9 Defenses That Actually Work Against MCA Lawsuits

Welcome to Delancey Street. If you’ve been sued by an MCA funder, or you’re about to be, this post is for you. Most business owners assume, once the lawsuit lands, it’s over. You signed the agreement, you missed the payments, you lose. That’s not how this works.

Short answer: MCA agreements have real defenses, and some of them are strong enough to get the case dismissed, the judgment vacated, or the funder to the table for a cheap settlement. The problem is, most attorneys don’t know these defenses, because MCA litigation is a niche, and most general commercial litigators have never fought one. Below are the 9 defenses we see actually work, in real cases, in real courtrooms.

Before we get into it – a caveat. Every case is different. A defense that wins in New York, might lose in New Jersey. A defense that works against one funder, might fail against another because of how their contract is drafted. But these are the arguments that move the needle, and if your lawyer isn’t raising at least some of them, you should be asking why.

1. The agreement is a disguised loan, not a true purchase of receivables

This is the big one. MCAs are structured, on paper, as a sale of future receivables. The funder “buys” your future revenue at a discount. That’s the entire legal fiction that lets them charge what would otherwise be criminal usury rates. But if the agreement is actually a loan, dressed up as a purchase, then the usury laws apply, and in many states the contract is void or unenforceable.

Courts look at three factors(this comes from the New York LG Funding case, which is the governing framework in most jurisdictions). Is there a reconciliation provision that actually works. Is there a finite term, or is the obligation truly contingent on receivables. Who bears the risk if the business fails. If the agreement forces repayment regardless of actual receivables, has a fixed daily amount with no meaningful reconciliation, and shifts all the risk to you through personal guarantees and default provisions, a court may find it’s a loan. And if it’s a loan, the interest rate is likely criminal, and the whole thing collapses.

2. The reconciliation provision is a sham

Related to #1, but worth it’s own spot. Every MCA agreement has a reconciliation clause, which lets you request an adjustment to the daily debit if your revenues drop. The funder includes this clause precisely to argue the deal isn’t a loan – because a real loan wouldn’t have it. But in practice, many funders make reconciliation impossible. They require documentation no small business could produce. They delay for weeks. They deny every request. Or the clause is written so it’s entirely at the funder’s discretion.

When reconciliation is a sham in practice, courts have found the agreement is actually a loan. We’ve seen this argument win, especially when you can show a paper trail – you asked for reconciliation, you provided bank statements, and they ignored you or denied without explanation.

3. The confession of judgment was defective, or is no longer enforceable

Many older MCA agreements, especially pre-2019, included a confession of judgment(COJ). The funder could file it in New York, get an instant judgment without a trial, and start freezing your accounts within hours. New York changed the law in 2019, and out-of-state defendants can no longer be hit with a COJ in New York courts. If you were sued with a COJ filed against you, and you’re not a New York resident, that judgment is likely vacatable. We’ve gotten judgments thrown out on this basis, even years after the fact.

4. The personal guarantee doesn’t actually cover what they’re claiming

MCA personal guarantees are usually limited, they only kick in under specific circumstances. Typically – fraud in the inducement, breach of the protective covenants(blocking ACH, closing accounts, stacking), or a sale of the business. If the funder is suing the personal guarantor, because the business simply ran out of money and couldn’t pay, that is often not covered by the guarantee. Read the guarantee carefully. Most of them are not general guarantees of payment, they are limited guarantees of performance. That distinction matters, and funders routinely sue personal guarantors on claims that aren’t covered.

5. Improper service, or lack of jurisdiction

This sounds technical, and it is, but it wins cases. MCA funders file thousands of lawsuits, and their process servers are often sloppy. If you were never properly served – meaning served personally, or through a method the rules of civil procedure allow – then the court never had jurisdiction over you, and any judgment entered is void. Separately, many MCA agreements have forum selection clauses, forcing you into New York courts. These clauses aren’t always enforceable, especially if your business has no connection to New York, and the agreement was signed somewhere else.

6. Fraud in the inducement by the broker or funder

The MCA industry has a broker problem. Brokers, who are paid on commission, routinely misrepresent the terms. They’ll tell a business owner it’s a loan. They’ll quote a fake interest rate. They’ll promise the reconciliation will be easy. They’ll submit altered bank statements to get the deal approved. If you can show the funder, or their broker acting as their agent, made material misrepresentations that induced you to sign, you may have a fraud defense, and potentially a counterclaim.

7. The default fees are unconscionable or unenforceable

MCA default provisions stack fees aggressively. Default fee of $5,000. Attorney fees. NSF fees that compound. Acceleration of the full undiscounted balance. Courts have pushed back on some of these, especially when the default fees aren’t a reasonable estimate of actual damages, but are a penalty. Liquidated damages, that function as penalties, are unenforceable in most states. This doesn’t usually kill the whole case, but it can knock the claim down significantly.

8. The funder isn’t licensed, or violated a state disclosure law

This is a newer defense, and it’s getting stronger. California, New York, Virginia, Utah, and a growing list of other states have passed commercial financing disclosure laws, requiring MCA funders to disclose APR, total cost, and other terms – in a standardized format. Many funders are not complying. Some states also require licensing for commercial lenders, and if the MCA is actually a loan(see #1), the funder may have been lending without a license. Unlicensed lending is a strong defense, and in some states it voids the obligation entirely.

9. The funder already got paid, through a different mechanism

This one sounds strange, but we see it. Sometimes the funder has already collected through – UCC notices to the CC processor, intercepted ACH payments, a prior settlement that wasn’t properly credited, or a payoff from a refinance. The funder’s accounting is often a mess. We’ve had cases where the funder sued for the full balance, and discovery showed they had already collected 60% of it through channels their internal collections team never logged. If you demand a full accounting, and the funder can’t produce one, that’s leverage.

What to do if you’re being sued

Don’t ignore it. A default judgment, is worse than almost any other outcome, because it strips you of your defenses. Once the judgment is entered, you’re fighting to vacate it, which is much harder than fighting the original lawsuit.

Don’t hire a general commercial litigator who’s never done an MCA case. The defenses above require specific knowledge of MCA contract structure, and the case law that has developed around it. A lawyer billing you $450 an hour, to figure out what an MCA even is, is not the lawyer you want.