A dental practice in Havre, Montana, is an unlikely source of a rule that now guides bankruptcy judges in Riverside, Sacramento, and Fresno. On May 21, 2026, the Ninth Circuit issued Harada Family Dental Care, PC v. Kapitus Servicing, Inc., No. 25-6945 (9th Cir. May 21, 2026) (unpublished). A merchant cash advance funder had filed a $110,898.85 claim in the practice’s Subchapter V case, the practice objected on usury grounds, and the funder invoked its arbitration clause. The bankruptcy court kept the dispute, and the Ninth Circuit agreed.
For a California business owner holding one of these agreements, the question is practical: once the company is in bankruptcy court, can the funder pull the fight into arbitration? When the dispute concerns the funder’s own proof of claim, the answer in this circuit is usually no.
What happened in Harada v. Kapitus?
Harada Family Dental Care filed Subchapter V in the District of Montana in 2024. Kapitus filed a proof of claim for the unpaid balance of its advance. The debtor objected and counterclaimed, contending the “purchase of future receivables” was a disguised loan at a rate that violated Montana’s usury statute, with a penalty the debtor computed at more than double the claim.
Kapitus moved to compel arbitration. On July 1, 2025, the bankruptcy court denied the motion in Harada Family Dental Care, P.C. v. Strategic Funding Source, Inc., Adv. No. 4:25-ap-04001-BPH (Bankr. D. Mont.), reasoning that claim allowance is core and that the usury defense could not be separated from the claim objection.
Why does it matter that a claim objection is a “core” proceeding?
The Ninth Circuit’s framework comes from Continental Insurance Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 671 F.3d 1011 (9th Cir. 2012). In a non-core proceeding, the bankruptcy court generally must enforce an arbitration clause. In a core proceeding, the court has “discretion to deny enforcement of an arbitration agreement” when arbitration “would conflict with the underlying purposes of the Bankruptcy Code.”
28 U.S.C. § 157(b)(2)(B) covers the “allowance or disallowance of claims against the estate,” and § 157(b)(2)(C) covers “counterclaims by the estate against persons filing claims against the estate.” An MCA funder that files a proof of claim has placed its contract inside both categories. Ackerman v. Eber (In re Eber), 687 F.3d 1123 (9th Cir. 2012), applied the same logic to a fraud-based discharge dispute. And as Morgan v. Sundance, Inc., 596 U.S. 411 (2022), put it, arbitration agreements are “as enforceable as other contracts, but not more so.”
On appeal, Kapitus argued the court could not assume delay without evidence of how long arbitration would take. Quoting Thorpe, the panel explained that arbitration of a creditor’s claim, “even if conducted expeditiously, prevents the coordinated resolution of debtor-creditor rights and can delay the confirmation of a plan.” The panel also corrected the district court, which had refused to hear the appeal: under 9 U.S.C. § 16(a)(1)(B), an order refusing arbitration is appealable as of right.
Being Pushed Into Arbitration by a Lender While Your Business Is Failing? The first response usually frames everything that follows. Talk it through with an attorney and CPA before you act.
Which disputes stay in bankruptcy court and which go to arbitration?
The Central District applies Thorpe the same way. In In re Orchid Child Productions, LLC, Adv. No. 2:21-ap-01212-RK (Bankr. C.D. Cal. Apr. 22, 2024), the court refused to arbitrate a trustee’s counterclaims against a claimant because an arbitrator would otherwise be deciding claim allowance. Common MCA disputes tend to land as follows.
| Dispute | Core or non-core | Likely forum | Authority |
|---|---|---|---|
| Objection to funder’s proof of claim (usury, recharacterization) | Core, § 157(b)(2)(B) | Bankruptcy court | Harada; Thorpe |
| Estate counterclaim for statutory penalties | Core, § 157(b)(2)(C) | Bankruptcy court | Harada; Orchid Child |
| Preference or fraudulent transfer avoidance (daily ACH debits) | Core, § 157(b)(2)(F), (H) | Bankruptcy court | Thorpe framework |
| Automatic stay or discharge violation by funder | Core | Bankruptcy court | Eber; § 362(k) |
| Debtor’s prepetition tort claim, funder filed no claim | Often non-core | Arbitration likely | Thorpe |
| Guarantor’s personal dispute outside the case | Not a bankruptcy matter | Arbitration or state court | FAA; CCP § 1281.2 |
What California law can a debtor raise against an MCA funder?
For an Inland Empire or Sacramento debtor, the California overlay is where the money is. Cal. Const. art. XV, § 1 caps interest on non-consumer loans at 10 percent (or 5 points over the Federal Reserve discount rate) but exempts lenders licensed under the California Financing Law. A funder licensed under Fin. Code § 22100 can charge what a commercial contract says. An unlicensed funder whose “receivables purchase” is recharacterized as a loan has a serious problem. That turns on whether the reconciliation clause is real, whether the funder can accelerate when sales slow, and whether a guaranty makes the purchase risk-free. In a claim objection, the bankruptcy judge decides those questions.
Add Fin. Code § 22800 et seq., enacted as SB 1235 and implemented at 10 CCR § 900 et seq., which requires commercial financing providers, including sales-based financing, to disclose total cost, term, payment schedule, and an annualized rate at the offer stage. A missing disclosure is not a usury defense, but it is evidence of what the deal really was. (A 2024 registration bill for these providers, SB 1482, died on the Assembly inactive file.)
CCP § 1281.2(c), the third-party litigation exception, is usually displaced by the FAA and out-of-state law the contract selects. The fee-default statute, CCP § 1281.98, upheld against preemption in Hohenshelt v. Superior Court, S284498 (Cal. Aug. 11, 2025), covers only employment and consumer arbitration. For a business borrower, the bankruptcy court is often the only forum where the clause does not control.
What does this look like for a Fontana trucking company in Subchapter V?
Consider a Fontana drayage carrier running fourteen tractors between the Port of Long Beach and Inland Empire warehouses. In March 2026 it takes a $150,000 advance against $210,000 of “future receivables,” a 1.40 factor rate, repaid by a $1,000 ACH debit every business day under a contract with New York law, an arbitration clause, and a personal guaranty. By August, freight rates have fallen and the debit eats a third of collections. The company files Subchapter V in the Riverside Division on September 8, 2026, owing $88,000.
The funder files a proof of claim for $88,000 plus default fees. The debtor objects under Fed. R. Bankr. P. 3007 and counterclaims. Over ten months on a declining balance, the $60,000 charge is an annualized rate above 90 percent. If the deal is a loan and the funder holds no California Financing Law license, the objection seeks to disallow the interest, recover interest paid, and obtain treble recovery under Civ. Code § 1916-3. When the funder moves to compel arbitration, Harada lets the judge deny it: the objection and counterclaim are core, and the unsecured class’s recovery turns on the answer.
The calendar is tight. The 11 U.S.C. § 1188 status conference comes within 60 days, and the plan is due within 90 days under § 1189(b), which for a September 8 filing means December 7, 2026. A debtor without a claim objection on file by then negotiates from weakness.
What goes wrong in practice, and what does the CPA side see?
The most common mistake is waiting. A funder that never files a proof of claim has not submitted its contract to the claims process, and a debtor’s affirmative suit against it looks much more like a non-core matter bound for arbitration. A guaranty also lets the funder pursue the owner in New York while the company’s case proceeds.
The accounting side is usually ignored. If the MCA is recharacterized as a loan, the $60,000 charge is interest, and a business that booked the debits as “bank fees” should correct the deduction. A claim disallowed because the debt was never valid produces no cancellation of debt income, but a compromise that writes down a valid claim usually does, subject to the § 108(a)(1)(A) bankruptcy exclusion.
Frequently Asked Questions
Can a merchant cash advance company force my California business into arbitration after it files bankruptcy?
Not always. Under the Ninth Circuit’s Thorpe Insulation rule, applied in Harada v. Kapitus in May 2026, a bankruptcy court may refuse to enforce an arbitration clause when the dispute is core, such as an objection to the funder’s proof of claim, and arbitration would conflict with the Bankruptcy Code’s purposes.
Does an MCA count as a loan under California usury law?
It depends on how the contract actually works. Courts look at whether repayment is truly contingent on receivables, whether the reconciliation clause is real, and whether a guaranty removes the funder’s risk. If the deal is recharacterized as a loan, California’s constitutional interest cap and the California Financing Law licensing requirement come into play.
What is a core proceeding in bankruptcy?
Core proceedings are matters listed in 28 U.S.C. § 157(b)(2), including claim allowance, estate counterclaims against claimants, avoidance actions, and stay and discharge matters. The bankruptcy court enters final judgments in them and may keep them out of arbitration.
Does the funder filing a proof of claim change anything?
Yes. Filing a proof of claim submits the funder’s contract to the claims process, which is core under § 157(b)(2)(B), and any estate counterclaim against that funder is core under § 157(b)(2)(C). A funder that never files a claim keeps a stronger argument that a debtor’s affirmative suit belongs in arbitration.
Can the funder appeal an order denying arbitration right away?
Yes. Section 16(a)(1)(B) of the Federal Arbitration Act allows an immediate appeal from an order refusing to compel arbitration, and the Ninth Circuit in Harada held that a district court cannot refuse to hear it. The bankruptcy case does not automatically stop during the appeal.
How fast does a Subchapter V debtor have to act on an MCA claim?
The plan is due 90 days after the petition under 11 U.S.C. § 1189(b), and the status conference comes within 60 days. A claim objection under Bankruptcy Rule 3007 should be filed early enough that the court can rule, or at least estimate the claim, before confirmation.
How North Star Law Firm Can Help
North Star Law Firm represents Inland Empire and Sacramento-area businesses in Subchapter V reorganizations, in SBA loan and business debt restructurings, and in claim objections and adversary proceedings against merchant cash advance funders. Phillip Zagotti is a California attorney and a CPA, admitted to the United States Bankruptcy Court for the Central District of California, so the firm handles both the litigation and the tax side of a disputed MCA. The firm also reviews financing agreements before signing through its contract review practice. See also the firm’s post on what happens when a defendant files Subchapter V.
If a funder is debiting your account daily and threatening arbitration while your company struggles, contact North Star Law Firm or schedule a consultation.