On July 27, 2026, Judge David S. Jones of the United States Bankruptcy Court for the Southern District of New York ruled that nineteen merchant cash advance agreements between the failed law firm Kossoff PLLC and the funder Capital Stack were loans, not purchases of receivables, whatever the paperwork said. In re Kossoff PLLC, No. 21-10699 (DSJ), 2026 WL 2168916 (Bankr. S.D.N.Y. July 27, 2026). The firm took in roughly $10.88 million and promised back about $14.88 million, and the Chapter 7 trustee is now chasing millions in prepetition payments.
Owners from Rio Rancho to Hobbs are asking whether this helps them. The New York usury theory at the center of Kossoff mostly does not work under New Mexico law, but the recharacterization idea behind it does, and it drives lien priority, clawback recoveries, and plan treatment in a Subchapter V case.
What did the Kossoff court actually decide?
New York’s Appellate Division set the framework in LG Funding, LLC v. United Senior Properties of Olathe, LLC, 181 A.D.3d 664 (2d Dep’t 2020): does the agreement have a reconciliation provision, does it have a finite term, and does the funder keep recourse if the merchant files bankruptcy?
Judge Jones found repayment absolute rather than contingent. Reconciliation was at Capital Stack’s discretion, with no duty to grant a request. Fixed daily ACH debits plus automatic default on a missed draw made the payoff date simple arithmetic. The bankruptcy carve-out was unavailable to a merchant already in default, which, given the breadth of the default triggers, meant every merchant. The label matters in New York because the state caps interest at 16% civilly and 25% criminally, and a criminally usurious loan is void from the start, so the funder gave no value and the payments become recoverable.
Does New Mexico usury law give a business borrower the same weapon?
No, and this is what out-of-state commentary misses. New Mexico repealed its general interest ceiling in 1991. What remains is NMSA 1978 § 56-8-3, a default rate of 15% per year that applies only when no written contract fixes a different rate, plus the penalty in § 56-8-13 (forfeiture of interest, and double recovery of interest paid if suit is filed within two years) and the misdemeanor in § 56-8-14, which have little to bite on.
The decisive provision is § 56-8-9(B). No law prescribing a maximum interest rate applies when a corporation, limited liability company, or other business entity is the debtor, and neither the entity nor its guarantor may plead usury or sue on it. Nearly every MCA merchant is an LLC with a personal guaranty, so company and owner are both shut out. The 2022 legislation (House Bill 132) that put a 36% annual percentage rate cap into the New Mexico Small Loan Act, NMSA 1978 § 58-15-1 et seq., does not change this: it governs licensed lenders making loans of $10,000 or less, effective January 1, 2023, and a $90,000 advance to an LLC sits outside it even though § 58-15-3 reaches disguised loans.
Why would a New York choice-of-law clause help a New Mexico merchant?
Here is the inversion. Most MCA contracts choose New York law. New York’s General Obligations Law § 5-521 bars a corporation from raising civil usury, but subdivision 3 expressly preserves the criminal usury defense under Penal Law § 190.40, the 25% line. A New Mexico LLC sued under a New York-governed MCA can therefore argue what it could never argue under § 56-8-9(B) at home.
New Mexico courts honor a contractual choice of law unless applying it would offend a fundamental New Mexico policy, Fiser v. Dell Computer Corp., 2008-NMSC-046, 144 N.M. 464, and a funder that drafted the New York clause is poorly placed to disown it.
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If usury is off the table, why does recharacterization still matter in New Mexico?
Because “loan or sale” decides four other things. First, Article 9. NMSA 1978 § 55-9-109(a)(3) pulls sales of accounts into Article 9, and § 55-9-318 says a seller of accounts retains no interest in what it sold, so a true-sale funder argues the receivables were never the debtor’s property. A lender is secured only to the extent of a correct UCC-1 filed with the New Mexico Secretary of State, and stacked advances are often junior to a bank’s blanket lien or filed against the wrong name.
Second, preferences. Under 11 U.S.C. § 547, payments on antecedent debt during the ninety days before filing can be clawed back. Daily pulls on a recharacterized loan are exactly that. Third, fraudulent transfers. A D.N.M. trustee has 11 U.S.C. § 548 for two years back and 11 U.S.C. § 544(b) to borrow the four-year reach of New Mexico’s Uniform Voidable Transactions Act, NMSA 1978 § 56-10-18 and § 56-10-23. Without a void-loan theory, the New Mexico case usually rests on a second advance whose proceeds went straight to pay the first, leaving the company with little new money and an unreasonably small capital base, a structure covered in the firm’s earlier post on MCA fraudulent transfer claims in New Mexico. Fourth, a claim objection under 11 U.S.C. § 502(b) is where default fees, attorney fee add-ons, and any imported New York usury defense get litigated.
How does a Subchapter V plan treat a merchant cash advance in Albuquerque?
Once the MCA is a loan and the funder’s lien is unperfected or junior, the claim is general unsecured. A plan confirmed under 11 U.S.C. § 1191(c) pays unsecured creditors the debtor’s projected disposable income over three to five years, and the daily debits stop at filing. The closest guidance in the Tenth Circuit’s territory is In re Heart Heating & Cooling, LLC, No. 23-13019 TBM (Bankr. D. Colo. Mar. 21, 2024), holding that MCA obligations are liquidated, noncontingent debts that count toward the Subchapter V eligibility cap because the payoff can be computed from the agreement.
| Issue | New York law (Kossoff) | New Mexico law | Effect in D.N.M. |
|---|---|---|---|
| Usury cap for an LLC borrower | 25% criminal, defense preserved | None (§ 56-8-9(B)) | Only via imported NY clause |
| Consequence of usury | Loan void, payments recoverable | Not available to entities | Trustee needs another value theory |
| Loan vs. sale test | LG Funding three factors | Substance over form, Article 9 | Lien priority and § 547 exposure |
| Fraudulent transfer reach | NY law, 4 years | UVTA § 56-10-23, 4 years | § 544(b) borrows the state period |
| Plan treatment | Not addressed | Unsecured under § 1191(c) | Daily pulls end at filing |
What does the math look like for a Rio Rancho landscaper with two advances?
Take a Rio Rancho landscaping and irrigation company with $1.4 million in annual receipts. Funder A advanced $105,000 in February 2026 for a purchased amount of $147,000; Funder B advanced $25,000 in May 2026 for a purchased amount of $33,000, most of it used to catch up Funder A. Purchased amounts total $180,000 and the combined daily ACH draw is $1,900, about $39,900 a month against perhaps $18,000 of monthly net profit. The $50,000 premium on $130,000 of funding is a flat 38%, but over a 95-business-day payoff the annualized cost passes 100%.
If the company files a Subchapter V petition in Albuquerque on October 15, 2026, the preference window opens July 17. Sixty-three business days of $1,900 pulls is $119,700 of transfers on what a court following Kossoff would call antecedent debt. Funder B’s May advance, with $22,000 of its $25,000 routed to Funder A, is the constructive fraudulent transfer candidate. If Funder B’s UCC-1 names the owner’s trade name instead of the LLC, its claim is unsecured and shares pro rata with the nursery supplier.
What is the tax and accounting side a lawyer alone might skip?
Recharacterization changes the books. A sale of receivables produces a factoring expense; a loan makes the $50,000 premium interest under I.R.C. § 163, generally outside the § 163(j) limit for a small business. New Mexico gross receipts tax runs on gross receipts, so the draws never reduce the GRT base. Any balance a plan wipes out is cancellation of debt income under I.R.C. § 61(a)(11), excluded in a Title 11 case under § 108(a)(1)(A) at the cost of attribute reduction. The practitioner’s warning: start a ledger of every pull by funder and date today. The preference analysis is only as good as the bank records.
Frequently Asked Questions
Can a New Mexico LLC argue that a merchant cash advance is a usurious loan?
Usually not under New Mexico law. NMSA 1978 § 56-8-9(B) says interest ceilings do not apply when a business entity is the debtor, and neither the entity nor its guarantor may plead usury. The argument opens up only if the contract imports another state’s law, such as New York, that preserves a criminal usury defense.
What happens to the daily ACH debits when my business files bankruptcy in Albuquerque?
The automatic stay under 11 U.S.C. § 362 stops the debits as of the petition date, and the funder must ask the court for relief to resume them. Pulls taken in the ninety days before filing may be recoverable as preferences.
Is a merchant cash advance a secured claim in a New Mexico bankruptcy?
Only if the funder filed a correct UCC-1 with the New Mexico Secretary of State against the borrower’s exact legal name and no earlier lien covers the same collateral. Many stacked advances are junior to a bank’s blanket lien or defectively filed, which leaves a general unsecured claim.
How far back can a New Mexico bankruptcy trustee claw back MCA payments as fraudulent transfers?
Two years before the petition under 11 U.S.C. § 548, and four years under New Mexico’s Uniform Voidable Transactions Act, NMSA 1978 § 56-10-23, when the trustee proceeds through § 544(b). The trustee must still show the company received less than reasonably equivalent value.
Does New Mexico's 36 percent interest cap apply to merchant cash advances?
Rarely. The 2022 amendments to the Small Loan Act and Bank Installment Loan Act cap the annual percentage rate at 36 percent for loans of $10,000 or less by licensed lenders, effective January 1, 2023. A commercial advance to an LLC falls outside it.
Will a merchant cash advance count toward the Subchapter V debt limit?
Yes. In In re Heart Heating and Cooling, LLC (Bankr. D. Colo. 2024), the court held MCA obligations are liquidated and noncontingent because the payoff can be computed from the agreement, so the remaining balance counts toward the cap.
How North Star Law Firm Can Help
North Star Law Firm represents New Mexico business owners being drained by stacked merchant cash advances, from negotiating with funders to filing a Subchapter V case in the District of New Mexico that stops the daily debits. Phillip Zagotti, JD/CPA, is admitted to the United States District Court and the United States Bankruptcy Court for the District of New Mexico, and his accounting background is why the firm builds the ACH ledger, the preference analysis, and the tax treatment of any forgiven balance into the plan from the start. The firm also handles preference and clawback matters and Chapter 11 reorganizations.
If a funder has frozen your merchant account or sent lien notices to your customers, contact North Star Law Firm before the next debit clears.