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The Southern District of New York has consistently been the best forum for decisions against Merchant Cash Advances, (MCAs), as the rulings in the Southern District of New York district and bankruptcy courts signal increasing judicial hostility toward MCA agreements. In three recent bankruptcy cases—JPR Mechanical, Williams Land, and Global Energy Services—courts applied New York’s three-factor test (reconciliation, fixed repayment term, and recourse) to determine whether MCAs are true sales of receivables or disguised loans. Only Global Energy Services survived scrutiny; JPR Mechanical was formally recharacterized as a loan, and Williams Land faced similar skepticism.
This trend is reinforced by a major early 2025 judgment against Yellowstone Capital, in which the New York Attorney General secured a $1.065 billion judgment, permanently barred the company from issuing MCAs, and canceled over $534 million in MCA debt owed by approximately 18,000 small businesses. Although this was viewed as significant progress by defense attorneys in the field, the results in New York State courts still vary from jurisdiction to jurisdiction and from judge to judge.
The courts may be increasingly focusing on economic reality over contract labels. In JPR Mechanical, the MCA failed on every front: reconciliation was illusory, repayment was effectively fixed, the provider had extensive recourse and guarantees, risk never transferred, and the provider treated itself as a creditor. As a result, the MCA was deemed a loan, and payments were clawed back as preferential transfers. In practice, almost every client informs us that their requests for reconciliation are either denied, ignored or processed in a way to ensure failure.
MCAs pose a broader risk to borrowers and traditional lenders alike. MCAs can siphon cash through daily account sweeps, prime existing lenders’ collateral interests, and push secured lenders far down the repayment stack—often without their knowledge, especially when multiple MCAs are “stacked.”
Overall, these rulings may suggest future growing legal momentum toward recharacterizing MCAs as loans, exposing providers to preference liability and potential debt modification or cancellation in bankruptcy. While MCAs are unlikely to change their practices quickly, at least federal courts are increasingly curbing predatory behavior by prioritizing substance over form, weakening the industry’s position and offering potential relief to distressed small businesses. The question now is, how long it will take for New York State courts to follow the lead of the Federal courts in reviewing MCAs the same way to protect small and medium businesses.