A Michigan Merchant
A standard MCA purports to purchase an interest in future merchant sales, to be collected by debit to the merchant’s bank account on a daily or weekly basis. The theory used by all funders to argue that the MCA is not a loan, and thus not subject to usury laws, is that it is all done with that theory. Most MCA agreements provide that the law of New York governs and any dispute is to be adjudicated in New York courts. For a Michigan merchant, the questions are: In a dispute, what law applies, and where and to whom does the dispute go? For merchants who want a response to that question, what type of attorneys are allowed to practice before that court? The answers to these questions are not all Michigan.
Michigan does not have a commercial financing disclosure law. In a dozen states, including New York, small business customers are required to be given written disclosure of the true cost of an MCA before it is advanced. A Michigan merchant is not protected by a state’s disclosure law. A Michigan merchant will have to read the contract and do the math, in order to know the actual costs of the advance: The amount of the funding, the total amount to be paid back, the daily or weekly amount of debits and the amount of default fees. No state disclosure law means that, even if the advance was misrepresented to a Michigan merchant, the merchant has no state disclosure statute to rely on.
Michigan’s usury laws are … a layer cake. The civil limit is 5% per year or 7% per year, depending on whether or not the contract is in writing. But there are numerous other laws authorizing other rates for other types of loans.
If a lender is charging a civilly usurious rate of interest, it can’t collect interest, fees or costs. MCL 438.41, the criminal usury statute, is the big kahuna. A lender may not knowingly charge simple interest over 25% per year without legal authority. Penalty: a term of up to five years’ imprisonment, a fine of up to $10,000 or both. MCL 438.61 allows business entities to agree to rates in writing in excess of the civil limit. Non-bank, non-credit union, non-insurance-company, etc. lenders remain subject to the criminal limit.
A Usury Defense
The form of business organization may be relevant to a usury defense. A corporation under MCL 450.1275 may agree in writing to pay any rate and is not entitled to raise the defense of usury. In In re Cadillac Wildwood Development Corp. (1993), the Sixth Circuit described Michigan courts as reading that statute as, in effect, repealing the usury laws as applied to corporations. By contrast, the LLC statute, MCL 450.4212, permits an LLC to agree to any rate so long as it does not exceed the criminal usury limit. A Michigan LLC thus may have a usury defense that a Michigan corporation does not have —at least if Michigan law applies.
In Michigan the interest-as-fee case is Soaring Pine Capital Real Estate and Debt Fund II v. Park Street Group Realty Services, 2023 (Mich. Sup. Ct.) The transaction involved $50,000 up front, and a $1,000 success fee per house. The fees were found by the trial court to be interest making the rate over 25%. The Michigan Supreme Court said that you can’t save a contract that stipulates an illegal rate of interest from the beginning with a usury savings clause, even though some of the interest is in the form of a fee. And it said no exemption for sophisticated parties. Soaring Pine was a real estate loan, not a merchant cash advance.
This most recent judicial pronouncement of an advance by a court in Michigan highlights the extent of Michigan usury law. In In re Cloverleaf Electric, June 16, 2026 (Bankr. E.D.Mich.) the bankruptcy court rejected the merchant’s argument that its advance was a loan made as a sale of receivables subject to usury laws. The bankruptcy court ruled that criminal usury does not give rise to a cause of action to seek relief, and it discussed unconscionability under New York law. Most contracts incorporate New York law so, normally New York law applies. In Adar Bays v. GeneSYS ID (2021) the highest court in New York State ruled that a corporation can raise a defense of criminal usury, i.e., interest in excess of 25%. A loan that is criminally usurious is void.
Confessions of Judgment
The 2019 amendment to CPLR 3218 largely eliminated confessions of judgment as a means for funders to enforce their agreements with Michigan merchants. Effective August 30, 2019, a confession of judgment must name the county in New York where the defendant resides and a business resides wherever it has a place of business. A Michigan merchant with no place of business in New York cannot have a confessed judgment entered against it in New York. The amendment was effective immediately for all affidavits filed on or after August 30, 2019, including affidavits executed prior to that date. New York appellate courts have held that the amendment is applicable to judgments entered outside the context of a lawsuit. The amendment does not prevent a funder from bringing a lawsuit on an ordinary breach of contract against a defendant in New York.
Michigan’s confession law: MCL 600.2906. The Michigan confession law is strict. Under the Michigan confession law: A Michigan circuit court has the authority to enter a confessed judgment without the filing of a suit only when the authority to confess the judgment is set out in a separate instrument from the instrument creating the underlying obligation, and the separate instrument is filed with the clerk when the judgment is entered. In USA Jet Airlines v Schick (2001), the Michigan Court of Appeals applied the strict separate instrument requirement of the confession law to the confession clause. The Court of Appeals applied strict separate instrument requirement of the confession clause in reliance on older Michigan court cases which required strict compliance with the separate instrument requirement of the confession law. Under the strict separate instrument requirement of the confession law, the authority to confess judgment must be kept separate and distinct from the promise to pay the underlying obligation. Advance agreement with confession clause may not meet the strict separate instrument requirement.
The Forum Selection Clause
Generally, forum selection clauses are enforced. Under MCL 600.745 and Turcheck v. Amerifund Financial, 2006, if there is an allegation of a forum selection clause having been violated, a Michigan court will dismiss or stay a case unless the party resisting the forum selection clause can prove one of the exceptions to the rule in the statute: misrepresentation, duress, or abuse of economic power and unfair or unreasonable. There is a high burden and unsupported allegations of inequality of bargaining power in Turcheck did not meet the requirements. A Michigan merchant who is suing a funder at home should expect a motion to have the case transferred to New York.
One of Three Court Systems
The lawsuit of a Michigan merchant can wind up in any one of three court systems. Typically the funder brings an action on the contract in New York Supreme Court, which is the state’s general trial court, in the county specified by the forum selection clause. A New York judgment enforced in Michigan will be filed in a Michigan circuit, district or municipal court. Federal cases, including bankruptcy cases, are filed in one of Michigan’s two federal courts. The Eastern District has 34 counties, including Wayne, Oakland and Macomb, and bankruptcy courts in Detroit, Flint and Bay City. The Western District has 49 counties, including Kent and the entire Upper Peninsula, and offices in Grand Rapids and Marquette.
The Uniform Enforcement of Foreign Judgments Act
A judgment from another state like New York does not, by itself, create any interest in money in a Michigan bank account. The funder must first obtain an authenticated copy of the judgment and an affidavit of the parties’ last known addresses under the Uniform Enforcement of Foreign Judgments Act, MCL 691.1171 to 691.1179, and file the judgment and affidavit with a Michigan clerk of court. The clerk mails notice of the filing to the merchant. The funder cannot enforce the judgment against the merchant until 21 days after mailing of the notice. The funder can then serve notice of a nonperiodic writ of garnishment under MCR 3.101 on the merchant’s bank, and the bank is then required to file a disclosure within 14 days. The court must stay enforcement of the judgment against the merchant’s money if the merchant proves grounds for staying a Michigan judgment.
For a Michigan business owner, the honest answer is that it depends on the stage of the dispute, and the first lawyer needed is often a New York one. A Michigan company served with a New York summons outside New York generally has 30 days after service is complete to appear under CPLR 320(a). Missing that deadline invites a default judgment. Usury defenses under Adar Bays, motions to dismiss and motions to vacate a default all have to be made in the New York court. A lawyer licensed only in Michigan is not the right first hire for that lawsuit.
Michigan counsel is important after the action is in Michigan. A Michigan attorney is necessary to pursue post-judgment actions in Michigan after entry of a New York judgment under the Uniform Enforcement of Foreign Judgments Act. The motion to stay under MCL 691.1175 to enforce the New York judgment within 21 days is a key filing. This is when you have to file for exemptions from garnishment. A Michigan attorney is also necessary to pursue a claim against a funder in Michigan on a forum selection clause under MCL 600.745. Finally, a Michigan lawyer is required to pursue an LLC’s usury claim under MCL 450.4212. The bankruptcy would be filed in the Eastern District of Michigan or Western District of Michigan. The recent Cloverleaf case shows the Eastern District of Michigan willing to analyze the contract under New York law.
Companies that have debts that are delinquent but have no lawsuits filed against them may be better off seeking a settlement negotiator or restructuring attorney first, as some of the debts may have already been written off. In January 2025, the New York attorney general agreed to a $1.065 billion settlement with Yellowstone Capital that extinguished $534 million of debt owed by more than 18,000 companies across the United States. It may be possible to have judgments vacated after the merchant files a claim.
