On July 27, 2026, a New York bankruptcy judge examined nineteen contracts that each declared in capital letters that they were NOT A LOAN, and ruled that every one was a loan. The funder had advanced roughly $10.88 million to a law firm and expected roughly $14.88 million back through fixed daily bank sweeps.
That ruling, In re Kossoff PLLC, Adv. Pro. No. 23-01109 (DSJ) (Bankr. S.D.N.Y. July 27, 2026), applied New York law. But the same contracts sit in the desk drawers of trucking companies in Fontana and warehouse operators in Ontario, and California law gives those businesses a different and in some ways sharper set of tools.
What did the bankruptcy court decide in Kossoff?
In the Chapter 7 case of Kossoff PLLC, a real estate law firm whose managing member diverted client funds, the trustee sued its funder, Capital Stack, LLC, over nineteen “Agreements for the Purchase and Sale of Future Receipts” signed between 2016 and 2020. In one contract, Capital Stack paid $300,000 and swept $2,190.48 from the firm’s operating account every business day until it had collected $414,000, 38 percent on top of the advance over 189 days.
Judge David S. Jones granted the trustee partial summary judgment, holding the agreements were loans as a matter of law. He called them “well drafted attempts to characterize high-return financing as asset sales,” drafted that way “at least in part because the rate of return under the agreements almost surely would violate New York usury law if the agreements were loans.”
Why did the “not a loan” label fail?
New York courts weigh three factors from LG Funding, LLC v. United Senior Properties of Olathe, LLC, 181 A.D.3d 664 (2d Dep’t 2020): whether the contract has a genuine reconciliation clause, whether it has a finite term, and whether the funder keeps recourse if the merchant goes bankrupt.
All three cut against Capital Stack. The reconciliation clause said the merchant “may request” a lower daily amount and the funder “may adjust” it, with no duty to refund over-collections. The fixed daily sweep plus a default trigger after four missed payments in a month meant the payoff date could be computed with a calculator, which is a term. And the bankruptcy carve-out applied only if the merchant was not already in default, which, given the breadth of the default provisions, would almost never be true. Seven reconciliations actually granted did not matter, because later conduct cannot rewrite an unambiguous contract.
How does California’s usury law apply to a merchant cash advance?
Article XV, § 1 of the California Constitution lets parties to a written business loan agree to interest at the higher of 10 percent per year or 5 percent over the Federal Reserve Bank of San Francisco discount rate.
The catch is the exemption list. The constitution exempts banks, credit unions, and “personal property brokers,” and Fin. Code § 22002 carries that last exemption to lenders licensed under the California Financing Law, Fin. Code § 22000 et seq. Many MCA funders hold no California license because they insist they are not lending, so a Kossoff-style ruling leaves them with a usury problem and a licensing problem at once.
The interest provision of a usurious loan is void, so the borrower owes principal only, and Civil Code § 1916-3 lets the borrower recover treble the interest paid in the twelve months before suit. California courts have looked past labels in usury cases since at least Boerner v. Colwell Co., 21 Cal. 3d 37 (1978). No published California appellate decision has yet applied the LG Funding factors to an MCA, so a judge here would draw on that principle, on In re Shoot the Moon, LLC, 635 B.R. 797 (Bankr. D. Mont. 2021), a Ninth Circuit-district case that treated eighteen advances as usurious loans, and on Kossoff.
Drowning in MCA Daily Debits? The first response usually frames everything that follows. Talk it through with an attorney and CPA before you act.
What California rules already treat MCAs like credit?
SB 1235, codified at Fin. Code § 22800 et seq., defines “commercial financing” to include an “accounts receivable purchase transaction,” the label every MCA wears. For offers of $500,000 or less, the recipient must sign a disclosure that states, under Fin. Code § 22802(b)(6), the total cost “expressed as an annualized rate,” computed under 10 CCR § 900 et seq.. The funders’ trade group challenged the rule and lost in Small Business Finance Ass’n v. Mohseni, No. 24-50 (9th Cir. Apr. 15, 2025) (unpublished). SB 666 added Civil Code §§ 1799.300 to 1799.303, effective January 1, 2024, which bar non-bank providers from charging small businesses ACH processing fees, payoff statement fees, or “platform” fees with no service behind them, at $500 or more in statutory damages per violation.
What happens to a stacked MCA in an Inland Empire bankruptcy?
Take a hypothetical cross-dock logistics company in Ontario that took three advances over eight months in 2025. Funder A paid $120,000 for $168,000 of “future receipts” at $1,400 per business day over 120 days. Funder B paid $90,000 for $124,200 at $1,150 per day over 108 days. Funder C paid $50,000 for $71,500 at $1,100 per day over 65 days. Total funded: $260,000. Total owed: $363,700. Combined daily debit: $3,650, roughly $76,000 a month, against monthly revenue that has slipped to $310,000. Under the DFPI formula the annualized rates are near 149, 158, and 293 percent.
If the company files under Subchapter V in the Riverside Division of the Central District of California, the automatic stay under 11 U.S.C. § 362 stops the sweeps immediately. The debtor can then use § 544(b) to borrow California’s Uniform Voidable Transactions Act, Civil Code § 3439.04, and attack each advance taken while insolvent as an obligation incurred without reasonably equivalent value to the extent of the usurious premium. Payments in the prior 90 days, roughly $180,000 here (63 business days of Funder A and B debits plus about 20 days of Funder C), are preference candidates under § 547. If the advances are loans, each claim can be objected to under § 502(b) and cut to unpaid principal; Funder C, paid for only about 20 days, would drop from $71,500 to near $28,000. The books need restating too, since an advance recorded as a sale hides interest expense.
| California tool | Authority | Who it reaches | Practical effect |
|---|---|---|---|
| Usury ceiling | Cal. Const. art. XV, § 1 | Unlicensed non-bank funders | Interest void; principal only |
| Treble recovery | Civ. Code § 1916-3 | Borrower who paid interest | Treble interest paid in prior year |
| APR disclosure | Fin. Code § 22802; 10 CCR § 900 | Offers of $500,000 or less | Signed annualized rate in the file |
| Fee limits | Civ. Code § 1799.302 | Small businesses | $500 or more per prohibited fee |
| Confession of judgment ban | CCP § 1132 | Judgments after Jan. 1, 2023 | Unenforceable in superior court |
| Avoidance powers | 11 U.S.C. §§ 544, 547, 548 | Debtor in C.D. Cal. | Recover payments; shrink claims |
Can a funder still use a confession of judgment in California?
Since January 1, 2023, Code of Civil Procedure § 1132 provides that a judgment by confession “is unenforceable and may not be entered in any superior court.” A funder holding a New York confession may still try to enter it there and domesticate it here, so object fast. A UCC-1 filing proves nothing either way, since Commercial Code § 9109(a)(3) covers sales of accounts as well as security interests.
What should a California owner check before the next daily debit clears?
Start with the reconciliation clause. If the funder “may” adjust the daily amount and nothing requires a refund of over-collections, the contract has the flaw the Kossoff court found fatal. Pull the SB 1235 disclosure; if none was given, or the stated APR bears no resemblance to what you are paying, that is a violation and an admission. Then count the days: the 90-day preference window and the one-year treble recovery period under § 1916-3 both run against you. What goes wrong in practice is the fourth advance taken to cover the first three.
Frequently Asked Questions
Is a merchant cash advance a loan in California?
It depends on the substance of the contract, not its title. If daily debits are fixed, reconciliation is discretionary, and default remedies are broad, the funder never really bears receivables risk, and a court can treat the advance as a loan subject to California’s usury limit and licensing rules.
What is the maximum interest rate on a business loan in California?
Article XV, section 1 of the California Constitution caps interest on a written business loan at the higher of 10 percent per year or 5 percent over the Federal Reserve Bank of San Francisco discount rate, unless the lender is exempt, as banks, credit unions, and California Financing Law licensees are.
Can I get my money back if an MCA is found to be usurious?
Under Civil Code section 1916-3, a borrower who paid usurious interest can sue within one year of payment to recover three times the interest paid, and the interest provision itself is void so only principal is owed. The funder must be unlicensed and the transaction must be a loan.
Are confessions of judgment enforceable in California?
No. Code of Civil Procedure section 1132, as amended effective January 1, 2023, makes a judgment by confession unenforceable and bars superior courts from entering one, though a funder holding a New York confession may still try to enter it there and domesticate it.
Do MCA companies have to disclose an APR in California?
Yes, for commercial financing offers of $500,000 or less. Financial Code section 22802 and the DFPI regulations at 10 CCR section 900 et seq. require a signed disclosure stating the total cost as an annualized rate.
Does filing bankruptcy stop MCA daily debits?
Yes. The automatic stay under 11 U.S.C. section 362 takes effect the moment the petition is filed and stops ACH sweeps, bank levies, and collection calls. In a Subchapter V case the debtor can then object to the funder’s claim and pursue preference and fraudulent transfer recoveries.
How North Star Law Firm Can Help
North Star Law Firm represents Inland Empire and Sacramento-area businesses carrying merchant cash advances, whether the goal is to challenge the contract, restructure the debt, or stop the daily debits. Phillip Zagotti is a California attorney and a CPA, which matters because the recharacterization question turns as much on the numbers (annualized cost, preference math, how the advances were booked) as on contract language. The firm handles contract review of MCA agreements, Subchapter V reorganizations in the Riverside Division, and business debt negotiations with funders and SBA lenders. An earlier post on defendants who file Subchapter V covers the creditor side.
If daily sweeps are outrunning receipts, review the contracts before the next default notice. Reach the firm through its contact page or book a consultation at calendly.com/pzagotti-ca-legal/30min.