Withholding Payments for Breach of MCA Agreement by Lender

Withholding Payments for Breach of MCA Agreement by Lender


When can a merchant legally withhold payments from an MCA lender for breach of contract? This is a complex issue that depends on the specific terms of the MCA agreement and applicable state laws. However, there are some general principles that may allow a merchant to defend against an MCA lender’s demands for payment.

Breach of Contract

The key legal basis for withholding payments is breach of contract. If the MCA lender fails to fulfill its contractual obligations under the agreement, this may constitute a material breach, allowing the merchant to stop making payments. For example, if the MCA agreement requires the lender to provide certain services or meet specific performance standards and they fail to do so, the merchant may argue the lender breached the contract. Or if the lender makes false statements or misrepresentations to induce the merchant to sign, that fraudulent inducement could also be grounds for breach.


Some courts have allowed merchants to defend against MCA payment demands by arguing the agreement itself is invalid and unenforceable. This is most commonly done by claiming the contract terms are unconscionable. Unconscionability means the terms are so unfair and one-sided that the contract should not be enforced against the weaker party. Factors like excessive interest rates, overly harsh default clauses, and confusing legalese tend to show unconscionability. If a court agrees the contract is unconscionable, the merchant would not have to comply with its payment obligations.

State Laws Against Unfair Lending

Many states have laws prohibiting predatory lending practices. These may make certain provisions in MCA agreements illegal and unenforceable. For instance, some states cap interest rates on loans below a certain amount. So if the MCA contract effectively charges above the legal limit, the merchant may be able to avoid making payments based on violation of lending laws. Usury laws, truth in lending acts, and general consumer protection statutes could provide similar defenses against unfair MCA agreement terms. Merchants can analyze the specific laws in their state to see if any render the MCA contract requirements unenforceable.

Retaliatory Withholding of Payments

While merchants do have legitimate legal arguments to defend against MCA payment obligations, caution should be exercised. Withholding payments when not clearly legally justified could prompt retaliation. The MCA lender may hit back with its own lawsuit against the merchant for breach of contract. And given the complexity of MCA agreement litigation, the outcome is hard to predict. Plus, if the merchant loses, they could end up owing even more in damages and legal fees. The lender may also try extrajudicial tactics like reporting negative credit history or interfering with merchant accounts.

Seeking Legal Counsel

Given the risks, merchants should consult attorneys before unilaterally deciding to stop making MCA payments. A lawyer can properly assess the agreement terms, lender actions, and applicable state laws to determine if withholding payments is likely defensible. They can also represent the merchant in any litigation brought by the MCA lender over non-payment. And counsel merchants on responding to other collection efforts or retaliation tactics. With a sound legal basis and skilled legal advocacy, merchants do have a chance to fight back against MCA lenders. But all options should be explored first with experienced legal help.

Defenses to MCA Demands Under State Laws

Many states have specific statutes merchants can use to defend against MCA payment obligations and debt collection efforts:

  • New York: Passed legislation greatly restricting MCA lending and providing defenses for merchants, including usury cap and rescission rights.
  • California: Limits interest rates under state lending laws, also has general unconscionability protections.
  • Texas: Incorporates both common law unconscionability and provisions in financial codes for defending against improper lending.
  • Florida: Usury and lending statutes prohibit excessive interest rates in many MCA contracts.
  • Illinois: Strict laws against predatory lending and high finance charges give merchants leverage in disputes.
  • Pennsylvania: MCA agreements deemed void and uncollectible if found to be unconscionable or usurious.

Again, every state differs in statutes and legal precedents governing MCA contracts. Merchants should analyze specific defenses with counsel before taking potentially risky measures like withholding payments.

Unconscionability Factors in MCA Agreements

Some factors courts look at to determine if an MCA contract may be unconscionable and unenforceable:

  • Excessively high effective interest rates
  • Overly strict default terms
  • Confusing legalese and fine print
  • Lack of understanding by the merchant
  • High fees and penalties
  • Misrepresentations during signing
  • Harsh collection tactics
  • Significant bargaining power imbalance

While unconscionability cases are very fact specific, merchants can use these general elements to build an argument against an unfair MCA agreement. However, legal counsel should still be obtained, as it is a complex process.

Withholding Payments – Practical Considerations

If a merchant does decide to stop making payments under an MCA agreement, some practical measures to consider:

  • Notify Lender: Send formal written notice explaining why payments are being halted, preferably through an attorney. Silently defaulting could worsen retaliation.
  • Open Separate Bank Account: Deposit revenues in new account so payments cannot be automatically debited by the MCA lender.
  • Seek Injunction: Ask a court to issue injunction prohibiting collection efforts pending litigation over the contract dispute.
  • Retain Counsel: Have lawyer send letters contesting enforceability and respond to any lawsuits or demands brought by lender.
  • Negotiate Settlement: If case looks weak or lender escalates tactics, try to settle by refunding part of outstanding balance.

Again, these steps involve legal risks if defenses ultimately fail in court. Thus, retaining qualified legal counsel is vital when withholding MCA payments over contract breaches.

The Bottom Line

Merchants clearly do have legitimate grounds to stop payments to predatory MCA lenders in many circumstances. Unconscionability arguments, usury violations, breach of contract claims, and state consumer laws can all provide defenses. However, MCA lenders also have the means to retaliate, through lawsuits, collections, and damaging credit. There are always two sides of the story. The ultimate determination depends greatly on the specific evidence and governing state laws. Given the complexities and risks in disputing an MCA agreement, obtaining qualified legal counsel is essential for any merchant considering withholding payments from the lender. An attorney experienced in finance contracts can properly assess defenses, represent the merchant in litigation, and provide strategic guidance. With the right legal basis and advocacy, merchants can stand up against unfair MCA contracts and abusive lender behavior. But all prospective steps should be carefully evaluated first with the help of legal professionals. The laws and language can be complex to the everyday person.

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