[author: Jeff Riazi]
For those operating in the MCA space, New York federal and state courts hold a preeminent role in guiding FinTech companies to structure non-loan products in ways that are alternative, at times clever, yet legally compliant. Recently, the U.S. Bankruptcy Court for the Southern District of New York found certain MCAs as disguised loans.[i]
By way of background, Radium2 entered into a series of MCA transactions with customer and receivables-seller J.P.R. Mechanical, and most of its facility structure complied with existing New York law, except for one small aspect of its reconciliation provision.
The court summarizes established New York law:
“The hallmark of a loan is that the lender is absolutely entitled to repayment under all circumstances, or put otherwise, the principal sum is repayable absolutely. New York courts usually weigh three factors in making that determination: (1) whether there is a reconciliation provision in the agreement; (2) whether the agreement has a finite term; and (3) whether there is any recourse should the merchant declare bankruptcy. Within the first two of these factors, courts examine whether the merchant could practicably invoke the reconciliation provision, and whether, even if the agreement purports to have no maturity date, it has a ‘de facto fixed term.’ Courts also at times consider a question the parties did not emphasize here: whether the daily payment rates appear to be good faith estimates of the merchant’s revenues. The root of all of these factors is the transfer of risk. Where the lender has purchased the accounts receivable, the borrower’s debt is extinguished and the lender’s risk with regard to the performance of the accounts is direct, that is, the lender and not the borrower bears the risk of non-performance by the account debtor.”[ii]
Now, for its analysis and holding here:
“As noted, the Agreements are styled as agreements by which Radium2 purchased future receivables, with a cash payment to JPR up front and a stream of daily payments in specified amounts in exchange. The Agreements allow the Debtor to request changes to the daily payment. However, the Debtor could request such a modification only once per month, and only on a going-forward basis. Nothing in the Agreements requires the Defendant to remit back to the Debtors any amounts by which the Debtors have been overcharged during any given month. Thus, the Agreements lack true reconciliation provisions. Applying these principles here, the Agreements lacked reconciliation provisions that would cause Radium2 not to receive more than the share of receivables purportedly purchased because the Agreements do not bind the Defendant to pay back any money collected that exceeds the specified percentage of the Debtors’ revenues. This factor accordingly weighs in favor of classifying the Agreements as loans.”[iii]
While Radium2’s facilities seemed to allow reconciliation on a prospective basis, the limitations it imposed (one time only, forwarded looking only), effectively mandated a threshold minimum monthly payment, which is a nonstarter in MCA drafting. Reconciliation provisions should allow a real true-up with receivables as received (i.e., as received, divided by, defined period of time), in relation to the purchased percentage. To set a standard or fixed payment amount (subject to a request down), and if and whether an MCA customer (seller of receivables)avails itself of such rights or forgets to do so, is one thing. But, to cut corners and mandate some minimum cashflow to the MCA provider (purchaser) is crossing the line and effectively playing with fire. Given the balance of the agreement’s consistency with MCA law (no fixed term, bankruptcy not by itself a default), let alone the meaningful seven-figure advances in play, this seemingly innocuous corner cut had to come as a blow. Found to be effectively a “lender,” the trustee was able to finish its strawman argument that payments received prior to the bankruptcy filing amounted to preferential transfers, subjecting such payments to the court’s claw-back powers. Not only did Radium2 lose on a portion of its purchased return, but certain funds as previously received were also subject to disgorgement.
MCAs are often flexible tools, to both financiers (buyers) and customers (sellers) alike. But certain guardrails must always be kept in mind when drafting these products. There are other legally compliant and yet equally proactive measures that can betaken to best achieve a desired return.
[i] In re: J.P.R. Mechanical Inc. v.Radium2 Capital, LLC, et al.,2025 WL 1550541 (S.D.N.Y. May 30, 2025) (“Radium2”).
[ii] Radium2 at *7.
[iii] Radium2 at *7.
