If you have fallen behind on a merchant cash advance, you have probably heard both words. The thing is, a funder’s letter and a call from a collector do not typically define “breach” and “default” for the merchant. It could just be a speech pattern difference or a simple misunderstanding on the part of the collector or the funder’s lawyer, but the legal consequences of these words are different. Not assuming that MCA default is the same as breach of an MCA could affect how business owners react to falling behind, and whether they take steps to try to negotiate an exit.
Singh V. LCF Group, Inc.
A 2023 decision from the Nassau County Commercial Division in New York, Singh v. LCF Group, Inc., shed light on how default and breach mean different things in the MCA world. The case involved a usury challenge to a set of merchant cash advance agreements, and the reason the usury claim failed was that there was no loan, which meant that there was no basis for the usury claim. The court held that a deal is a loan only if the principal amount is absolutely repayable. A reconciliation provision, a finite term, and having recourse if the merchant goes bankrupt are all factors courts generally weigh in determining whether the principal is absolute.
Why should an owner care about a usury ruling? Because to get there, the court had to read the contract’s breach language and its default language side by side. Start with breach. Section 1.10 of the agreement says there’s no stated interest rate; no stated schedule of payments; and no stated period of time for collection of the Purchase Amount. Bankruptcy or business closure, in and of itself, doesn’t put the merchant in breach of the agreement. There is an extensive list of events of default, in Section 1.12. Bankruptcy is not on it.
Default is a different animal. Section 1.12, titled “Protections Against Default,” lists things the merchant does or allows, and the funder can pull Protections 1 through 8 on an immediate and no-notice basis if the merchant discourages use of the processor, alters its processor arrangements to the funder’s detriment, switches processors or allows transactions to be routed elsewhere, disrupts the business or sells or transfers the business or its assets without written consent, or steers customers toward other ways of paying. Any of those events places the merchant in default. Proceeding immediately against the merchant means that the funder does not have to take specific steps to declare a default and then wait for something else to happen. In this contract, a default is an event that triggers specific remedies under the contract. Still, the court was not persuaded that the events of default were defined so broadly that they could practically never be avoided.
So what happens when a merchant actually files for bankruptcy? The merchants in Singh argued that bankruptcy was a default in everything but name, because a debtor must cease using pre-petition accounts, thus cutting off the funder’s collection. But, the court found, that reading of the agreements flies in the face of Section 1.10. So it resolved the tension between the two provisions by finding that the agreements don’t treat bankruptcy as an event of default. Then there is Appendix A of the agreements. See the part about $2,500 being charged each time the merchant defaults? Does that clinch the argument that the agreements aren’t loans? The court said no, it’s not dispositive. And the plaintiffs’ argument that the funder treated a bankruptcy filing as an event of default speaks to a breach of contract, but not the character of the transactions. The court’s analysis boils down to how the deals were structured, not how the funder chose to enforce them.
So, to answer the question in the title as plainly as we can, at least for an agreement like this one: an MCA default is an act by the merchant that triggers Protections by the funder. In legal terms, a breach means you didn’t do something you agreed to do (in a contract). The contract can also spell out what is not a breach, as Section 1.10 did for bankruptcy and closing the business.
The Reconciliation Clause
There is one more provision every owner should look for before payments get tight: the reconciliation clause. In the LCF agreements, Section 1.4 let the merchant request reconciliation in writing, with a complete bank statement, within 30 days after the end of the month. Time limits can impose a hardship, the court said, but the provision is not discretionary.
None of this means the court thought the deals were fair. It said that the agreements had various troubling aspects (like high rates alleged by the merchants and limits on reconciliation). There are a few federal cases that have applied heightened scrutiny to MCAs, but that is not New York law.
You Shouldn’t Assume That Default and Breach Are the Same
What does all of this mean for an owner who is struggling to keep up with the daily debits? At least for this funder, you shouldn’t assume that default and breach are the same. But Singh is one decision about one funder’s contract, so read your own agreement. The two words may mean different things to you, to your funder, and to a court. There is always a risk that the funder can decide you defaulted; that the language of the contract is ambiguous or subject to interpretation; and that the funder views a situation differently than you do.
At Delancey Street, we see how difficult it can be to stop the MCA debits before they bankrupt the business. We negotiate with MCA funders on behalf of business owners, and we are not a law firm. When an owner tells us the funder has declared a default, the first thing we want to see is the contract itself, because the notice may have been an error, or it may refer to a provision that does not exist. If the contract includes provisions that appear to be nonpayment defaults, like altering your processor arrangements, then we need to see that provision. A first consultation is free and confidential, and when litigation or bankruptcy is the better path, we refer owners to a vetted independent attorney. Either way, your call and consultation will help you find some clarity in the decisions you must make.
