When is a merchant cash advance a loan? New York usury law and the Yellowstone judgment

By Solomon Wiesen, editor. Updated October 2026. Editorial standards | How this site is funded

New York’s usury laws apply to loans, and a merchant cash advance is written as a purchase of your future sales. A New York court will treat the advance as a loan when the contract gives the funder an absolute right to be repaid, and a loan to a business that costs more than 25% a year is void. That reasoning produced the Attorney General’s $1.065 billion judgment against Yellowstone Capital in January 2025.

This is general information and is not legal advice. A judge decides if an agreement is a loan, one contract at a time.

The two caps: 16% and 25%

The civil cap is 16% a year: General Obligations Law 5-501 bars interest above the rate in Banking Law 14-a, which sets it at 16%. The criminal cap is in Penal Law 190.40: knowingly charging more than 25% a year is criminal usury in the second degree, a class E felony.

An incorporated business cannot use the 16% cap. GOL 5-521 says a corporation may not raise usury as a defense, and Limited Liability Company Law 1104 says the same for an LLC. Both make an exception for criminal usury, so the number that counts for either is 25%.

Neither cap reaches a real sale of receivables, because usury requires a loan. A funder that buys a share of your future sales and bears the risk that they never arrive has not lent you anything. An advance of $50,000 at a 1.40 factor rate collected over six months works out to about 142% a year, so the litigation is about the label.

The three-factor test

The leading decision is LG Funding, LLC v. United Senior Properties of Olathe, LLC, 181 AD3d 664 (App. Div. 2d Dept., March 11, 2020). The court held that a transaction is a loan only if the principal is “repayable absolutely,” whatever name the parties gave it, and said courts weigh three things:

1. whether the agreement has a reconciliation provision, a clause that adjusts your payments to your real receipts;
2. whether the agreement has a finite term;
3. whether the funder has recourse if the merchant declares bankruptcy.

In that case the funder could adjust payments only at its “sole discretion” and bankruptcy was an event of default. The court refused to dismiss the usury defense.

Funders won where the adjustment clause bound them and lost where it was optional or ignored.

People v. Richmond Capital Group

The Attorney General sued Richmond Capital Group, along with two affiliated funders and four principals, in June 2020 (Index No. 451368/2020). On September 15, 2023, Justice Andrew Borrok found “no issues of fact that the MCAs were loans,” with sample rates from 169% to 2,496%. He ordered the agreements rescinded, confessions of judgment vacated and liens terminated within 60 days, and refunds of what merchants paid minus the principal they received. In February 2024 the Attorney General announced a $77 million judgment.

On February 19, 2026, the First Department affirmed that the advances were loans and that the companies committed usury and fraud (246 AD3d 585). It vacated the $77,289,631 award and sent it back for recalculation, because the state “made no attempt to exclude repayments of principal.”

The Yellowstone Capital case

On March 5, 2024, the Attorney General announced a suit against more than 30 companies and individuals (People v. Yellowstone Capital LLC, New York County Index No. 450750/2024). The defendants included Yellowstone Capital, which she said had run since 2009 under dozens of names, its co-founder David Glass, and Delta Bridge Funding (also called Cloudfund), which she alleged took over the same business with the same staff in 2021. The allegations track the three factors: contracts that promised payments tied to revenue, fixed daily debits over 60 or 90 days in practice, a reconciliation process built so that refunds were almost never available, and rates of up to 820% a year. It also alleged that Yellowstone used confessions of judgment to seize money from bank accounts. The state asked for at least $1.4 billion.

Yellowstone Capital LLC and 24 subsidiaries settled, along with CEO Isaac Stern and president Jeffrey Reece. The court entered the settlement on January 16, 2025, and the Attorney General announced it on January 22. The $1.065 billion judgment has three parts:

• $534,552,724 in cancelled debt: every balance owed to the Yellowstone companies, by more than 18,000 businesses nationwide and over 1,100 in New York;
• $16.1 million in cash from the companies and the two officers for distribution to merchants, rising to $30 million if they break the settlement;
• about $514 million for which the Yellowstone companies remain liable.

The companies and both officers are permanently banned from the merchant cash advance business. Five other individuals had settled before the suit was filed, paying $3.37 million.

Only part of the relief was automatic. According to the Attorney General’s settlement page, the debt cancellation, personal guarantees included, required nothing from merchants, and judgments were vacated by court order between April 29 and December 18, 2025. UCC liens were terminated only on request, by July 8, 2025. Cash required a claim by January 9, 2026 from a merchant who had paid Yellowstone more than it received. Payments went out on April 3, 2026 and are final; the page says the fund was too small to compensate everyone in full.

Delta Bridge Funding and CloudFund did not settle, and neither did the remaining individuals, Glass among them. On March 4, 2026, Justice Paul A. Goetz denied their motions to dismiss, finding that the petition, taken as true, alleged a reconciliation process that was “purely illusory.” That is not a ruling on the merits. The settlement page, last updated April 16, 2026, says the court has not decided the state’s request to declare Delta Bridge advances illegal loans and stop collection. The settlement does not cover Delta Bridge or Cloudfund contracts; the Attorney General tells those merchants to file a complaint with her office and ask a lawyer about continuing to pay.

What a “loan” ruling does

In Adar Bays, LLC v. GeneSYS ID, Inc., 37 NY3d 320 (Oct. 14, 2021), the Court of Appeals held that a loan to a corporation above the 25% criminal rate is void from the start under GOL 5-511, a section that lets a court declare the instrument void and order it cancelled.

In Crystal Springs that meant the default judgment was vacated and the restraining notice lifted. In Richmond the agreements were rescinded and the refund was limited to payments above the principal advanced; merchants did not keep the funder’s money.

The limits

Principis is an appellate decision enforcing an advance and handing the funder summary judgment, and the Fourth Department reached the same result in Samson MCA LLC v. Joseph A. Russo M.D. P.C., 219 AD3d 1126 (Aug. 11, 2023). An agreement with a binding reconciliation clause, no fixed term and no bankruptcy default has held up, whatever it costs.

Under New York law a corporation or LLC can raise criminal usury only as a defense: LG Funding allowed it as an affirmative defense and dismissed the counterclaim built on it. So the argument gets made after the funder sues, or on a motion to vacate a judgment as in Crystal Springs, and it takes a lawyer with the contract in hand. The merchants who sued first in Davis leaned on other claims, including federal racketeering law, and the Attorney General’s cases ran under Executive Law 63(12), which a private business cannot use.

Four things to check in your own agreement

• Reconciliation: see if the clause obliges the funder to adjust your debit to real receipts when you ask, because “sole discretion” is the wording held against the funder in Fleetwood and Richmond.
• Fixed amount and end date: a set dollar debit every business day that never moves, like the $4,000 a day in Crystal Springs, points toward a loan.
• Default triggers: look for language that makes the whole balance due if you file for bankruptcy or bounce a few debits.
• Personal guarantee: one the funder can collect on when the business cannot pay or goes bankrupt counted toward a loan in Davis.

I’d start with the reconciliation clause, since it is the first factor in every decision above. If your offer was made after August 1, 2023, the estimated APR on the state-required disclosure tells you how far above 25% the deal would sit if a court called it a loan.

Bills in Albany

Two bills would settle the label question by statute, and neither has passed either house as of October 2026. S1726 (Assembly A4918), the End Loan Sharking Act, would apply the usury statutes to any “financing arrangement,” a term that names merchant cash advances. It reached third reading in the Senate on May 22, 2025, and went back to the Judiciary Committee on January 7, 2026. S10127 (Assembly A11302), introduced April 30, 2026 and still in committee, would extend the caps to “covered services,” merchant cash advances included.

Sources

• Statutes: General Obligations Law 5-501, 5-511 and 5-521; Banking Law 14-a; Penal Law 190.40; LLC Law 1104.
• Decisions: LG Funding; Davis; Principis; Samson MCA; Crystal Springs; Fleetwood Services; Adar Bays; People v. Richmond Capital Group LLC, trial court and First Department; People v. Yellowstone Capital LLC.
• New York Attorney General: Yellowstone complaint; Yellowstone settlement; settlement page for merchants; Richmond Capital judgment.