Judge refuses to confirm Arbitration Award in favor of Merchant Cash Advance “Lender”

In a surprising decision out of the Supreme Court, Nassau County, LCF Group, Inc. v Fields, a judge refused to confirm an arbitration award against the “borrower” of a Merchant Cash Advance “lender.” I think it is surprising because it is extremely hard to attack an arbitration award and the motion to confirm the award was unopposed. In other words, the judge did this on his own accord without having been asked to do so by the respondent.

The judge wrote:

The Court of Appeals has recognized “three narrow grounds that may form the basis for vacating an arbitrator’s award—that it violates public policy, is irrational, or clearly exceeds aspecifically enumerated limitation on the arbitrator’s power”. (Matter of Shenendehowa Cent.Sch. Dist. Bd. of Educ. (Civil Serv. Empls. Assn., Inc., Local 1000, AFSCME, AFL—CIO,Local 864), 20 NY3d 1026, 1027 [2013]).

In this case, the Court has examined the Arbitration Award dated February 9, 2022, and finds that it is irrational and lacks “even a barely colorable justification for the outcomereached”. 

Accordingly, LCF’s motion to confirm same is DENIED. The arbitrator’s awardthat LCF seeks to confirm provides that, under Agreement 1, the respondents’ total balance,consisting of default fees, attorneys’ fees and the remaining balance due and owing to LCFtotaled $63,899.28, a completely irrational and illogical figure considering that the agreementwas for LCF to be reimbursed for $14,900.00. Even accepting the arbitrator’s determinationthat the respondents’ default under Agreement 1 resulted in the imposition of a liquidateddefault fee of five thousand three hundred fifteen USD ($5,315.00), plus imposition ofliquidated counsel [*3]fees in the amount of one-third of the Total Balance in the amount offourteen thousand seven hundred twenty-eight 73/100 USD ($14,728.73), the arbitrator failsto explain how the respondent’s default in reimbursing their $14,900.00 contractual obligationresulted in a total sum of $74,996.79. That, when added to the $31,627.56 that the arbitratordetermined was owed to LCF under Agreement 2, resulted in the exorbitant total of$106,624.35 total owed to LCF. 

While the Court recognizes the “extremely limited” scope of its review, the vast disparity between the payment received by the respondents and the amount the respondents arer equired to pay pursuant to the arbitration award, and the arbitrator’s failure to specify how he calculated such an exorbitantly high total figure, have caused this Court concern and this Court finds that such an award is violative of public policy.

What are Merchant Cash Advances?

If you are not familiar with Merchant Cash Advances: In New York, it is considered a criminally usurious loan if a lender charges more than 25% interest. Merchant Cash Advance “loans” get around that by styling their agreements and cash advances as sales of receivables. They buy your rights for cash against your customers at a discount. For example, they may “purchase” $25,000 in future receivables against your customers for a mere $20,000. You get $20,000 but have to forward all your customer payments to them until the MCA lender has received $25,000. They will make you authorize direct withdrawals from your business bank account and withdraw specified daily amounts. Those daily amounts are supposedly calculated using a percentage of your regular cash flows, but often they are not.

They claim to carry all the risk of your customers not paying or your cash flow going down, because, on paper, you have a chance to lower your daily payments by going through a “reconciliation” provision whereby you prove to the Merchant Cash Advance company that your cash flow is really going down. They put in the agreement that your bankruptcy will not be a default. But in reality, long before you had a chance to declare bankruptcy or demand a lowering of your daily payments, you will find yourself in default and liable for the full amount of the “loan” along with personal liability, because you probably have signed a personal guaranty.

Unfortunately, even though some recent court cases indicate that the scales seem to be tipping in favor of the borrowers now, many New York courts have decided that a merchant cash advance is not a loan, but a sale of your future receivables. Therefore, the rules about usury do not apply and Merchant Cash Advance lenders can get away with highway robbery. How do you make the distinction between a loan and a sale of receivables?

Courts have explained that there are certain factors that a court should look for to see if repayment is absolute or contingent. Does the merchant lender have the risk of the merchant’s business going down, i.e. no receivables to collect? Or does the lender have a right to repayment no matter what?


Courts named three factors that should be present in any MCA agreement in order not to be a usurious loan: (1) a reconciliation provision that allows the merchant to adjust the fixed daily ACH payments to the amount of its actual daily receipts (answer should be yes); (2) an indefinite contract term, which is consistent with the contingent nature of each and every collection of future sales. . (answer should be yes).; and (3) whether the merchant financing company has recourse if the merchant declares bankruptcy (answer should be no).

If you must rely on Merchant Cash Advances, do this:

Carefully read all documents you are being asked to sign. Make sure you 100% understand what causes a default and what you have to do to lower your payments when you have a slowdown in cash flow into your account. Make sure such reconciliation provision is realistic in the context of your business. Make sure that the lowering of the payment amounts is a “must” for the MCA company and they do not have discretion to lower the payments or not.

Chose a reputable Merchant Cash Advance company. Quite frankly, I don’t know if that exists, but see how many times they have sued their customers. If the company only has been around for 2 years and they have already filed hundreds of lawsuits against its merchants, that is a very bad sign. That signals that a lowering of daily payments was not really possible and all those merchants were thrown into default and sued before they knew what hit them.

Do not go with any MCA company that mandates arbitration.