5 Contract Clauses That Can Become Your Defense In Court

Five of the most important contract clauses to be aware of in defending MCA cases.

Which MCA contract clauses can actually help you in court?

New York courts look at the contract terms to see if the funder is “absolutely entitled to repayment under all circumstances.” If not, then the transaction will be treated as a purchase of accounts receivable, and usury will not apply. See LG Funding v United Senior Properties (2d Dept 2020). The Court asked whether there was a reconciliation clause, a finite term, and recourse if the business filed for bankruptcy. The First Department adopted this test in Kapitus v Suburban Waste (February 2026), and the Fourth Department followed in June.

If the transaction is a loan, a merchant can raise criminal usury as a defense if the interest rate exceeds 25% per year, see Penal Law 190.40, even though civil usury does not apply to corporations, see GOL 5-521. But criminal usury works only as an affirmative defense in the funder's lawsuit, not as a counterclaim (LG Funding), so these provisions help most when the merchant is being sued.

Is a reconciliation clause helpful if it was not used?

Not necessarily, although its wording still matters. In LG Funding, the clause created a triable issue of fact since the funder could reconcile “at [its] sole discretion.” In Oakshire Properties v Argus (4th Dept 2024), the clause appeared illusory since the failure to reconcile did not constitute a breach. And last February, in People v Richmond Capital (1st Dept 2026), the Court found loans despite mandatory monthly reconciliation, because none was ever performed.

More recently, in Apollo Funding (2d Dept 2025), the merchant never used the procedure, so the Court would not consider whether it was illusory, and the funder won summary judgment. And in NewCo v SPE Trading, the merchant was in default because the agreement gave it one business day to request reconciliation after a payment was returned for insufficient funds, and it did not.

Does “no fixed term” in your MCA contract end the argument?

Not necessarily, as the Court may find an implied finite term. In Oakshire, the Court found one in a contract purchasing $554,850 of accounts receivable with daily ACH debits of $2,935.71, which works out to exactly 189 business days. In Richmond, fixed daily payments that were not a good faith estimate of receivables helped establish the loans. The best defense is the math plus bank statements showing the daily debit was not based on actual receivables. But if the contract merely requires payment “until” the funder is paid in full, the Court may find a true purchase of receivables, see Kapitus.

What if bankruptcy is an event of default in your agreement?

That helps you, since it will be evidence that the transaction is a loan. In LG Funding and Kapitus, the funder could accelerate the unpaid balance and enforce the guaranty and confession of judgment in the event of a bankruptcy, and Kapitus noted that this “suggests a loan.” In Richmond, the merchant would be in default if it closed or “interrupted” its business or if there was repeated non-payment. Newer contracts expressly state that bankruptcy or going out of business does not constitute a breach, and that helped the funder in NewCo.

Can I get out of a forum selection clause requiring me to litigate in New York?

Not easily; distance alone won't get a forum selection clause tossed. You must prove it is unreasonable or so burdensome as to deprive you of your day in court. See Global Merchant Cash v Trapp (Kings County 2025) (merchant loses on this argument in $195,285 claim). While GOL 5-1402 requires New York courts to hear cases on contracts of $1,000,000 or more, Kings County has enforced forum selection clauses on smaller MCAs. Other trial courts have found no jurisdiction over sub-$1 million MCA disputes between out-of-state parties. Also check whether the funder sued in the proper county, see CPLR 503, and whether it served you in compliance with any mail or email service provision.

Can my funder use a confession of judgment clause?

Only if it enters judgment in a county where you reside. A business “resides in any county where it has a place of business.” CPLR 3218(b). Thus, an out-of-state company with no place of business in New York cannot be hit with a confession of judgment there. A New York merchant can, as can an out-of-state merchant with one New York location. If you're in Texas, any contract with a confession of judgment in it is “void and unenforceable” as to deals entered into after September 1, 2025. Tex Fin Code 398.055. To undo a confession of judgment entered in New York, you'll generally need a separate plenary action showing fraud or a false affidavit.

Frequently Asked Questions

Does including a personal guaranty in an MCA contract turn it into a loan?

It depends on the scope of the guaranty. A guaranty is a factor, but one that only guarantees performance of the contract, not repayment of the funds, may not turn an MCA into a loan.

Are these defenses only available in New York?

Mostly. The three-factor test is based in New York law, and most MCA contracts include New York law provisions. In Shoot the Moon, the Montana Bankruptcy Court applied Montana law despite a New York choice-of-law provision. However, rulings like that are only as good as their persuasiveness.

Doesn't New York prohibit confessions of judgment in MCA contracts?

No, it merely limits them. Since 2019, confessions of judgment can only be entered in the county where the defendant resides, under CPLR 3218(b). So defendants who do not reside in New York are out of reach. A pending bill, A07545, would bar confessions of judgment on debts of less than $5,000,000. It is languishing in the New York Assembly's Judiciary Committee and has not been enacted as of September 2026.