Usury is defined as “an unconscionable or exorbitant rate or amount of interest.”[1] Specifically, it is “interest in excess of a legal rate charged to a borrower for the use of money.”[2] There are two types of usury statutes in the United States: civil and criminal usury.
Civil usury statutes state, among other things, that a lender usually cannot charge an interest rate higher than that set by statute.[3]
Criminal usury, on the other hand, is when a lender “knowingly charges, takes or receives any money or other property as interest on the loan or forbearance of any money or other property” at a rate exceeding that set by statute.[4]
Usury laws are set by the individual states, but not every state has usury laws. For example, “[i]nterest rates in New York are subject to statutory controls.”[5] “G.O.L. § 5-501 provides, as a civil matter, a maximum interest of 6% or such higher rate shall be prescribed from time to time by the New York Banking Board pursuant to Banking Law § 14-a.”[6] Meanwhile, Delaware usury law provides no cap on interest rates - adhering, instead, to the specific interest-governing contract terms.[7]
In recent years, the growing use of merchant cash advance agreements (“MCA Agreements”) has been under scrutiny due to the, at times, questionable rates of, what can be termed “interest”, resulting from their unique terms. An MCA Agreement is an arrangement whereby lender – termed a “Purchaser” - extends to a borrower – termed a “Seller” - a lump sum payment in exchange for a portion of the “Seller’s” future receivables.[8]
MCA Agreements “provide working capital to businesses, particularly small businesses.”[9] Businesses may enter into these agreements when they need access to cash quickly.[10] However, although MCA Agreements may seem like a quick fix, their terms often effectively contain excessively high interest rates.
A common debate among the courts is whether MCA Agreements are considered a loan or a sale of future receivables.[11] If the MCA Agreement is considered a loan, it is subject to the state’s usury laws.
To determine whether an MCA Agreement constitutes a loan rather than a sale of future receivables, a court examines “(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.”[12] It should be noted that “[t]hese factors ‘provide only a guide to [the] analysis’ and ‘do not dictate the conclusion.’”[13]
Courts look to the substance of the agreement and not the form.[14] “Ultimately, a court considers whether the funding agreement bears the hallmarks of a loan: that the lender is ‘absolutely entitled to repayment under all circumstances[.]’”[15]
“A court also evaluates whether the transaction involves a ‘real transfer of risk,’ because in a bona fide sale of future receivables, ‘the lender and not the borrower bears the risk of nonperformance by the account debtor.’”[16]
If an MCA Agreement is determined to be a loan, it is then subject to that state’s usury laws, which can lead to the transaction becoming void or other penalties should the interest rate exceed that which is allowable under that state’s laws.
In a recent case, Spig Indus., LLC v. Novac Equities LLC, the Court conducted an analysis to determine whether certain MCA Agreements were simply disguised loans. After determining that the MCA Agreements were loans, the Court concluded that they were unenforceable under New York State usury laws.[17]
The Spig. Indus. Court explained that, according to its calculations, the interest rates charged in the subject MCA Agreements ranged from approximately 91% to over 800%.[18] Notwithstanding those calculations, the Court explained that both of those rates were “still well over the cutoff for usurious rates” under New York law as the criminal usury rate is capped at 25% per annum.[19]
In most cases, our firm represents clients after they have entered into such agreements. While we can be of help, Cullen and Dykman lawyers caution existing clients to be wary and exercise caution before entering into an MCA Agreement. When in doubt, one is well advised to consult with counsel for guidance.
Please note this is a general overview of developments in the law and does not constitute legal advice. Nothing herein creates an attorney-client relationship between the sender and the recipient. If you have any questions regarding the provisions discussed above, or any other aspect of bankruptcy law, please contact Michael H. Traison, Esq. (mtraison@cullenllp.com) at 312.860.4230, Jocelyn Lupetin, Esq. (jlupetin@cullenllp.com) at 516.296.9109 or Kelly McNamee, Esq. (kmcnamee@cullenllp.com) at 516.296.9166.
Footnotes
[1] https://www.merriam-webster.com/dictionary/usury.
[2] Id.
[3] See e.g. 1-2 N.Y. Comm. Mortg. Trans. § 2.02.
[4] See e.g. N.Y, CLS Penal § 190.42.
[5] 2 N.Y. Prac. Guide: Business and Commercial § 11.06.
[6] Id.
[7] Madden v. Midland Funding LLC, 237 F.Supp.3d 130, 149 (S.D.N.Y. 2017), citing Del. Code. Ann. Tit. 5 § 943.
[8] See generally, Spig Indus., LLC v. Novac Equities LLC, Case No. 23-CV-8667 (AT)(RFT) 2025 U.S. Dist. LEXIS 208356 (S.D.N.Y. Oct. 22, 2025).
[9] Gecker v. LG Funding, LLC (In re Hill), 589 B.R. 614, 618 (Bankr. N. D. Ill. 2018).
[10] Zyppah, Inc. v. Ace Funding Source, LLC, Case No. 1:19-cv-01158 (ALC), 2019 WL 6647912, *1 (S.D.N.Y. Nov. 6, 2019).
[11] The concept of recharacterization is often the subject of consequential argument in various areas of law. In bankruptcy, some examples are, whether a lease is a true lease or whether it is a disguised installment sales agreement or whether infusions of cash into a debtor is considered an equity investment or a loan.
[12] Greenwich Retail Grp. LLC v. Moby Cap., LLC (In re Greenwich Retail Grp. LLC), Case No. 25-11295 (MEW), Adv. Proc. No. 25-01106 (MEW), 2026 Bankr. LEXIS 417, *53 (Bankr. S.D.N.Y. Feb. 20, 2026) (internal citations omitted).
[13] Spig Indus., LLC, 2025 U.S. Dist., at *32 (internal citations omitted).
[14] Id. (internal citations omitted).
[15] Id. at *33 (internal citations omitted).
[16] Id.
[17] Id. at 51.
[18] Id. at 51-52.
[19] Id.