Answering the lawsuit and testing the funder’s paperwork
Sued by a merchant cash advance funder
Most merchant cash advance agreements say that disputes go to court in New York, so many business owners across the country are sued in New York even though they have never been here. A lawsuit is serious, but it is also the point where a funder's paperwork is finally tested by a judge.
Do not miss the answer deadline
In New York state court, a defendant generally has 20 days to answer after being personally served, or 30 days when served another way. Missing the deadline can lead to a default judgment. If the deadline is close, call right away; an extension can often be arranged.
Is it really a sale, or is it a loan?
Funders call these deals a purchase of future receivables, not a loan, because loans are subject to usury limits. New York courts look at the substance of the deal. In LG Funding, LLC v. United Senior Properties of Olathe, LLC, 181 A.D.3d 664 (2d Dep't 2020), the court pointed to three factors:
- whether the agreement has a real reconciliation provision that adjusts payments when sales drop
- whether the agreement has a finite term
- whether the funder has recourse if the merchant declares bankruptcy
If the funder does not truly share the risk that the business will fail, the deal may be treated as a loan.
Why that matters: criminal usury
Corporations generally cannot raise civil usury as a defense (General Obligations Law § 5-521), but they can raise criminal usury, which applies to interest above 25 percent a year (Penal Law § 190.40). In Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320 (2021), New York's highest court held that a criminally usurious loan is void from the start. Many merchant cash advances carry effective rates far above 25 percent.
Other defenses and claims we review
- Payments the funder took after sales fell, without honoring reconciliation
- Default fees, attorney fees and charges the agreement does not support
- Stacking, where several funders took positions in the same receivables
- Guaranties that do not cover what the funder is demanding (see personal guaranty defense)
- Counterclaims where the funder's conduct supports them
Commercial disputes outside the MCA context are handled by our commercial litigation team.
Frequently asked questions
I am not in New York. Why was I sued here?
Most merchant cash advance agreements contain a clause choosing New York law and New York courts. Whether that clause is enforceable, and whether the case is in the right county, is part of our review.
How long do I have to respond?
In New York state court, generally 20 days after personal service or 30 days after other service. Send us the papers as soon as you receive them.
Is a merchant cash advance a loan?
Not always. Courts look at whether the funder truly shares the risk that the business fails, including reconciliation, the term of the deal and recourse in bankruptcy. If it is really a loan, usury defenses may apply.