to the MCA company wasn’t a payment, it was just the company getting its own stuff back. But if it was actually a loan in disguise, then all the MCA company is is another one of the business’s regular creditors who happened to get paid before everyone else. The judge put it in four words: “substance - not form - controls.” In other words, the MCA documents said it was a sale. But that did not mean it was. Think of the transaction like a kitchen recipe. You look not at the label on the package but at what actually went into the bowl.
Lender Deal Terms
The court looked inside the bowl using the factors New York courts have long applied to MCA deals, along with a few more, and the funder lost on every one. First, the reconciliation clause was “largely illusory.” The deal only allowed adjustments once a month, didn’t make the MCA company give back any extra money collected, and the MCA company was guaranteed to get its money back no matter what - that’s a loan. Reconciliation itself isn’t huge - what matters is the obligation to refund overpayments.
Second, the term was effectively fixed. A contract like this might say “until X amount is paid” on the paper, but the math made it obvious when it would end. Here the agreements said the purchase ran until 25% of receipts reached a target amount. A witness under oath testified the date could be figured out by a simple math problem.
Third, the funder kept the tools of a lender. Just because the deal didn’t say “bankruptcy is an event of default” doesn’t mean the company is out of luck. The contract still said if anything got in the way of the MCA company getting paid, the whole debt would come due immediately. And the personal guarantee meant the MCA company could go straight after the owner, without being forced to fight the business first. These are normal lender deal terms, the Court said.
Fourth, the risk never moved. The business, not the funder, assumed the risk that customers wouldn’t pay. The funder was getting money from the business’s bank account, no matter which customers paid. These facts supported the conclusion that the provider was a secured, but junior, lender and not a buyer. Also, the funder didn’t point to specific customer accounts, the business was free to spend the money anywhere, and when they filed their claims in bankruptcy, the funder called itself a “creditor.”
The court pierced through the contract and said what you have here is a loan. That made the payments preferential transfers. If the deal was really a loan, the MCA company can be forced to return the payments.
Before you treat this as a guarantee, there is a catch. The MCA provider was late with the paperwork: it missed discovery deadlines and filed its opposition late, so the court treated the trustee’s motions as unopposed, worked from an undisputed record, and noted that the funder had waived several defenses. But this case is weird because the facts weren’t really disputed, so other cases might come out differently, and you have to look at each agreement individually.
Your MCA Contracts
So what does this mean for you? If an MCA agreement has any kind of vague requirement to “reconcile” sales, a set date when it’ll be paid off, a clause that makes it due immediately, or a personal guarantee, it might be treated as a loan instead of a sale of future receivables. That means the money you paid before going bankrupt could be clawed back. For an MCA company to truly avoid being treated as a lender, it has to have a real process to refund excess payments, an indefinite term, and no personal guarantees or calls that you owe everything when things go wrong.
Borrowers, please re-read your MCA contracts and see if you have a case against the MCA provider. Pull out every agreement, look at how the reconciliation clause actually works, check whether there is a personal guarantee, and do the arithmetic on the payoff date yourself. Then take it to someone who reviews these deals for a living. If a company’s contract looks more like a loan than a sale of receivables, the MCA provider’s last-minute takeback might get clawed back. In short, this case drives home the point that an MCA agreement can be recharacterized as a loan even if it’s labeled a sale, and that a Chapter 7 trustee can recover the money taken from your account in the period before you file.
