- 1New York courts weigh reconciliation, indefinite term and bankruptcy recourse in loan-or-MCA disputes.
- 2Reconciliation should be mandatory on merchant request, not discretionary.
- 3A fixed-percentage attorney's fee clause may avoid a lodestar reduction; confirm governing law.
MCA contracts are under more scrutiny, and David Mizrahi, principal attorney at David I. Mizrahi Law, P.C., argues that small drafting gaps can invite expensive litigation. Mizrahi represents MCA funders in collections, litigation and judgment enforcement. His guidance for funders centers on the test New York courts commonly use to decide whether a deal is a loan or a true merchant cash advance.
The test
Judges look at three questions: does the contract include a reconciliation provision, is the repayment term open-ended, and is the funder left without recourse if the merchant goes bankrupt. Defense lawyers often label deals loans to support usury claims, so Mizrahi says contracts should address each factor explicitly. He lists three must-have provisions and one strongly recommended addition.
The provisions
- Reconciliation. The clause should not be discretionary. If a merchant asks for reconciliation, the agreement should require the funder to perform it, which supports the position that the funder bought receivables rather than enforcing fixed payments.
- No definite time period. The contract should say there is no fixed repayment term, and Mizrahi recommends avoiding even an estimated period. Because of reconciliation rights, payments may be delayed or may never fully materialize.
- Bankruptcy is not a default. The contract should say the deal is a purchase of future receivables and that a bankruptcy filing alone is not an event of default, while making clear that other defaults such as fraud or misrepresentation remain enforceable.
- A specific attorney's fee clause. He advises against vague "reasonable attorney's fees" language, which can invite the lodestar method of multiplying hours by an hourly rate. He notes that percentage-based clauses have been upheld in New York and several other jurisdictions, and gives a sample setting the fee at 30% of the remaining balance. Funders should check their governing law first.
The takeaway
Mizrahi recommends periodic contract reviews by counsel familiar with evolving MCA case law. His firm's MCA practice page and his LinkedIn profile carry more detail.
Source reporting: deBanked.
