New York’s Merchant Cash Advance Case Law Update May, 2026
Recent legal developments in New York in 2026 have shifted the landscape for Merchant Cash Advances (MCAs). More specifically, the Courts have started to look beyond the mere name of a merchant cash advance agreement and analyze whether the agreement is in fact a disguised loan.
Piercing the Corporate Veil
Courts and regulators are increasingly piercing the purchase and sale of future receivables veil, and treating certain MCA’s as disguised loans, and therefore subject to New York’s criminal usury cap of 25%.
The Disguised Loan Precedents
The central legal test in New York as to whether the agreement is a loan or a merchant cash advance is whether the funder carries the risk of loss or a decline in business revenues. If repayment is absolute and not contingent on the merchant’s actual revenue, courts are recharacterizing these deals as a criminal usurious loan.
The Yellowstone Settlement (January 2025)
- The Case: People of the State of New York v. Yellowstone Capital et al.
- Outcome: A landmark $1.065 billion judgment against one of the industry’s largest players. The NY Attorney General proved that Yellowstone’s contracts were fraudulent loans with interest rates up to 700% and that they systematically refused to conduct a reconciliation / true up.
- Precedent: The court found that despite the contract language, the funder did not genuinely take on the risk of the merchant’s business failing.
- Effect:
- Debt Cancellation: $534 million in outstanding merchant debt was legally erased.
- Vacated Judgments: Thousands of prior judgments against merchants were voided.
- Ban: Yellowstone’s principals were permanently banned from the industry.
Haymount Urgent Care v. GoFund Advance
- The Case: Multiple merchants brought a class action lawsuit against an MCA funder alleging RICO (racketeering) violations and claimed the MCA funder was collecting unlawful debt.
- Ruling: The court allowed the RICO claims to proceed, thereby piercing the “corporate veil” to hold the individual owners of the funding company personally liable.
- Effect: This case shows that NY Courts will pierce the veil of companies committing fraud and if so, it’s possible to sue a funder and also its owners, when appropriate, based on a RICO claim.
Fleetwood Services v. Ram Capital Funding
- The Case: The court examined whether a standard merchant cash advance agreement was a true sale of future receivables or a disguised loan.
- Outcome: The funder filed a motion to dismiss the merchant’s lawsuit. The Court found that the reconciliation provision (the clause that is supposed to adjust the MCA payments to match actual revenue, was a sham because it was rarely if ever honored.
- Effect: This case reinforces the ability of Courts to pierce the Corporate Veil and look beyond the four corners of the agreement. If it walks and acts like a loan, it is a loan.
3 Factor Test
While there is no definitive test for determining a loan from an MCA, the NY Courts have begun to look at three primary factors when making their determination.
• NY Courts are primarily focused on three (3) factors to test whether there is a disguised loan:
- Reconciliation: Does the MCA funder actually adjust payments when revenue drops?
- Indefinite Term: Is there a fixed date upon which the MCA must be repaid? Only a loan has a definitive repayment time lime, whereas a true MCA has no pre-determined and definitive time line for repayment, because an MCA is strictly contingent on the generation of receivables.
- Recourse After Bankruptcy: Does the MCA funder have a way to collect even if the business fails completely and files bankruptcy. An example of this would be an MCA funder pursuing the merchant’s personal guarantee even post-bankruptcy? This is because the risk of loss has shifted from the funder to the merchant and that is unacceptable.
