Preference pitfalls for Merchant Cash Advances—Lessons from the Southern District of New York

Addressing bankruptcy specific preference liability, J.P.R. Mechanical,¹ a recent decision by the Bankruptcy Court for the Southern District of New York (Court) applying New York law, found that the MCA agreements at issue, structured as “sales of future receipts,” were, in substance, loans allowing the Chapter 7 trustee to claw back as preference payments more than $3 million paid by the debtors shortly before the bankruptcy filing. This opinion makes an important point:

Form will not shield MCA providers. If reconciliation is illusory, repayment looks fixed, or the funder keeps traditional lender protections, a bankruptcy court will likely re-characterize the deal and treat pre-petition payments as (potentially recoverable) debt service.

In J.P.R. Mechanical, the Court granted the Chapter 7 trustee’s motions for partial summary judgment in two related adversary proceedings brought against an MCA provider. The trustee sought to claw back three large pre-petition payments, totaling over $3 million, which the debtors made under three separate MCA agreements.²

Although preference law drove the dispute, the ultimate issue was whether the MCA agreements created debt instead of representing a true sale. If they were true purchases of receivables, the payments would represent the buyer’s own property and could not be preference payments. However, if they were disguised loans, the MCA provider was simply a creditor that had been paid ahead of others.

In evaluating this issue, the Court noted that “substance—not form—controls.” It then considered factors long used by New York courts to evaluate MCA transactions as well as some additional factors, all of which are set forth below.

Applying these factors, the Court found as follows: first, reconciliation was illusory. Each agreement allowed only one adjustment request per month and never required the MCA provider to remit over-collections. The Court found this “largely illusory,” leaving the MCA provider “absolutely entitled to repayment”—the hallmark of a loan.

Second, the term was effectively fixed. Despite boiler-plate statements that the purchase continued until 25% of receipts reached a target amount, deposition testimony showed the payoff date could be predicted by simple arithmetic, creating a de-facto finite term. 

Third, the MCA provider retained ample recourse. Despite bankruptcy not being labeled a default, any interference with the MCA provider’s ability to collect would accelerate the entire “Purchased Amount,” and personal guarantees exposed the merchant’s principal to suit without exhaustion of the MCA provider’s remedies against the debtors. The Court found that these were classic lender protections. 

Fourth, risk never shifted. The debtors, not the MCA provider, bore the risk of non-payment by customers. Moreover, daily draws came from the debtors’ bank accounts regardless of specific receivable performance. Thus, the MCA provider held the position of a secured (albeit junior) creditor, not a purchaser. 

Finally, the MCA provider’s blanket description of “all payments” rather than specified accounts, the debtors’ unrestricted use of funds, and the MCA provider’s own proofs of claim (wherein it referred to itself as a “creditor”) collectively reinforced the loan characterization.

Consequently, the Court found that the MCA agreements provided for loans, not true sales. Thus, the funds transferred pursuant to these agreements were preferential transfers and subject to recovery by the trustee.

Practical Take-Aways 

This case reminds both MCA providers and borrowers to re-examine existing MCA agreements to update their potential exposure/causes of action and for providers to make changes in these agreements moving forward. Moreover, this decision highlights the following:

• MCA providers face heightened preference risk. Courts will pierce “future receivables” language where reconciliation is illusory, and repayment looks fixed.
• An MCA provider must carry the risk or accept loan treatment. Rebutting the loan presumption requires a refund-capable reconciliation process, indefinite duration, and no personal guarantees or accelerations tied to the merchant’s financial distress.

Indeed, for MCA providers, J.P.R. Mechanical underscores that MCA agreements must demonstrably transfer economic risk to survive bankruptcy-preference scrutiny.

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If you have any questions about this Legal Briefing, please feel free to contact any of the attorneys listed or the Eversheds Sutherland attorney with whom you regularly work.

_{1 In re: J.P.R. MECHANICAL INC. d/b/a JPR MECHANICAL, et al., Debtor. MARIANNE T. O'TOOLE, solely in her capacity as Chapter 7 Tr. of the Est. of J.P.R. Mech. Inc. d/b/a/ JPR Mech., Pl., v. RADIUM2 CAPITAL, LLC, f/k/a RADIUM2 CAPITAL, INC. Def. MARIANNE T. O'TOOLE, solely in her capacity as Chapter 7 Tr. of the Est. of J.P.R. Mech. Services Inc. Pl., No. 19-23480 (DSJ), 2025 WL 1550541, at *1 (Bankr. S.D.N.Y. May 30, 2025).}

_{2 The Court treated the motions as “unopposed” because the MCA provider missed discovery deadlines and filed late opposition papers. Therefore, the Court reviewed an undisputed factual record. Moreover, in conducting itself in the manner noted above, the MCA provider waived various affirmative defenses applicable to the trustee’s preference action, which the Court notes in its decision.}