For a small business squeezed on cash, the merchant cash advance pitch is seductive: money wired tomorrow, no bank underwriting, just sign over a slice of your future receivables. Then the daily debits start, the math stops working, and a second advance gets taken to cover the first. Owners tend to assume that once they signed, they are stuck. A recent decision out of the bankruptcy court in Dallas says otherwise: MCA obligations can be attacked — and wiped out — as fraudulent transfers.
In Denali Construction Services, LLC v. Cloudfund, LLC, Adv. No. 24-3083 (Bankr. N.D. Tex. Mar. 20, 2026), the court avoided two merchant cash advance obligations as constructively fraudulent under the Bankruptcy Code. For New Mexico contractors, restaurants, and trucking outfits caught in the MCA cycle, the case is a reminder that these agreements are not untouchable — and that bankruptcy law gives a struggling business real offensive weapons.
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Daily Debits Eating Your Revenue? How Merchant Cash Advance Debt Can Be Attacked (4 min)
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A construction company took a cash advance of four hundred forty thousand dollars and promised to hand back seven hundred forty-nine thousand five hundred dollars just sixty days later. When a court did the math, the annual cost worked out to four hundred twenty-seven point nine percent. Most business owners who sign a merchant cash advance believe that once the daily debits start, they are stuck — they signed, so they owe it. This spring, a bankruptcy court in Dallas said otherwise. It erased that obligation, and a second, even larger one, completely. Here is how that happened, and what it means for New Mexico businesses.
Start with what a merchant cash advance actually is. On paper, it is not a loan. The funder buys a piece of your future revenue at a discount — say, it pays one hundred thousand dollars today for the right to collect one hundred forty thousand dollars of tomorrow’s receipts — and it collects through automatic debits from your bank account every single business day. Because the deal is labeled a sale instead of a loan, the funder argues the usual rules about interest never apply. Now hold one distinction in mind. Most people hear fraudulent transfer and picture assets sneaking out the back door. But the bankruptcy rules reach two different things: property a business gives away, and debts a business takes on. An obligation itself — the promise to pay — can be attacked and undone. That second branch is what this case turns on.
In the Denali Construction case, a construction company in Chapter eleven sued its funders to eliminate two advances. The first deal required it to pay three hundred nine thousand five hundred dollars on top of a four hundred forty thousand dollar advance, over sixty days. The second required six hundred forty-nine thousand dollars on top of eight hundred fifty thousand, over eighty days — that one worked out to three hundred forty-eight point three percent a year. The court undid both under the constructive fraud rule. That rule asks two questions. Did the business get reasonably equivalent value for what it promised? And was it insolvent, or left with unreasonably small capital, at the time? No bad intent is required — the rule measures the exchange, not the motives. Promising back nearly seven hundred fifty thousand dollars for four hundred forty thousand in hand fails that test when the company is already gasping. Two honest cautions. This is one bankruptcy court’s decision — it illustrates the rules, it does not change the law. And avoidance is not automatic: a healthy, solvent business that signed an expensive deal generally does not qualify.
Why does this matter here in New Mexico? Because usury is a dead end. New Mexico repealed its general interest rate ceilings decades ago, so a commercial borrower generally cannot attack a three hundred percent effective rate as illegal by itself. That makes the fraudulent transfer theory the main event, not a sideshow. The federal rule reaches back two years, and New Mexico’s own voidable transactions law can stretch the window to four. Undoing the obligation wipes out the unpaid balance, and payments already made can sometimes be clawed back. Picture a Las Cruces contractor grossing sixty thousand dollars a month with three stacked advances debiting twenty-eight hundred dollars a day — that is ninety-eight percent of revenue gone before payroll. That business is not just unprofitable; it is arithmetically impossible.
Three moves this week. Before signing any advance, check the agreement for four things: a real reconciliation clause that lowers payments when revenue drops, a confession of judgment, a blanket lien on your assets, and a personal guaranty. Price the deal honestly — total payback, divided by the days, annualized. Most owners who do that math walk away. And if you are already in the debit spiral, get the numbers in front of someone who can tell you whether a workout or a reorganization fits — before the next advance. That’s what we do at North Star Law Firm. The initial consultation is free, and the full written analysis with citations is at nm-legal.net.
Also available on the North Star Tax and Legal Briefing on Podbean.
What is a merchant cash advance, really?
On paper, an MCA is not a loan at all. The funder “purchases” a fixed dollar amount of the business’s future receivables at a discount — say, it pays $100,000 today for the right to collect $140,000 of tomorrow’s revenue — and collects through automatic daily or weekly debits from the business bank account. Because the transaction is styled as a sale rather than a loan, funders argue that interest-rate concepts do not apply, and the effective cost of the money routinely works out to triple-digit annual rates once you annualize a 40 percent fee collected over a few months.
The sale label is doing a lot of work, and courts increasingly look behind it. The tell is the reconciliation clause: a true receivables purchase adjusts the daily payment down when revenue drops, because the funder supposedly bought a percentage of receipts, not a fixed repayment stream. When the contract requires fixed daily payments no matter what the business collects, backstopped by a personal guaranty and a confession of judgment, the transaction starts to look like what it functionally is — a very expensive loan.
What did the bankruptcy court do in Denali Construction?
Denali, a construction company in Chapter 11 in the Northern District of Texas, sued its MCA funders in an adversary proceeding to eliminate two advances. According to the court’s findings as reported by practitioners, the first agreement obligated Denali to pay $309,500 on top of a $440,000 advance over a sixty-day term — an annualized rate the court computed at 427.9 percent — and the second required $649,000 on top of an $850,000 advance over eighty days, or 348.3 percent annualized. The court avoided both obligations under 11 U.S.C. § 548(a)(1)(B) as constructively fraudulent.
A candid caveat: the Denali adversary proceeding is verifiable on the court’s docket, but the judgment itself is not freely available online, so this description rests on the docket and on professional commentary rather than the opinion text. The statutory framework it applies, though, is not in doubt, and that framework is the point.
How can a debt obligation itself be avoided as a fraudulent transfer?
Most people hear “fraudulent transfer” and picture assets moving out the door. But § 548(a)(1) reaches two distinct things: transfers of the debtor’s property and obligations the debtor incurred. The constructive-fraud branch, § 548(a)(1)(B), lets a trustee or debtor in possession avoid an obligation incurred within two years of the petition if the debtor received less than reasonably equivalent value in exchange and was insolvent at the time, was left with unreasonably small capital, or intended to incur debts beyond its ability to pay. No bad intent is required — the statute measures the exchange, not the motives.
Apply that to a stacked MCA. A business promises to repay $749,500 in sixty days in exchange for $440,000 in hand. Was $440,000 reasonably equivalent value for a $749,500 obligation? When the debits begin the next morning and the business is already insolvent or hanging by a thread — which is usually why it turned to an MCA in the first place — the elements line up. And if the obligation is avoided, the consequences are powerful: the unpaid balance is wiped out, and payments already made on the avoided obligation can be recovered for the estate under 11 U.S.C. § 550.
What does New Mexico’s voidable transactions law add?
Section 548 has a two-year reach-back. But 11 U.S.C. § 544(b) lets the estate borrow state fraudulent-transfer law, and New Mexico’s version — the Uniform Voidable Transactions Act, NMSA 1978, §§ 56-10-14 through 56-10-29, which the state adopted in its modern form in 2015 — contains parallel language allowing avoidance of obligations incurred without reasonably equivalent value, generally with a four-year window. An MCA signed three years before the petition, beyond § 548’s reach, may still be avoidable through § 544(b) and the state act.
The state-law angle matters in New Mexico for another reason: usury is a dead end here. New Mexico repealed its general interest-rate ceilings decades ago — the former usury sections of the money-and-interest statute, NMSA 1978, §§ 56-8-11 and 56-8-11.1, are repealed — so a commercial borrower generally cannot attack a 300 percent effective rate as illegal in itself. That makes the fraudulent-transfer theory, along with recharacterizing the “sale” as a loan, the main event for a New Mexico business rather than a sideshow.
What does MCA stacking look like for a Las Cruces contractor?
Put numbers on it. A Las Cruces excavation contractor grosses about $60,000 a month on commercial site work along the I-25 corridor. A slow spring leads to a first MCA; a payroll crunch leads to a second; a funder who saw the first two UCC filings cold-calls with a third. Each funder debits the operating account every business day, and together the debits total $2,800 a day. Over roughly twenty-one business days a month, that is $58,800 — 98 percent of gross revenue — taken off the top before payroll, fuel, materials, insurance, or gross receipts tax. The business is not merely unprofitable; it is arithmetically impossible. The only way to make Friday payroll is a fourth advance, which raises the daily debit again. That is the death spiral, and it is why the § 548 elements are usually easy to satisfy in these cases: a company in that position was insolvent or left with unreasonably small capital almost by definition, and no one can say with a straight face that a promise to repay $170,000 in seventy days was exchanged for reasonably equivalent value when $115,000 hit the account.
Which path fits: workout, Subchapter V, or Chapter 7?
The decision runs roughly like this. If the business is viable apart from the MCA debits — real customers, real margins, a product that sells — the first move is often a negotiated workout, because funders who know their contracts are vulnerable to avoidance and recharacterization have reasons to deal. If the funders will not deal, or there are too many of them, a Subchapter V reorganization lets a small business stop the debits with the automatic stay, keep the owner in control, and bring the avoidance action inside the case; the adversary proceeding lands in the debtor’s home bankruptcy court — for a New Mexico business, the District of New Mexico — regardless of the New York forum-selection clauses these agreements love. A larger company may need a full Chapter 11. And if the business is not viable even without the MCAs, Chapter 7 ends the bleeding, with a trustee who can still pursue the avoidance claims for creditors. Whether the avoidance action is worth bringing is a straightforward expected-value question: how much was already paid on the avoided obligations and is recoverable, how collectible is the funder, and what will the litigation cost. Which chapter fits a given company is its own analysis — the firm has written a guide to choosing the right bankruptcy chapter for a New Mexico business owner.
What should you look for before signing an MCA agreement?
Before signing anything, read for four things. First, the reconciliation clause: if there is no genuine right to adjust payments when revenue falls, you are taking a fixed-payment loan at a rate no bank could legally advertise as a purchase. Second, a confession of judgment or agreed-judgment provision, which can let the funder take a judgment against you with little or no notice. Third, the UCC-1 blanket lien — most funders file against all assets, which strangles future borrowing and trips defaults under existing loan covenants. Fourth, the personal guaranty, which converts a corporate cash-flow problem into a threat against your house. If the deal survives that reading and you still need the money, price it honestly: compute the total payback, divide by the days, and annualize it. Most owners who do that math walk away.
| Advance received | Total promised back | Term | Annualized rate found by the court |
|---|---|---|---|
| $440,000 | $749,500 | 60 days | 427.9% |
| $850,000 | $1,499,000 | 80 days | 348.3% |
Frequently Asked Questions
Is a merchant cash advance a loan or a sale of receivables?
It depends on how the agreement actually works. Courts look past the label to substance: fixed daily payments regardless of revenue, no meaningful reconciliation right, personal guaranties, and default-on-slowdown provisions all point toward a disguised loan rather than a true purchase of receivables.
Can MCA debt really be eliminated in bankruptcy?
Sometimes, yes. Section 548(a)(1)(B) permits avoidance of obligations — not just payments — incurred for less than reasonably equivalent value while the business was insolvent or undercapitalized. In the Denali Construction adversary proceeding, the court avoided two MCA obligations on exactly that theory.
What if the MCA was signed more than two years ago?
Section 548 reaches back two years, but § 544(b) imports state law, and New Mexico’s Uniform Voidable Transactions Act generally allows a four-year look-back. Older obligations may still be avoidable through the state-law route.
Does New Mexico usury law cap MCA rates?
Generally no. New Mexico repealed its general usury ceilings for commercial transactions, so a triple-digit effective rate is not automatically illegal. That is why fraudulent-transfer avoidance and loan recharacterization carry the load in New Mexico rather than a usury defense.
Can payments already made to the MCA funder be recovered?
If the obligation is avoided, § 550 allows recovery of transfers made on account of it, and payments within the preference or fraudulent-transfer windows may be recoverable on independent grounds. How much is realistically collectible from the funder is part of deciding whether the lawsuit is worth bringing.
Will the MCA’s New York forum-selection clause keep the fight out of New Mexico?
Usually not once a bankruptcy is filed. Avoidance claims are brought as an adversary proceeding in the debtor’s bankruptcy court, and the automatic stay halts the funder’s collection efforts, including confessed judgments, while the case proceeds.
How North Star Law Firm Can Help
North Star Law Firm helps New Mexico businesses evaluate whether MCA obligations can be restructured, recharacterized, or avoided outright, and which vehicle fits — from a negotiated workout to a Subchapter V reorganization to a traditional Chapter 11. Led by an attorney-CPA, the firm builds the insolvency and reasonably-equivalent-value analysis on real financial statements, not guesswork, across its bankruptcy practice. A business watching daily debits eat its payroll can contact the firm for a free analysis by phone or video before signing the next advance.