MCA Usury Defense New York

Attorney-reviewed legal analysis for New York business owners facing merchant cash advance enforcement.

If you are a New York business owner watching daily ACH withdrawals drain your operating account, holding a summons from a Manhattan or Brooklyn court, or staring at a frozen bank balance, you are not the first owner to suspect that something about your merchant cash advance was never quite legal. You are also not without options.

New York has some of the most protective usury laws in the country. Civil usury is capped at 16 percent annual interest. Criminal usury begins at 25 percent. Many merchant cash advance (MCA) agreements—drafted to look like “purchases of future receivables”—charge effective annual rates well above both thresholds. When that happens, New York courts can re-examine the substance of the deal, look past the funder’s chosen labels, and treat the contract as what it actually is: a loan. And when an MCA is recharacterized as a loan with a usurious rate, the consequences for the funder can be severe—up to and including the contract being declared void and entirely unenforceable.

This guide explains how the usury defense works in New York, the cases that shape it, and what business owners under pressure can do right now.

What Is MCA Usury Defense in New York?

MCA usury defense is a legal argument used by New York businesses to challenge a merchant cash advance contract on the grounds that it is, in substance, an illegal loan with an interest rate above New York’s usury limits. The defense works because New York courts apply a doctrine known as substance over form—they look past how a contract is labeled and examine how it actually operates.

A typical MCA agreement says the funder is “purchasing future receivables” at a discount. On paper, that is not a loan. There is no fixed interest rate, no maturity date, and no absolute repayment obligation. But many MCA agreements operate exactly like loans: fixed daily debits, no meaningful adjustment when business slows, personal guarantees, and remedies that look identical to debt collection. When the substance contradicts the label, a New York court can recharacterize the agreement and apply usury law.

If the recharacterized loan exceeds 25 percent APR—which most MCAs easily do once the discount, fees, and short term are annualized—the contract may be void as criminally usurious. That is the heart of MCA usury defense in New York.

A skilled New York MCA defense attorney builds this argument by examining the contract language, the payment history, and the funder’s actual conduct after default.

New York Usury Laws Explained

New York’s usury framework rests on two statutes:

• Civil usury—N.Y. General Obligations Law § 5-501 (referencing N.Y. Banking Law § 14-a) caps the interest rate on most loans below $250,000 at 16 percent per year.
• Criminal usury—N.Y. Penal Law § 190.40 makes it a Class E felony to knowingly charge interest at a rate exceeding 25 percent per year on a loan or forbearance.

A few features of these laws matter enormously in MCA litigation:

1. Civil usury can void the contract entirely. When civil usury applies, both principal and interest may be unrecoverable.
2. Corporations cannot ordinarily raise a civil usury defense. Under N.Y. General Obligations Law § 5-521, business entities are barred from asserting civil usury against most loans. But—critically—they can still raise criminal usury as a defense. That single carve-out is why criminal usury is the centerpiece of nearly every MCA usury fight.
3. Effective rate, not stated rate, controls. Courts compute the actual annualized cost of the money, including fees, “origination” charges, and the compressed repayment schedule.

For a deeper breakdown of how these statutes are applied to MCA contracts, see our overview of New York usury laws and merchant cash advances.

Are Merchant Cash Advances Illegal in New York?

Merchant cash advances are not, as a category, illegal in New York. A genuine purchase of future receivables—where the funder takes real risk that the merchant’s revenue may underperform, with no fixed maturity and a true reconciliation mechanism—is a legitimate commercial transaction.

The problem is that most MCA agreements written in New York over the last decade do not look like genuine receivables purchases when stress-tested. They look like high-rate loans. When a court reaches that conclusion, the agreement can be recharacterized—and once recharacterized, it is judged against the same usury rules that govern any other loan.

In short: not every MCA is illegal, but a large share of them are vulnerable. The question is whether the specific contract in front of the court has the markers of a disguised loan.

When an MCA Is Considered a Loan

New York’s leading appellate decision on MCA characterization is LG Funding, LLC v. United Senior Properties of Olathe, LLC (App. Div., 2d Dept., 2018). The court set out three factors that drive the loan-versus-purchase analysis:

• Is there a reconciliation provision? A real reconciliation provision lets the merchant adjust payments downward when revenue drops. If reconciliation is mandatory and meaningful, the contract looks more like a true purchase. If it is discretionary (“upon written request and at funder’s sole discretion”), or never honored in practice, that points toward a loan.
• Is the term finite? A genuine receivables purchase has no fixed end date—the funder collects until the purchased percentage of receivables is delivered, however long that takes. A contract that effectively forces full repayment within a defined number of days or months looks like a loan.
• What happens if the merchant goes bankrupt or stops generating revenue? A true purchaser bears that loss. If the agreement gives the funder full recourse against the merchant or a personal guarantor when revenues disappear, the funder is acting like a lender, not a buyer.

Other factors courts weigh include the existence of personal guarantees, confessions of judgment, security interests, default acceleration provisions, and whether daily debits actually move with deposits. Our detailed MCA disguised loan defense page walks through how each of these factors is argued.

Key New York Cases on MCA Usury

Several New York decisions shape how courts evaluate MCA usury arguments today:

• LG Funding, LLC v. United Senior Properties of Olathe, LLC—established the three-factor framework now used by most New York courts.
• Principis Capital, LLC v. I Do, Inc.—applied the LG Funding factors and reinforced that no single factor controls; the court evaluates the overall economic reality.
• Davis v. Richmond Capital Group—federal litigation in the Southern District of New York that subjected MCA funders to RICO and usury counterclaims, signaling that MCA practices can support affirmative claims by merchants.
• Haymount Urgent Care PC v. GoFund Advance, LLC (S.D.N.Y., 2022)—found that certain MCA agreements operated as criminally usurious loans, opening the door to RICO and unjust enrichment claims against the funder and its principals.

These decisions together make clear that New York courts treat the MCA-versus-loan question seriously and are willing to look deeply at how a contract actually operates.

Signs Your MCA May Violate New York Usury Laws

You should consider whether your MCA may be vulnerable to a usury defense if any of the following apply:

• The effective annualized rate of your advance exceeds 25 percent (most do, often by a wide margin).
• Daily or weekly fixed ACH withdrawals continue regardless of your actual deposits.
• Reconciliation is described as discretionary, requires the funder’s “consent,” or has been refused when you asked for it.
• The agreement has, in practice, a defined repayment term—you can calculate exactly when the advance will be “paid off” if debits continue at the contracted amount.
• You signed a personal guarantee, confession of judgment, or security agreement typical of commercial loans.
• The funder filed suit in a New York court under a New York forum selection clause, even though your business operates elsewhere.
• After default, the funder’s remedies look like ordinary debt collection: bank levies, judgment enforcement, and UCC enforcement rather than receivables recovery.

The more of these markers a contract displays, the stronger the disguised-loan argument tends to be.

How to Use Usury as a Defense in Court

When an MCA funder sues a New York business, the usury defense generally moves through the following stages:

• Service and answer. The merchant is served with a summons and complaint—often in New York County, Kings County, or Queens County, even if the business is out of state. Deadlines to answer in New York are short (typically 20 to 30 days), which is why early counsel matters.
• Affirmative defenses and counterclaims. The answer raises criminal usury and disguised-loan recharacterization as affirmative defenses, and—where appropriate—asserts counterclaims for unjust enrichment, fraud, and (in federal court) RICO.
• Motion practice. The defense often files a motion to dismiss or for summary judgment, attaching the agreement, the ACH history, and any reconciliation correspondence. The court applies the LG Funding factors.
• Discovery, where needed. If the case survives early motions, the parties exchange documents and depositions about the funder’s reconciliation practices, underwriting, and other portfolio data.
• Outcome. The case may end in dismissal, a finding that the agreement is void as usurious, a settlement on heavily discounted terms, or a judgment for one side. A finding of criminal usury can void the entire contract.

If a default judgment has already been entered against your business, the path is different. Our guide on vacating an MCA default judgment in New York walks through the standards under CPLR 5015. Cases that should never have been filed in the first place can also be addressed through a motion to dismiss the MCA lawsuit.

Can You Cancel or Void an MCA Contract?

Yes, in some circumstances. New York treats criminally usurious loans as void, which means the contract cannot be enforced at all and the lender forfeits both interest and principal. This is one of the few areas of commercial law where the consequence of overreach is total, not partial.

Cancellation typically happens in one of three ways:

• As a defense in a lender’s lawsuit—the court declares the contract unenforceable and dismisses the funder’s claims.
• As an affirmative claim—the merchant sues first, seeking a declaratory judgment that the agreement is void.
• Through settlement—once the funder understands its exposure on a usury defense, many agree to walk away or accept pennies on the dollar.

Our MCA contract defense page explains the contract terms most often challenged in New York litigation.

What Happens If You Win a Usury Defense?

If a New York court finds that an MCA is a criminally usurious loan, the consequences typically include:

• The contract is void. No further payments are owed.
• Pending lawsuits are dismissed. Including, in many cases, suits already in active enforcement.
• Liens may be released. UCC liens filed by the funder become unenforceable and can be removed.
• Restitution becomes available. The merchant may pursue return of payments already made, including by counterclaim for unjust enrichment.
• In egregious cases, additional damages. Federal courts have allowed RICO and fraud claims to proceed where MCA conduct involved systemic misrepresentation.

The exact recovery depends on the facts, the specific funder, and the procedural posture of the case.

Can You Recover Money Already Paid?

Possibly. Where a court finds the MCA was a usurious loan, the merchant may have a viable claim for unjust enrichment and restitution to recover amounts already withdrawn by the funder. In federal court, additional theories—including RICO, fraud, and conspiracy—have been used to seek treble damages and attorneys’ fees against MCA funders engaged in pattern conduct.

Recovery is not automatic. Statutes of limitations apply, and the strength of the claim depends on the contract, the funder’s conduct, and the documentary record. Acting quickly preserves more options.

Emergency MCA Situations in New York

Many merchants do not seek help until they are already in crisis. The most common emergencies New York businesses face include:

Frozen Bank Account

A funder with a New York judgment can serve a restraining notice or information subpoena under CPLR Article 52, freezing accounts at the bank. If your account has just been frozen, see our guide on unfreezing a bank account after MCA enforcement in New York.

Daily ACH Drains

Funders pull fixed amounts every business day, often before payroll clears. There are legal and operational steps to halt withdrawals while the underlying contract is challenged. Our resource on stopping MCA ACH withdrawals in New York explains the process.

Default Judgment

If you missed an answer deadline, a default judgment may already exist. New York courts will, in appropriate cases, vacate the judgment under CPLR 5015. Move quickly—delay is the most common reason vacatur fails. See MCA default judgment in New York.

Bank Levy and Marshal Activity

A judgment creditor can direct a city marshal or sheriff to levy on accounts and assets. Stopping or reversing a levy is time-sensitive; the stop MCA bank levy in New York guide outlines emergency options.

Confession of Judgment

Although recent New York legislation curtailed the use of out-of-state confessions of judgment, many older judgments are still being enforced. Our confession of judgment in New York MCA cases page explains how to attack them.

Legal Strategies to Stop MCA Collections

Depending on where the case stands, available strategies include:

• Pre-suit demand. A formal demand citing usury and disguised-loan factors often produces settlement before litigation costs grow.
• Affirmative declaratory action. Filing first puts the merchant on offense and may enable a Temporary Restraining Order against ACH withdrawals.
• Motion to dismiss or for summary judgment. Where the contract on its face fails the LG Funding factors, an early dispositive motion can end the case.
• Motion to vacate default. Available where service was improper or the merchant has a meritorious defense.
• Counterclaims. Unjust enrichment, fraud, and RICO claims can shift the financial weight of the litigation.
• Negotiated settlement. Once usury exposure is on the table, many funders settle for a fraction of the claimed balance.
• Bankruptcy as a last resort. Chapter 11 (including subchapter V for small businesses) and, in some cases, Chapter 7, can stop collections immediately and provide a forum to challenge MCA claims.

Each path has tradeoffs. The right one depends on the contract, the funder, and the timeline.

When to Contact an MCA Defense Attorney

Time is the single most important variable in New York MCA defense. Answer deadlines are short. Default judgments arrive quickly. Bank account restraints can take effect within days of judgment entry. The window to vacate a default judgment, while real, narrows with delay.

You should consider speaking with an MCA defense attorney as soon as any of the following occur:

• You receive a summons, demand letter, or “intent to file” notice.
• Your bank account is restrained or frozen.
• ACH withdrawals are continuing despite reduced revenue.
• A UCC lien has been filed against your business.
• You believe the funder filed in New York despite your business being elsewhere.
• A judgment has been entered without a hearing.

Early intervention preserves the broadest set of defenses—including the usury defense—and often results in a far better economic outcome than waiting until enforcement is in full motion.

If the funder pursuing you is a recognized name in MCA litigation—such as those covered on our Yellowstone Capital lawsuits, GTR Source lawsuits, or Itria Ventures lawsuits pages—the path forward may already be well-charted.

Frequently Asked Questions

Is a merchant cash advance illegal in New York?

Not categorically. A genuine purchase of future receivables is legal. But many MCA agreements operate as disguised loans, and when the effective rate exceeds 25 percent, they may be void as criminally usurious under New York law.

What is the usury limit in New York?

Civil usury is capped at 16 percent per year (N.Y. General Obligations Law § 5-501; N.Y. Banking Law § 14-a). Criminal usury begins at 25 percent per year (N.Y. Penal Law § 190.40). Most MCAs annualize well above 25 percent once fees and the compressed term are factored in.

Can MCA interest rates exceed 25 percent under New York law?

A genuine purchase of receivables is not analyzed as having “interest.” But once a court recharacterizes an MCA as a loan, anything above 25 percent annualized triggers criminal usury, which can void the contract entirely.

Can I stop paying an MCA in New York?

Stopping payment without legal cover is risky—it typically triggers default, acceleration, and a lawsuit. The right approach is to challenge the contract through counsel before or simultaneously with stopping payments, and ideally to seek injunctive protection.

Can I sue an MCA lender for usury?

Yes. New York merchants have brought affirmative actions and counterclaims against funders for unjust enrichment, declaratory relief, fraud, and—in federal court—RICO. Recovery of payments already made is possible in appropriate cases.

What happens if my MCA is ruled a loan in New York court?

The contract is measured against the usury statutes. If the effective rate exceeds 25 percent, criminal usury applies, the contract may be declared void, and the funder may forfeit both principal and interest.

Can I reverse ACH withdrawals from an MCA?

Recent withdrawals can sometimes be challenged through the bank’s dispute process or the courts, particularly when the underlying contract is alleged to be void. Forward-looking ACH activity can often be halted through legal action against the funder or, in active litigation, through a TRO.

Can MCA lenders freeze my business bank account in New York?

A funder with a New York judgment can serve a restraining notice that freezes the account up to twice the judgment amount. Without a judgment, account freezes are not lawful and can be challenged immediately.

How do I fight an MCA lawsuit in New York?

You answer the complaint with affirmative defenses and counterclaims, including criminal usury and disguised-loan recharacterization, and—where appropriate—file a dispositive motion. Deadlines are short; counsel should be engaged as soon as the summons arrives.

Can I reopen a default judgment in an MCA case?

Yes, in many cases. CPLR 5015 allows vacatur where the merchant can show, among other grounds, excusable default and a meritorious defense, or improper service. Speed matters—delay weakens the motion.

Does the corporate borrower exception apply to MCAs?

Corporations and most LLCs cannot raise a civil usury defense in New York. They can, however, raise criminal usury, which is the more powerful defense in MCA cases because criminal usury voids the loan entirely.

How long do I have to raise a usury defense in New York?

The defense should be raised in the first responsive pleading—typically the answer—filed within New York’s short response window. Affirmative claims for restitution have their own statutes of limitations, generally six years for unjust enrichment and shorter for some fraud-based theories.

Conclusion

A merchant cash advance that operates as a disguised loan above New York’s 25 percent criminal usury threshold may not be enforceable at all. New York courts have repeatedly looked past the “purchase of receivables” label and applied the substance-over-form doctrine to protect business owners from contracts that were never legitimate financing in the first place.

If your business is facing a frozen account, daily ACH withdrawals, a UCC lien, a lawsuit, or a default judgment, the usury defense may be available—but the window to use it narrows with each passing day. Act early, preserve documentation, and speak with counsel experienced in New York MCA defense before deadlines pass. The cost of waiting is almost always greater than the cost of acting.

For broader context across New York MCA litigation, see our overview of merchant cash advance lawsuits in New York.

Disclaimer

This article is for general informational purposes only and does not constitute legal advice. Reading or relying on this content does not create an attorney-client relationship. New York MCA litigation is fact-specific; outcomes depend on the contract, the funder, and the procedural posture of the case. Speak with a qualified attorney about your specific circumstances.