Merchant Cash Advances in Bankruptcy: True Sale or Loan, Effect on Post-Petition Receivables, Liens, and More

MCA funding is unlike traditional forms of receivables financing and raises thorny issues both in and out of bankruptcy. Under an MCA agreement, the merchant "purchases" or advances a lump sum in exchange for a percentage of the debtor-seller's future sales revenue. The advance usually bears an extremely high interest rate, and is repaid, along with fees, daily or weekly over a short time. 

Bankruptcy courts do not hesitate to recharacterize MCA transactions as loans, with all the attendant consequences to both the purchaser-lender and the seller-debtor. The critical question is which party bears the burden of non-payment of the receivable, and courts have reached different conclusions on similar facts. Additionally, MCA funding has come under scrutiny from state regulatory agencies and even the Federal Trade Commission.

MCAs can present numerous issues in bankruptcy on everything from eligibility, cash collateral, lien avoidance, post-petition financing, avoidance actions, and discharge. Although Article 9 applies, in the MCA agreement, the debtor purports to sell receivables that do not exist and in which it has no present rights. Priority disputes with traditional lenders or with other MCAs can also arise. 

Listen as this panel of bankruptcy lawyers offers guidance to practitioners encountering MCAs.