Available at: American Bankruptcy Law Journal, Volume 100, Issue 2 (Summer 2026)
Abstract:
We learn early in legal education that a party cannot sell property it does not own. Yet merchant cash advance (MCA) agreements frequently characterize transactions as sales of receivables that do not yet exist and are not identified as specific accounts. In resolving challenges to these agreements, courts have often focused on contractual language addressing reconciliation, repayment structure, and risk allocation, sometimes at the expense of more fundamental questions about whether a present transfer of such a property interest can occur at all. This article argues that MCA agreements, as commonly structured, cannot constitute true sales where, at the time of execution, the merchant lacks rights in the receivables purportedly transferred, and where the agreement purports to convey not specific accounts receivable but a fixed dollar amount sourced from an undefined stream of future receivables. Courts should not reach the familiar risk-allocation factors unless the transaction is first capable of effecting a present transfer of property. Where a merchant lacks present rights in identifiable receivables, an MCA agreement should not constitute a sale as a matter of law, regardless of how risk is allocated.
Summary:
In Merchant Cash Advances Are Not Sales, published in Volume 100, Issue 2 of the American Bankruptcy Law Journal, Professor Chrys Ondersma challenges the fundamental legal premise underlying much of the merchant cash advance (MCA) industry: that a financially distressed business can presently sell accounts receivable that do not yet exist.
Merchant cash advances have become an increasingly common, and frequently predatory, financing mechanism for small businesses unable to obtain conventional credit. Rather than making what is explicitly denominated as a loan, an MCA company advances money in exchange for what it characterizes as the purchase of future receivables, generally collecting repayment through daily or weekly automatic withdrawals from the merchant's bank account.
This characterization is critically important. If the transaction is a true sale, the funder argues that it is not subject to laws governing loans, including potentially applicable usury restrictions. It may also assert ownership of receivables rather than merely a security interest, significantly affecting its treatment in bankruptcy.
Courts generally evaluate these arrangements through a multifactor analysis focused on whether the funder actually assumes the risk of the business's future performance. Among the factors considered are whether repayment is absolute, whether reconciliation provisions meaningfully adjust payments to reflect business revenue, whether there are personal guaranties, and whether bankruptcy or business failure constitutes a default.
Ondersma argues that this analysis starts with the wrong question.
Before determining whether a contract allocates the risks of ownership or lending, courts should ask whether the supposed seller actually owned anything capable of being sold.
An MCA agreement frequently does not identify existing receivables, particular accounts, or specific customers. Instead, it purports to convey a fixed dollar amount to be collected from an undefined stream of future business activity.
Under basic principles of property and commercial law, a merchant cannot presently transfer ownership of property in which it has no existing rights.
Ondersma therefore argues that courts should not treat contractual declarations of a sale, or even provisions purporting to shift the risk of nonpayment, as sufficient to establish a true sale where the property interest being sold does not yet exist.
This does not necessarily mean that a financing arrangement referencing future receivables is unenforceable. Article 9 of the Uniform Commercial Code recognizes security interests in after-acquired collateral, and agreements may create enforceable rights when receivables subsequently arise.
But that is fundamentally different from concluding that the funder acquired present ownership of nonexistent receivables when the MCA agreement was executed.
The distinction matters enormously in bankruptcy.
If an MCA is actually a financing transaction rather than a completed sale, the receivables may remain property of the bankruptcy estate, subject to whatever valid and perfected security interest the funder possesses. Payments made before bankruptcy may become subject to preference or fraudulent transfer analysis, while claimed rights to postpetition receivables must be evaluated under §§ 541, 552, and other applicable provisions of the Bankruptcy Code.
Ondersma's central proposition is that risk allocation cannot transform an otherwise impossible present conveyance into a valid sale.
Commentary:
Professor Ondersma's article is a useful addition to the growing body of scholarship and bankruptcy decisions questioning whether merchant cash advances are anything other than very expensive loans dressed up as something else.
The most important contribution is that it challenges courts to stop accepting the industry's characterization of these transactions as the starting point.
For years, MCA litigation has largely revolved around whether contractual reconciliation provisions are meaningful, whether the lender bears the risk of nonpayment, and whether default provisions effectively guarantee repayment.
Those questions remain important, but Ondersma suggests that they should be secondary.
Before asking who bears the risk associated with ownership of the receivables, a court should ask whether ownership could have been transferred in the first place.
That is a particularly compelling argument where the agreement purports to sell a fixed amount of future revenue without identifying any existing receivable.
There is, however, a potential qualification to Ondersma's categorical approach. Commercial law recognizes assignments of future rights and the attachment of interests when after-acquired property comes into existence. Consequently, the inability to complete a present transfer of nonexistent receivables does not necessarily resolve every question about whether an agreement can provide for a future sale.
Still, the distinction between a present sale and an agreement creating rights in future property is precisely the distinction that MCA companies often attempt to obscure.
North Carolina Bankruptcy Courts Have Been Grappling with These Issues
North Carolina bankruptcy courts have developed a substantial body of merchant cash advance decisions, several of which have previously been discussed on this blog.
1. Williams Land Clearing, Grading, and Timber Logger v. Apex Funding Source, LLC (Bankr. E.D.N.C.)
In this particularly significant decision, the Bankruptcy Court for the Eastern District of North Carolina concluded that the purported MCA was actually a loan, not a true sale of receivables.
Applying New York law, the court determined that the transaction carried an effective annual interest rate of 101.1%, rendering it criminally usurious and void from inception.
The court also permitted recovery of a $30,159.42 preferential transfer.
The decision illustrates the substantial consequences of looking beyond contractual labels and determining the actual legal nature of the financing arrangement.
2. Martinez Quality Painting & Drywall, Inc. v. Newco Capital Group VI, LLC (Bankr. W.D.N.C.)
The debtor challenged MCA arrangements under which it had received approximately $575,000 but became obligated to remit more than $799,000.
The litigation raised fraudulent transfer claims under § 548, North Carolina's Uniform Voidable Transactions Act, and issues involving New York usury law.
As with many MCA cases, the central question was whether the agreements represented legitimate purchases of receivables or disguised lending transactions.
3. Black Pearl Vision, LLC v. Pearl Delta Funding, LLC (Bankr. W.D.N.C.)
Judge Ashley Austin Edwards refused to dismiss significant claims challenging a transaction labeled a revenue purchase agreement.
The debtor alleged that it received approximately $143,000 and paid nearly $200,000 over nine months, with an effective annualized interest rate approaching 52%.
The court concluded that the debtor plausibly alleged that the agreement was a loan rather than a true sale, particularly in light of allegedly illusory reconciliation provisions and the funder's limited assumption of risk.
4. Black Pearl Vision, LLC v. G & G Funding Group, LLC (Bankr. W.D.N.C.)
In another decision involving the same debtor, Judge Edwards held that a prior New York default judgment enforcing the MCA agreement did not prevent the bankruptcy estate from pursuing constructive fraudulent transfer claims under § 548.
The funder had advanced approximately $191,830 in exchange for purportedly purchasing $314,409 in future receivables.
The debtor paid more than $233,000 in approximately six months before filing bankruptcy.
The court recognized that federal bankruptcy avoidance claims could proceed notwithstanding the earlier state court judgment.
5. In re Blackbeard's Triple Play, LLC (Bankr. E.D.N.C.)
The bankruptcy court addressed an MCA company's postpetition interference with a Subchapter V debtor's credit card receivables.
The funder's assertion of a UCC lien through the debtor's payment processor prevented the restaurant from receiving revenue necessary to continue operating.
This decision illustrates the very practical importance of determining ownership and security interests in receivables. For a small business operating on narrow margins, losing access to daily credit card receipts may destroy any possibility of reorganization.
Taken together, these decisions demonstrate that North Carolina bankruptcy courts are increasingly unwilling to accept MCA agreements at face value.
Ondersma's approach would potentially move the analysis one step further.
Rather than conducting an extensive factual examination of reconciliation provisions, guaranties, and default remedies in every case, courts could first determine whether the purported sale was legally capable of transferring the claimed ownership interest.
If not, the agreement cannot be treated as a completed sale merely because its terms describe one.
Professor Kara Bruce and the Developing Scholarship on Desperation Finance
Ondersma's analysis also complements Professor Kara Bruce's article, Desperation Finance: Merchant Cash Advances in Bankruptcy and Beyond, previously discussed here:
Bruce offers a broader examination of MCA transactions, the difficulties of characterizing revenue-based financing under commercial law, and the consequences for bankruptcy estates, creditors, and struggling businesses.
Her work considers how recharacterization affects property of the estate, avoidance actions, security interests, and other bankruptcy rights.
Ondersma's contribution is narrower but potentially more fundamental.
Bruce provides an analytical framework for understanding what an MCA actually is.
Ondersma asks whether it can be what the lender claims it is.
Both articles are particularly relevant as bankruptcy courts confront increasingly sophisticated financing arrangements designed to place distressed businesses outside traditional lending protections.
Merchant Cash Advances Are Not the Only Debts of Desperation
As discussed in my earlier commentary on Professor Bruce's article, merchant cash advances are simply one example of a much broader category of financial products that might best be called debts of desperation.
Consumer bankruptcy attorneys encounter their equivalents every day.
Payday loans provide immediate cash to borrowers who cannot otherwise meet ordinary living expenses, often using automatic account withdrawals and extremely high effective interest rates. Repeated borrowing can create a cycle remarkably similar to the stacking of multiple MCAs by struggling businesses.
Vehicle title loans offer short-term liquidity secured by what may be the consumer's most important asset after a home. Loss of the vehicle can mean loss of employment, creating an economic catastrophe substantially greater than the amount originally borrowed.
Buy-now, pay-later (BNPL) financing is often marketed as a convenient, inexpensive alternative to traditional credit. Although many BNPL transactions do not carry interest and are not inherently abusive, repeated borrowing, late fees, automatic withdrawals, and overlapping installment obligations can create significant problems for financially distressed consumers. The ease of obtaining this credit may conceal the aggregate burden until the consumer can no longer manage the payments.
The common feature is not necessarily the particular legal structure of the financing.
It is that these products are frequently marketed to borrowers facing immediate financial pressure, who may have little opportunity to evaluate the long-term consequences.
While the exact terms, costs, and protections vary significantly, the economic vulnerability of the borrower is remarkably consistent.
An Especially Troubling Example: Bifurcated Chapter 7 Attorney Fees
Perhaps the most uncomfortable example of desperation financing is one that originates within the consumer bankruptcy profession itself.
Some Chapter 7 attorneys use bifurcated fee agreements under which the debtor signs one agreement for limited prepetition services and a second agreement for postpetition representation.
The ostensibly postpetition attorney fee is then immediately sold or factored to a third-party financing company, which assumes responsibility for collecting payments from the debtor.
The asserted justification is that the debtor cannot afford to pay an attorney before filing bankruptcy and needs immediate relief.
That is a legitimate problem.
But the proposed solution can introduce a new financial obligation, often substantially more expensive than the legal services would otherwise cost, at precisely the moment the debtor is attempting to obtain a fresh start.
In my earlier discussion of Professor Bruce's article, I discussed Kallen v. U.S. Trustee, in which the District of Arizona affirmed substantial sanctions arising from a Chapter 7 attorney-fee financing arrangement.
The financing company advanced a discounted amount to the bankruptcy firm in exchange for the right to collect the full fee from debtors.
Among the particularly disturbing features were undisclosed financing arrangements, potential default interest rates of up to 300%, conflicts of interest, and misleading attorney compensation disclosures.
The bankruptcy court ordered disgorgement exceeding $1.6 million and imposed additional sanctions.
Not every bifurcated fee arrangement is improper, and the mere fact that a law firm permits installment payments does not establish misconduct.
But factoring postpetition obligations to a third party raises questions that go well beyond the mechanics of fee collection.
Among them are whether the financing arrangement creates incentives to increase attorney fees, whether the debtor adequately understands the actual cost, whether the arrangements comply with §§ 329 and 526–528, and whether the attorney's professional judgment remains independent of the factoring company's financial interests.
It also presents a striking parallel to merchant cash advances.
An attorney needing immediate revenue sells a future payment stream at a discount to a financing company.
The ultimate source of repayment is a financially distressed consumer.
And the financing company earns its return from precisely the financial circumstances that brought the debtor into bankruptcy.
Unlike the typical MCA transaction, however, the supposed purchaser may be acquiring rights under a specifically identifiable postpetition fee agreement. Ondersma's threshold property-law argument therefore would not necessarily apply in the same way.
Nonetheless, the common economic concern is unmistakable.
Bankruptcy attorneys should be especially reluctant to participate in the same types of desperation financing arrangements from which they are supposed to be rescuing their clients.
Conclusion
Professor Ondersma's article offers a potentially important simplification of merchant cash advance litigation.
Courts have spent considerable time examining whether funders assume sufficient risk to characterize their transactions as purchases rather than loans.
Ondersma argues that the analysis should begin with a more elementary question: Was there any existing property capable of being sold?
If the answer is no, the contractual label should not determine ownership.
That argument will undoubtedly encounter resistance, particularly given the recognized enforceability of assignments and security interests involving after-acquired property. The distinction between an ineffective present conveyance and an enforceable agreement to transfer future property will remain important.
Nevertheless, the article provides bankruptcy attorneys with another valuable argument for challenging MCA companies that claim ownership of revenue generated by businesses after filing bankruptcy.
Read together with Professor Kara Bruce's work and the growing body of North Carolina bankruptcy decisions, it provides further support for careful scrutiny of these transactions rather than deference to their carefully drafted labels.
And the broader lesson extends well beyond merchant cash advances.
Whether the financing involves a small business selling its anticipated revenue, a consumer borrowing against a paycheck or vehicle, a shopper accumulating buy-now, pay-later obligations, or a bankruptcy attorney factoring fees owed by a Chapter 7 debtor, the underlying economic problem is often the same.
Financial distress creates opportunities for financing arrangements that would be far less attractive, and often far less defensible, if the borrower had meaningful alternatives.
Calling a loan a sale does not make it one. Calling an expensive financing arrangement an innovation does not make it beneficial. And calling a new obligation part of a bankruptcy fresh start does not necessarily make it consistent with that purpose.
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