If you’ve been served with an MCA lawsuit, you’re probably reading this from your phone, sitting in your car, trying to figure out what just happened. Take a breath. You have defenses. Real ones.
Short answer: The strongest defenses against an MCA lawsuit are (1) the agreement is actually a disguised usurious loan, (2) the reconciliation provision was illusory, (3) the broker committed fraud in the inducement, (4) the contract is unconscionable, (5) you were never properly served, (6) the personal guarantee is defective, (7) the funder breached first, (8) the confession of judgment can be vacated, and (9) the choice of law clause doesn’t apply to you. Most MCA cases settle before trial, but only if you push back hard. The funders count on you not pushing back. Don’t give them that.
Let me walk through each one.
1. The MCA is actually a loan, and it’s criminally usurious
This is the biggest defense, and the one funders are most afraid of. An MCA is supposed to be a purchase of future receivables, not a loan. But most MCA contracts, when you actually read them, look exactly like a loan with extra steps.
NY courts use a three-factor test (the LG Funding test) to figure out if it’s a real sale or a disguised loan:
- Is there a reconciliation provision, and is it real
- Is the term finite, or does it depend on actual receivables
- Does the funder have recourse if the business goes bankrupt
If the answer makes it look like a loan, the court can recharacterize it. And once it’s a loan, the effective APR (often 100-400%+) is criminally usurious in NY. Criminal usury voids the contract. You owe nothing.
This is the nuclear option, and it works.
2. The reconciliation provision was illusory
Related to the above, but worth its own section. Every MCA contract has a reconciliation clause — it says if your revenue drops, you can ask for the daily payment to be adjusted down. In theory.
In practice? Funders ignore reconciliation requests. Or they require so much documentation that it’s impossible. Or they just say no.
If you requested reconciliation, and got blown off, save every email, every text, every voicemail. That documentation is gold in court. An illusory reconciliation provision is one of the strongest pieces of evidence that the MCA is a disguised loan (see defense #1).
3. Fraud in the inducement (the broker lied to you)
Most MCA’s are sold by brokers, not by the funder directly. And brokers will say almost anything to close a deal. They’ll tell you the daily payment can be adjusted anytime. They’ll tell you there are no fees. They’ll tell you the factor rate is “basically interest” of 15%. None of it true.
If a broker materially misrepresented the deal, and you relied on that misrepresentation when you signed, you have a fraud in the inducement defense. This can void the entire contract.
The catch: you need proof. Texts, emails, recorded calls. If it’s just your word against the broker’s, it’s harder. But many brokers operate sloppy, and the paper trail is there if you go looking.
4. Unconscionability
This is a harder defense to win, but it’s getting more traction in NY courts. Unconscionability has two parts:
- Procedural unconscionability: The contract was take-it-or-leave-it, you had no real bargaining power, the terms were buried in dense legalese, you needed the money urgently
- Substantive unconscionability: The terms themselves are shocking — effective APRs of 200%+, fees stacked on fees, default provisions that accelerate the entire balance over a single missed payment
You generally need both. But if you have both, courts have voided MCA contracts. The legal landscape has shifted in the last few years, and judges are less willing to enforce these contracts as written.
5. You were never properly served
This isn’t sexy, but it works more often than people think. Service of process has rules. If the process server didn’t follow them — and many don’t — the lawsuit can be dismissed, or a default judgment can be vacated.
Common service problems:
- Server claims to have served you at an address you haven’t lived at in years
- Server claims personal service when nobody was home
- Server claims “nail and mail” but never actually mailed anything
- Server’s affidavit lists a description that doesn’t match anyone in your household
If you were never properly served, you didn’t have a chance to defend the case. Courts take this seriously. File a motion to vacate, fast.
6. The personal guarantee is defective
The personal guarantee is what lets the funder come after your house, your car, your personal accounts. Without an enforceable PG, all they have is a claim against the business (which is often judgment-proof).
PG defenses include:
- You signed under duress (the funder threatened to pull funding the business already needed to survive)
- The PG was signed by someone without authority to bind you personally
- There was no separate consideration for the PG
- The PG language is ambiguous about scope
- Fraud in the inducement (see #3) — if it taints the underlying contract, it taints the PG
If you can knock out the PG, the funder loses most of their leverage. And once the leverage is gone, settlement numbers drop fast.
7. The funder breached first
Contracts go both ways. If the funder breached the agreement before you stopped paying, that’s a defense, and often a counterclaim.
Common funder breaches:
- Refused or ignored a valid reconciliation request
- Contacted your customers, or vendors, in violation of the agreement
- Made unauthorized debits beyond the agreed daily amount
- Threatened or harassed you in violation of state law
- Filed a UCC-1 with overbroad language designed to choke off your business
A material breach by the funder can excuse your performance. And if you have a counterclaim for damages, the math of the case changes overnight. The funder isn’t just trying to collect anymore — they’re now defending themselves.
8. Vacating a confession of judgment
If you signed a confession of judgment (COJ) before August 2019, and you’re not a NY resident, the COJ might be vacatable under the 2019 NY law change. Even if the COJ is technically valid, there are procedural ways to attack it — improper filing, defective notarization, ambiguous language, unauthorized signatory.
Vacating the COJ doesn’t make the underlying debt go away. But it puts you back in a normal litigation posture, where you can raise all the defenses above, and where the funder has to actually prove their case. That’s a huge shift in leverage.
9. The choice of law and forum selection clauses don’t apply
Almost every MCA contract picks NY law, and NY courts. The funder wants you fighting in NY, far from home, under the most lender-friendly law in the country.
But these clauses aren’t bulletproof. If you have no NY contacts, if the contract was signed in another state, if the funder’s broker reached into your state to solicit you, there are arguments to be made about jurisdiction. Some states (CA especially) have strong public policy against enforcing forum selection clauses that deny their residents access to local courts.
This isn’t a defense to liability. It’s a defense to where the case gets fought. And where matters. A lot.
What you should actually do
If you’ve been sued, the clock is running. In most jurisdictions you have 20-30 days to file an answer. Miss that, and you get a default judgment, which means the funder can start garnishing accounts and freezing assets without ever having to prove their case.
Three things to do right now:
- Don’t ignore the lawsuit. This is how 80% of MCA cases turn into default judgments. The funders are counting on you panicking and freezing.
- Pull every document. The original contract, every amendment, every email with the broker, every reconciliation request, every bank statement showing the debits. The case lives or dies on documentation.
- Talk to someone who actually does this. Not a general business attorney. Someone who litigates MCA cases, specifically. The defenses above only work if someone knows how to plead them.
The funders win when business owners give up. Most of these cases settle — often for 30-50 cents on the dollar — but only when the defendant fights back hard enough to make settlement cheaper than continued litigation. That’s the whole game.
