6 Situations Where You Can Countersue Your MCA Funder

Most business owners think when an MCA funder sues them, the game is over. It isn’t. In a lot of cases, the funder has done something in the course of funding you, or collecting from you, that gives you a real counterclaim. And a counterclaim changes the entire posture of the case. Suddenly you’re not the defendant begging for a settlement, you’re the plaintiff too, and the funder has to worry about writing you a check.

Short answer: You can countersue an MCA funder when the “purchase” was really a disguised loan at criminal interest rates, when they misrepresented terms, when they breached the reconciliation clause, when they filed a fraudulent UCC notice or lied to your customers, when their collection tactics crossed the line, or when the personal guaranty was obtained through fraud or duress. Each of these is a real claim. Lawyers bring them every day, and they win.

Here are the six situations worth knowing about.

1. The “it’s not a loan” defense — usury

Every MCA agreement says the same thing. This is a purchase of future receivables, not a loan. That language is in there for a reason. If a court decides the transaction is actually a loan, the funder has a problem, because the effective interest rate on most MCAs, when you annualize it, is somewhere between 80% and 400%. In New York, anything over 25% is criminal usury. In other states the number is different, but the idea is the same.

Courts look at three factors. Is the repayment absolute or contingent on your revenue. Is there a fixed term. Does the funder have a real recourse if your business fails, or do they eat the loss. If the answers line up the wrong way for the funder, (meaning you’re really just paying them back on a schedule regardless of how the business does), the “purchase” argument falls apart. And when it falls apart, you can countersue for usury. In some states that means the entire principal becomes uncollectable. You don’t owe them anything, and they may owe you back what they’ve already taken.

2. Breach of the reconciliation clause

Almost every MCA contract has a reconciliation clause. It says, in plain English, that if your revenue drops, you can ask the funder to adjust the daily payment down to match your actual receipts. That clause is the entire legal basis for calling this a “purchase” instead of a loan. Without it, the funder’s argument collapses.

Here’s the problem. Most funders ignore reconciliation requests. Or they make it so painful, (asking for 90 days of bank statements, processor reports, tax returns, a CPA letter), that the business owner gives up. Some funders flat out refuse.

That is a breach. And it’s a breach of the exact term that makes the contract legal in the first place. If you requested reconciliation in writing, and they ignored you or stalled you, you have a counterclaim. You also have a decent argument that their refusal to reconcile converts the whole thing into a loan, which gets you back to argument number one.

3. Fraud in the inducement

This one comes up more than people realize. The broker or the funder told you something before you signed, that wasn’t true. Common examples – they told you the factor rate was “like” a certain APR when it wasn’t even close. They told you there was no personal guaranty, when there was. They told you you could pay it off early at a discount, and the contract says otherwise. They told you the daily payment would be “around” a certain number, and the actual number is 40% higher.

If you can show the representation was made, that it was false, that you relied on it, and that you were damaged by relying on it, you have a fraud claim. Fraud claims are powerful because they can pierce a lot of the contract’s defenses, and in some cases, they open the door to punitive damages.

4. Fraudulent UCC filings and tortious interference

When you defaulted, or when the funder decided you defaulted, they probably sent notices to your credit card processor, your customers, and anyone else on your bank statements. Telling them to redirect payments. This is a legitimate tool, if it’s done correctly, and if the default is real.

But funders mess this up constantly. They send the notices before a default has actually occurred. They send notices claiming amounts that are wrong. They send notices to customers who aren’t even account debtors under the UCC. They keep sending notices after a judge has told them to stop. Every one of those is potentially tortious interference with your business relationships. And if you lost a customer because of it, or a processor shut you down because of it, the damages can be substantial.

The other version of this is a fraudulent UCC-1 filing in the first place. If the filing overstates what you owe, or describes collateral the funder has no right to, you can move to terminate it and sue for the damage it caused.

5. FDCPA, state collection laws, and abusive collection conduct

The FDCPA technically doesn’t apply to commercial debt, this is something a lot of people get wrong. But that doesn’t mean MCA collection is a free-for-all. Most states have their own commercial collection statutes, or general consumer protection statutes that reach commercial conduct in some situations. And almost every state recognizes common-law claims for harassment, intentional infliction of emotional distress, defamation, and tortious interference.

MCA collectors cross these lines routinely. They call your customers and tell them you’re a fraud. They call your spouse. They threaten criminal prosecution for a civil debt, which is illegal in most states regardless of whether it’s consumer or commercial. They impersonate process servers. They impersonate law enforcement. They show up at your house. Every one of those is a potential claim, and more importantly, every one of those is the kind of behavior a judge does not want to see. If you have recordings, or texts, or emails, document them, save them, you’re going to need them.

6. Duress and unconscionability on the personal guaranty

The personal guaranty is usually what keeps business owners up at night. The business can fail, the LLC can dissolve, but the personal guaranty follows you home. Here’s what a lot of people don’t know – personal guaranties can be attacked.

If the guaranty was signed under duress, (meaning the funder threatened to pull funding you were already counting on, unless you signed a personal guaranty that wasn’t in the original deal), that’s a defense and potentially a counterclaim. If the terms of the guaranty are unconscionable, (meaning so one-sided that no reasonable person would agree to them), courts can refuse to enforce them. If the guaranty was obtained through fraud, same analysis as argument number three, it can be voided.

This is especially true when there’s a confession of judgment attached. New York used to be ground zero for MCA confessions of judgment, the law there has changed, but a lot of old confessions are still out there, and a lot of funders still try to use them improperly.

A few things worth saying before you do anything

A counterclaim is not a magic wand. You still have to prove it. You still need the documents, the timeline, the communications. Start saving everything now, bank statements, emails with the broker, emails with the funder, recordings of collection calls if your state allows one-party recording, (most do). Write down what was said, and when, and by whom.

You also need a lawyer who actually does MCA work. Not a general commercial litigator, not your cousin who does real estate closings. Someone who has litigated against these specific funders and knows the pattern. Because the funders have patterns, they do the same things to everyone, and a lawyer who’s seen it before knows exactly where to look.