Summary:
In Black Pearl Vision, LLC v. Pearl Delta Funding, LLC, the Bankruptcy Court for the Western District of North Carolina (Judge Ashley Austin Edwards) issued a careful and consequential order granting in part and denying in part a motion to dismiss brought by two New Jersey–based merchant cash advance companies.
The debtor alleged that what was labeled a “Revenue Purchase Agreement” was, in substance, a loan bearing an effective annualized interest rate of nearly 52%, secured by sweeping UCC liens, a personal guaranty, and aggressive default remedies—including ACH sweeps of 100% of revenue. Over roughly nine months, the debtor paid almost $200,000 on an advance of about $143,000.
At the pleading stage, the court refused to accept the MCA label at face value. Applying well-established principles that substance controls over form, the court held that the debtor plausibly alleged the agreement was a loan rather than a true sale of receivables, particularly where the funder bore little to no risk of nonpayment and reconciliation provisions were allegedly illusory. That determination alone allowed the debtor’s constructive fraudulent transfer claims under § 548 to survive dismissal.
The court did, however, draw an important line on usury. Consistent with prior North Carolina bankruptcy decisions applying New York law, the court reiterated that corporations may not use usury affirmatively as a sword. Criminal usury can be raised defensively, but not as an independent basis for affirmative avoidance. Still, that did not doom the case: the debtor adequately pled lack of reasonably equivalent value based on the stark disparity between what it received and what it paid.
On RICO, the result was mixed. The court held that the debtor plausibly alleged a violation of 18 U.S.C. § 1962(a) (investment of income derived from the collection of unlawful debt), but dismissed the § 1962(c) claim for failure to plead the required distinction between the “person” and the “enterprise”—a fixable pleading defect, with leave to amend.
Commentary: Why This Case Matters Beyond Merchant Cash Advances
This opinion should be read as part of a much larger enforcement roadmap, not just an MCA skirmish.
First, the court’s willingness to let RICO theories based on unlawful debt survive—even while trimming defective pleadings—should catch the attention of out-of-state lenders and service providers doing business in North Carolina. The logic here is not limited to MCAs. It applies with equal force to:
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Out-of-state title lenders making loans to North Carolina residents at interest rates flatly prohibited by North Carolina law, while taking liens against vehicles through contractual sleight of hand or choice-of-law clauses; and
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Debt settlement or “credit relief” companies that market into North Carolina, collect fees, and provide services without complying with North Carolina licensing, fee, and conduct restrictions.
Second, the decision reinforces a crucial point for bankruptcy practitioners: you do not need to win the usury fight outright to create leverage. Even where state law limits affirmative usury claims, § 548 fraudulent transfer analysis looks to economic reality, not labels. If a debtor paid far more than it received, under coercive terms, while insolvent or undercapitalized, that alone may support avoidance and recovery.
Third—and this is where things get uncomfortable for repeat players—the court’s discussion of RICO “unlawful debt” opens the door to pattern-based litigation. Many of these businesses operate on a national scale using near-identical contracts, ACH authorizations, guarantees, and enforcement playbooks. If those arrangements are unlawful as to principal or interest under applicable state law, RICO is no longer theoretical. It becomes a real risk multiplier, especially once discovery begins.
Finally, for North Carolina practitioners, this case fits squarely into a growing body of law pushing back on attempts to export high-cost lending and fee-based financial products into the state under foreign law labels. Bankruptcy courts are increasingly willing to look past contractual formality and ask the only question that matters: who bore the risk, and who really paid the price?
Expect this opinion to be cited not just in MCA disputes, but in title-loan, litigation-funding, and debt-relief cases where out-of-state actors assumed North Carolina law would never catch up with them.
To read a copy of the transcript, please see:
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