$14 Million on the line: SDNY delivers another cautionary ruling to MCA providers

On July 27, 2026, the United States Bankruptcy Court for the Southern District of New York delivered another cautionary ruling to the merchant cash advance industry. In In re Kossoff PLLC,¹ Judge David S. Jones, the same judge who decided J.P.R. Mechanical² just over a year earlier, declared that 19 MCA agreements were loans under New York law. Capital Stack, LLC advanced $10.88 million under those agreements, requiring $14.88 million in total repayment. At the time of bankruptcy, approximately $8 million had already been repaid. The court’s ruling opens the door to avoidance actions to recover that $8 million, along with potential fraudulent conveyance claims that could reach the full $14.88 million repayment obligation, representing roughly $14 million in exposure.

This is not an academic exercise. Missteps in structuring, documenting and litigating MCA transactions carry serious financial consequences, and the Southern District of New York is not a friendly forum for MCA providers.

From JPR Mechanical to Kossoff: The pattern deepens

In May 2025, Judge Jones issued a ruling In re J.P.R. Mechanical Inc., finding that three MCA agreements totaling over $3 million were loans, not true sales of future receivables. Kossoff materially extends that analysis in several critical ways.

First, the procedural posture is entirely different. JPR Mechanical was effectively decided on an undisputed record. The MCA provider missed discovery deadlines, filed late opposition papers, and waived affirmative defenses. In Kossoff, Capital Stack actively litigated, submitted expert testimony and advanced robust arguments about the parties’ course of dealing and reconciliation history. Nevertheless, the court still found the MCAs were loans. This outcome on a contested record is far more significant than a default-like result.

Second, the court neutralized a key strategic maneuver. In JPR Mechanical, the MCA provider filed proofs of claim, which the court treated as “virtually dispositive” evidence that the provider viewed itself as a creditor, not a purchaser. Capital Stack apparently took note: in Kossoff, it chose not to file proofs of claim and did not issue default notices, attempting to distance itself from lender-like behavior. The court held this post-petition posturing was irrelevant. What matters are the contractual rights at execution, not litigation strategy adopted afterward. MCA providers cannot cure structural defects through post-petition conduct.

Third, the scale amplifies the stakes. JPR Mechanical involved three agreements and roughly $3 million. Kossoff involves 19 agreements, $10.88 million advanced and a $14.88 million repayment obligation.

Fourth, the court distinguished Womack v. Capital Stack, an earlier decision favorable to Capital Stack where a state court found substantially similar agreements were true sales of future receivables. The Kossoff court explained why Womack was unpersuasive: it overvalued the bankruptcy carve-out and under-weighed other loan indicators. MCA providers can no longer rely on Womack as a shield.

The parties’ arguments

The Trustee in Kossoff moved for partial summary judgment, arguing the 19 MCA agreements were loans under the substance-over-form framework from Adar Bays and the three-part LG Funding test. On reconciliation, the Trustee argued the provision was illusory: Capital Stack had complete discretion over adjustments, which operated only prospectively with no obligation to refund past over-collections, effectively guaranteeing repayment regardless of the magnitude of actual receivables generated by the related merchants. On term, fixed daily ACH sweeps of $2,190.48, combined with a specified total repayment amount, created a calculable 189-day repayment period, which is a hallmark of a loan. On recourse, the Trustee pointed to extensive default remedies: acceleration, security interests in substantially all assets of the related merchants, a personal guaranty and confession of judgment. The Trustee argued these were flatly incompatible with a true sale of future receivables. The Trustee also argued the MCA agreements failed to transfer collection risk to Capital Stack because they identified no specific receivables, gave Capital Stack no right to collect directly from customers and tied payments to a fixed sum. Finally, the Trustee invoked M Design Village for the proposition that a present sale of future receivables is a legal impossibility, though the court did not opine on that theory.

Capital Stack cross-moved, defending the MCA agreements as true sales. Its primary defense centered on the contractual language: each agreement was titled “Sale of Future Receipts” and disclaimed “THIS IS NOT A LOAN.” Capital Stack argued the reconciliation provision was genuine, pointing to seven reconciliation requests it had voluntarily honored. On term, it argued the agreements lacked a stated maturity date and the reconciliation provision rendered daily remittance amounts variable. On recourse, Capital Stack leaned heavily on the bankruptcy carve-out, which stated that if the business went bankrupt without a prior breach, the seller would owe nothing further. Capital Stack also emphasized its post-petition conduct (no proofs of claim, no default notices) as evidence it acted as a purchaser and not as a lender. It submitted an expert report and cited Womack v. Capital Stack, a 2019 S.D.N.Y. decision finding substantially similar agreements represented true sales of future receivables.

Key holdings

The court analyzed each LG Funding factor and concluded that on every front, the MCA agreements at issue failed:

• Reconciliation was illusory. Capital Stack retained complete discretion over adjustments, which were prospective only with no refund obligation for past over-collections. The court found this effectively guaranteed repayment of the full purchased amount.
• The term was effectively fixed. Despite no stated maturity date, fixed daily ACH sweeps of $2,190.48 created a calculable 189-day repayment period, a de facto finite term characteristic of a loan.
• The bankruptcy carve-out was largely theoretical. Although the agreements excluded bankruptcy from the definition of default, solvency representations meant a breach would almost certainly precede any filing. The draconian default remedies (acceleration, security interests in all assets, personal guarantees, and confession of judgment) were flatly incompatible with a true sale of future receivables.
• Extrinsic evidence could not override contract substance. The court rejected expert testimony, course-of-dealing evidence and self-serving labels (including “THIS IS NOT A LOAN”) as insufficient to overcome the MCA agreements’ unambiguous substance.
• The M Design theory. The Trustee invoked M Design Village v. Versant Funding LLC,³ a July 2025 decision from the Bankruptcy Court for the District of New Jersey holding that a present sale of future receivables is “both a metaphysical and legal impossibility.” Capital Stack countered by citing U.C.C. provisions permitting sales of goods not yet in existence. The court acknowledged the argument but declined to reach it, noting prior recharacterization decisions had not relied on that theory and that the transfers already failed to shift collection risk under traditional LG Funding analysis. The M Design theory remains untested in the Southern District of New York.

Practical takeaways

• The SDNY is not a friendly forum. Bankruptcy courts in the Southern District applying New York law continue to find that agreements that purport to represent sales of future receivables in fact represent loan transactions. MCA providers should consider which state’s law governs their agreements and where they are likely to end up in litigation. Businesses that seek MCAs are often in financial distress, or at least constrained by their available liquidity, which increases the probability that such businesses may end up in bankruptcy.
• Reconciliation must be real. Discretionary, prospective-only reconciliation will be found illusory. To preserve a true-sale characterization, reconciliation must be mandatory, automatic and include a retroactive refund mechanism.
• Bankruptcy carve-outs alone will not avoid recharacterization of an MCA. Excluding bankruptcy from default is insufficient when the MCA agreement includes draconian remedies, security interests, personal guarantees, and confession of judgment. Courts look at the entirety of a transaction, and if on a whole it looks more like a secured loan, they will treat it as one.
• Post-petition conduct will not change the result. Courts look at contractual rights at execution, not whether the MCA provider filed proofs of claim or issued default notices afterward. Strategic post-petition conduct cannot cure structural defects.
• Ask the fundamental question. If an MCA agreement had the substance required for a true sale (genuine risk transfer, meaningful reconciliation, indefinite duration, no personal guarantees, no acceleration and no confession of judgment), would it still deliver the returns MCA providers expect? If not, the industry faces a structural problem that better drafting alone cannot solve.

Kossoff is not incremental. It is a contested, fully briefed ruling on a substantial record that extends JPR Mechanical into more consequential territory. MCA providers should treat it as the leading case on recharacterization in the SDNY and plan accordingly.

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The lookback window may be longer than you think

While the recharacterization holding is the headline, the Kossoff court also resolved a statute of limitations question with significant practical consequences. Capital Stack argued that certain NYDCL fraudulent conveyance claims were time-barred because the transfers occurred more than six years before the Trustee filed his complaint. The court disagreed, holding the six-year period runs from the petition date, not the complaint date.

This distinction matters. In many MCA disputes, the gap between petition and complaint can span months or years, particularly in involuntary cases or complex Chapter 7 administrations. By anchoring the lookback to the petition date, the court expanded the universe of potentially avoidable transfers. MCA providers should take note: the avoidance window may reach further back than the complaint date suggests.

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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 Togut v. eProdigy Fin., LLC (In re Kossoff PLLC), No. 21-10699 (DSJ), Adv. Pro. No. 23-01109 (DSJ), 2026 Bankr. LEXIS 1850, 2026 WL 2168916 (Bankr. S.D.N.Y. July 27, 2026).
2 O’Toole v. Radium2 Cap., LLC (In re J.P.R. Mech. Inc.), No. 19-23480 (DSJ), Adv. Pro. Nos. 21-07079 (DSJ), 21-07082 (DSJ), 2025 Bankr. LEXIS 1319, 2025 WL 1550541 (Bankr. S.D.N.Y. May 30, 2025).
3 M Design Vill. v. Versant Funding LLC (In re M Design Vill.), No. 24-21406 (MEH), Adv. Pro. No. 24-01639 (MEH), 2025 WL 2088887 (Bankr. D.N.J. July 24, 2025).}