A Cold Shoulder for MCA Vendors in Bankruptcy Court

By: Michael L. Moskowitz, Esq.

Merchant cash advance (“MCA”) providers have long relied on form agreements and carefully chosen labels—purchase of future receivables, not a loan, no fixed term—to insulate their products from usury laws and borrower defenses. A recent decision from the United States Bankruptcy Court for the Southern District of Texas suggests that, at least in bankruptcy, those labels may no longer be enough.

In Sommers v. Global Merchant Cash, Inc. (In re Anadrill Directional Services, Inc.), Chief Bankruptcy Judge Eduardo V. Rodriguez denied, in large part, an MCA vendor’s motion to dismiss a chapter 7 trustee’s fraudulent transfer claims, holding that the trustee plausibly alleged that the purported MCA was, in substance, a high‑interest loan rather than a true sale of receivables. While the Court dismissed the trustee’s RICO count, its analysis of the MCA structure should command the attention of funders, lenders, and insolvency professionals alike.

The Transaction at Issue

The debtor, an oil‑and‑gas services company, entered into an agreement styled as a merchant cash advance with Global Merchant Cash, Inc. Under the agreement, the funder advanced approximately $650,000 in exchange for the right to receive more than $1 million through weekly withdrawals allegedly equal to ten percent of the debtor’s future revenue.

On paper, the agreement checked many of the familiar MCA boxes: it disclaimed being a loan, described the transaction as a purchase of receivables, and included a reconciliation provision. In practice, however, the trustee alleged that the economics told a very different story. Based on the payment structure, the court calculated an annualized interest rate exceeding 60 percent. The agreement also authorized sweeping remedies in the event of default, including ACH withdrawals of up to 100 percent of the debtor’s revenue, a confession of judgment, a blanket security interest, and a personal guaranty.

After the debtor filed chapter 7, the trustee sued to avoid both the obligation and the payments made under it as constructively fraudulent transfers under section 548 of the Bankruptcy Code. The debtor paid $847,000 to the MCA vendor pre-petition. The trustee argued that the transaction was a criminally usurious loan under New York law and therefore void, or alternatively, that the debtor did not receive reasonably equivalent value.

Substance Over Form—Again

At the heart of the decision is a threshold question that has become increasingly common in MCA litigation: was the agreement a true sale of receivables or a disguised loan?

Applying New York law, the Court emphasized that it must look to the substance of the transaction rather than the labels chosen by the parties. Citing recent New York and federal cases, the Court focused on whether the funder bore meaningful risk or instead retained an absolute right to repayment.

The trustee’s allegations, taken as true at the pleading stage, were enough. The Court pointed to several features that strongly suggested a loan rather than a sale:

• the funder’s ability to sweep all of the debtor’s revenue upon default;
• the requirement of a confession of judgment;
• a blanket lien on the debtor’s assets; and
• a personal guaranty by the company’s principal.

These provisions, the Court reasoned, shifted virtually all risk away from the funder and ensured repayment regardless of the debtor’s actual receivables—hallmarks of a loan, not a contingent purchase.

Just as important, the Court rejected the argument that a reconciliation provision or the absence of an express bankruptcy‑default clause was dispositive. A reconciliation that merely adjusts weekly payments, without changing the total amount owed, does little to undermine the existence of an absolute repayment obligation.

Fraudulent Transfer Claims Survive

Having concluded that the trustee plausibly alleged the existence of a loan, the Court turned to the fraudulent transfer claims. At the motion‑to‑dismiss stage, the sole disputed element was whether the debtor received reasonably equivalent value.

The Court held that the trustee adequately pled a lack of reasonably equivalent value on two independent theories. First, if the agreement were ultimately found to be a criminally usurious loan under New York law, it would be void ab initio—and a void obligation cannot confer reasonably equivalent value. Second, even setting usury aside, obligating the debtor to repay more than $1 million in exchange for a $650,000 advance plausibly alleged a gross disparity in value.

As a result, the Court allowed the trustee’s avoidance claims under section 548 and recovery claim under section 550 to proceed.

A Limit to the Court’s Willingness: RICO

The decision was not an across‑the‑board loss for the MCA vendor. The Court dismissed the trustee’s RICO claim, finding that the complaint failed to allege a cognizable injury flowing from the use or investment of racketeering income, as required under section 1962(a). Allegations that the funder reinvested proceeds into its general operations or into issuing additional advances were insufficient under controlling Fifth Circuit precedent.

This portion of the ruling underscores an important distinction: while bankruptcy courts may be increasingly skeptical of MCA structures, they remain unwilling to stretch federal racketeering statutes beyond their established limits.

Practical Takeaways

For MCA providers, the message is clear. Bankruptcy courts—particularly at the pleading stage—are prepared to look past contractual labels and scrutinize whether an MCA truly allocates risk to the funder. Security interests, personal guarantees, confessions of judgment, and aggressive default remedies may collectively undermine the argument that a transaction is a bona fide receivables purchase.

For trustees and creditors’ counsel, the decision provides a roadmap for challenging MCA transactions in bankruptcy without needing to prove intent or survive heightened pleading standards. Allegations grounded in economic reality and risk allocation may be enough to get past a motion to dismiss.

Whether this “cool” reception signals a broader trend remains to be seen. But for now, Anadrill stands as another reminder that in bankruptcy court, substance still triumphs over form—and MCA vendors may find the climate increasingly inhospitable.

For guidance navigating MCA disputes, fraudulent transfer litigation, or complex bankruptcy matters, contact FRB’s Creditors’ Rights & Bankruptcy Practice Group at (516) 599-0888 or fill out the form below. 

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