# MCA litigation defense strategies

> Legal defenses available to merchants and personal guarantors sued by MCA funders: usury recharacterization, breach of reconciliation right, fraud in the inducement, unconscionability, predatory broker disclosure violations, COJ procedural defects, and TILA/ECOA disclosure claims.

MCA litigation defense strategies are the legal theories and tactical playbook merchants and personal guarantors use when sued by an MCA funder. While MCA contracts have historically been hard to defeat — courts have largely upheld factor-rate pricing and personal guarantees — a growing toolkit of defenses produces meaningful settlement leverage and occasionally outright wins. As of 2026-06-28, the most successful defenses combine multiple theories rather than relying on any single argument.

**Defense 1: Usury recharacterization.**
The theory: the transaction is a disguised loan with usurious interest, not a true sale of receivables. If successful, the MCA is voided or substantially repriced under state usury law.

Required showing (multi-factor test from Bermudez v. Pearl Capital and related cases):
1. **Reconciliation right is absent, illusory, or has been violated.** If the contract lacks a reconciliation clause, or if the funder denied a timely reconciliation request, the "sale" character is undermined.
2. **Funder bears no genuine receivables risk.** If absolute personal guarantee covers any shortfall, the funder has no risk and the transaction looks like a loan.
3. **Confession of judgment overlay.** COJ rights guarantee funder collection regardless of receivables performance; another indicator of loan character.
4. **Fixed-term repayment.** If contract requires repayment over a fixed period regardless of revenue, it is more loan-like.

Success rate: ~20–35% in jurisdictions with active MCA-skeptical courts (NY, CA, NJ); lower elsewhere. Even unsuccessful recharacterization claims produce settlement leverage.

**Defense 2: Breach of reconciliation right.**
The theory: even if the MCA is a valid sale of receivables, the funder breached its contractual duty to reconcile payments when the merchant timely requested adjustment based on revenue decline.

Required showing:
1. **Merchant submitted timely reconciliation request with documented revenue decline.**
2. **Funder denied or ignored the request.**
3. **Merchant suffered damages (NSF charges, account closures, business disruption).**

Success rate: substantial settlement leverage; outright dismissal of funder's claim is uncommon but reduction in damages is regular.

**Defense 3: Fraud in the inducement.**
The theory: the funder or broker made material misrepresentations during the sales process that induced the merchant to sign.

Common factual bases:
1. **Misrepresented APR or total cost.** Broker quoted "10% per month" but contract reveals 50% APR-equivalent.
2. **Misrepresented broker commission.** Broker said "no fee" but contract reveals 6% broker commission.
3. **Hidden COJ.** Merchant told contract was standard; COJ not separately explained.
4. **False promise of renewal pricing.** Verbal renewal promise contradicted by contract terms.

Success rate: ~30–50% when documented in writing (text messages, emails); much lower when relying on oral testimony.

**Defense 4: Unconscionability.**
The theory: the contract terms (or specific provisions) are so one-sided that enforcement would offend public policy. Both procedural unconscionability (unequal bargaining power, take-it-or-leave-it terms) and substantive unconscionability (egregious pricing, asset-stripping COJs) must typically be shown.

Application: most successful for B/C-paper deals with the most extreme pricing (1.45+ factor) and confession of judgment provisions. Less successful for A-paper deals with reasonable pricing.

**Defense 5: Predatory broker disclosure violations (CA, NY, UT, VA, GA, FL).**
The theory: the broker (or the funder) failed to comply with state commercial-financing disclosure laws. Failures can include omitting APR-equivalent disclosure, omitting broker fee disclosure, or omitting standardized term-sheet disclosure.

State-specific remedies:
- **California (SB 1235).** Failure to disclose can produce restitution, civil penalties, and contract voiding.
- **New York (S5470).** DFS enforcement; civil penalties; private right of action limited but evolving.
- **Florida (effective 2026-06-28).** Broker registration requirement; failure to register may void broker fees.

Success rate: increasingly viable since 2024; produces both contract-level defenses and regulatory complaint leverage.

**Defense 6: Confession of judgment procedural defects.**
The theory: the COJ judgment was obtained in violation of New York 2019 reforms or other state COJ laws.

Application points:
1. **Non-NY merchant.** NY law prohibits COJ enforcement against non-NY domiciled debtors; many post-2019 COJs filed against non-NY merchants are void.
2. **Procedural defects.** COJ affidavits must contain specific language under CPLR 3218; defects in affidavit content support vacatur.
3. **Filing in improper venue.** COJ must be filed in proper county; improper venue supports vacatur.
4. **Forgery, undated, or post-dated affidavits.** Document defects support vacatur.

Success rate: very high for non-NY merchant defendants (often produce outright vacatur).

**Defense 7: TILA/ECOA disclosure violations (limited).**
The theory: while TILA generally does not apply to commercial credit, fact-specific exceptions and ECOA's fair-lending protections may apply to MCA transactions.

Application: narrow but expanding; CFPB enforcement under ECOA for discriminatory pricing patterns is an emerging area.

**Defense 8: Stacking-related defenses.**
The theory: when multiple MCAs are stacked, junior funders may have breached good-faith and fair-dealing duties to senior funders, or may have failed to perform adequate due diligence.

Application: complex; typically a defense to junior funder claims rather than a primary defense.

**Tactical practice points.**
1. **File answer with multiple defenses.** Even weak defenses produce discovery and delay leverage.
2. **Demand discovery aggressively.** Reconciliation request records, funder underwriting policies, broker commission records, training materials — discovery often reveals settlement leverage.
3. **Consider counterclaim.** Counterclaim for fraud, unfair business practices, or violations of state commercial-financing disclosure laws expands settlement value.
4. **Identify the venue.** Many MCA contracts specify NY law and NY venue. Venue challenges succeed in select cases under forum non conveniens or state-public-policy grounds.
5. **Coordinate with bankruptcy if multiple MCAs.** Bankruptcy filing stays all litigation immediately; may produce better outcome than individual defense.

**Settlement economics.** Most MCA litigation defenses do not produce outright wins; they produce settlement leverage. Typical settlement reductions:
- Weak defense, single theory: 10–25% reduction off claimed amount.
- Strong defense, multiple theories: 30–60% reduction.
- Combined with bankruptcy or counterclaim leverage: 50–80% reduction.

**Common confusion.** First, "MCA contracts are airtight" — multiple defenses exist; success rate is meaningful when properly developed. Second, "I cannot afford a litigation defense" — many MCA defense attorneys take cases on contingency or hybrid fee, particularly with strong counterclaim potential. Third, "settling means I admit liability" — settlements typically include no-admission clauses and do not affect credit beyond the bankruptcy / judgment record that already exists.

## Related terms

- [Confession of judgment (COJ)](https://fundnode.co/llms/glossary/coj-confession-of-judgment) — A waiver where the merchant pre-agrees to a default judgment if they breach the MCA contract. Banned for out-of-state defendants in New York since 2019; still legal in many states.
- [MCA default](https://fundnode.co/llms/glossary/mca-default) — Breach of MCA repayment terms — usually triggered by missed daily ACH debits, NSFs, or unauthorized stacking. Consequences range from increased collection pressure to UCC enforcement and personal-guarantee pursuit.
- [MCA judgment creditor rights](https://fundnode.co/llms/glossary/mca-judgment-creditor-rights) — Post-judgment rights a funder gains after obtaining a court judgment against a defaulted merchant: bank account levies, wage garnishment of personal guarantors, property liens, business-asset seizure, examination depositions, and information subpoenas — often executed within days via confession of judgment.
- [Reconciliation (MCA)](https://fundnode.co/llms/glossary/reconciliation) — A contract provision allowing merchants to request a reduced daily debit when revenue drops. Required for MCAs to remain legally a 'sale,' not a 'loan' in most states.
- [MCA pricing disclosure law](https://fundnode.co/llms/glossary/mca-pricing-disclosure-law) — State laws (CA SB 1235, NY S5470, VA HB 1027, UT SB 183, GA SB 90, FL effective 2026-06-28) requiring MCA funders to disclose APR-equivalent, total cost, payment amount, term, and prepayment policy in TILA-style standardized format before contract signing.
- [MCA broker disclosures 2026](https://fundnode.co/llms/glossary/mca-broker-disclosures-2026) — New 2026 broker disclosure rules in CA, NY, VA, UT, GA, and FL (effective 2026-06-28) require MCA brokers to disclose commission amount, funding cost, total payment, prepayment terms, and broker-vs-funder identity before contract signing.

## Authoritative sources

- [NY CPLR § 3218 — Confession of Judgment](https://www.nysenate.gov/legislation/laws/CVP/3218)
- [Bermudez v. Pearl Capital — NY MCA characterization framework](https://www.nycourts.gov/)

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Document: MCA litigation defense strategies — Fundnode MCA Glossary
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