Key Takeaways
- A New York bankruptcy court reclassified 19 merchant cash advances totaling $10.8 million as loans, exposing funders who cannot prove their deals are true purchases of future receivables.
- The court's 36-page analysis examined actual cash flow patterns, reconciliation behavior, and fixed-payment structures to distinguish genuine MCA transactions from disguised loans.
- Bank verification software for funders is no longer just an underwriting tool; it is now a legal defense mechanism that documents whether remittances track real revenue.
- Funders who collect granular, timestamped cash flow data at origination and throughout the deal lifecycle can demonstrate the variable-payment character courts require.
- Let's Submit helps funders build this evidentiary foundation by collecting bank statements asynchronously and extracting daily deposit patterns that prove revenue-based repayment.
A 36-Page Ruling That Every MCA Funder Should Read
On Monday, a New York bankruptcy court judge presiding over the Chapter 7 Estate of Kossoff PLLC issued a 36-page decision reclassifying 19 merchant cash advances as loans. The total: $10.8 million in transactions spanning 2016 to 2020, all stripped of their purchase-of-receivables characterization and recast under lending law. For the funder on the receiving end, the consequences are severe: loan reclassification triggers usury analysis, potential voiding of the debt, and subordination in bankruptcy proceedings.
But the implications reach far beyond one case. This ruling is a roadmap for every bankruptcy trustee, debtor's counsel, and state attorney general looking to challenge MCA structures. And the evidence the court relied on most heavily was not contract language or merchant testimony. It was cash flow data: how payments were collected, whether they reconciled to actual revenue, and whether the funder could prove its remittances were truly variable.
That makes bank verification software for funders the frontline defense. If your platform cannot produce granular deposit histories, daily balance patterns, and reconciliation evidence, you are building your legal position on sand.
What the Court Actually Examined
Fixed Payments Versus Revenue-Linked Remittances
The core legal test for whether an MCA is a true sale of future receivables or a disguised loan hinges on one question: does the merchant's payment obligation fluctuate with actual revenue? Courts have examined this question before, but the Kossoff ruling is notable for how deeply the judge went into transactional data.
The court looked at whether daily or weekly remittances stayed constant regardless of the merchant's sales volume. When payments remained fixed, even through periods where bank statements showed revenue dips, the judge concluded the arrangement functioned as a loan with fixed repayment terms. The contract language calling it a "purchase" did not override the economic reality.
This is precisely where automated bank statement analysis becomes critical. A funder who can show, with timestamped evidence, that remittances adjusted proportionally to daily deposits has a defensible position. A funder relying on boilerplate contract terms and manual reconciliation does not.
Reconciliation as Proof of Structure
The ruling also scrutinized whether the funder ever performed reconciliation, the process of comparing what was collected via ACH or split-payment to what the merchant actually earned. Reconciliation is the mechanism that proves an MCA is revenue-based. Without it, a court sees a fixed-payment loan dressed up in receivables-purchase language.
Most funders treat reconciliation as an afterthought, something a merchant can request but rarely does. The Kossoff decision flips that assumption. Going forward, funders need to document reconciliation capability at origination and demonstrate they actually exercised it during the deal's life. As we explored in our coverage of how reconciliation accuracy reshapes automated bank statement analysis for lenders, the ability to programmatically compare remittances against deposit data is becoming table stakes.
Granularity of Cash Flow Data
The third pillar of the court's analysis was the quality of cash flow evidence. Aggregate monthly revenue figures were not sufficient. The judge wanted to see daily deposit patterns, the frequency and size of individual transactions, and whether there were periods where revenue dropped but payments did not.
This level of granularity is exactly what AI-powered bank statement extraction delivers. When a funder collects four months of bank statements through an asynchronous upload link, and then runs those statements through machine learning models that categorize every deposit, the result is a day-by-day revenue profile. That profile becomes evidence, not just for underwriting, but for litigation defense.
Bank Verification as a Legal Defense Layer
Until now, most funders have thought of bank verification software as an underwriting tool. You collect statements, check average daily balances, count NSFs, estimate monthly revenue, and make a funding decision. The Kossoff ruling adds a second function: legal defense.
Consider the evidentiary chain a funder needs to survive judicial scrutiny in 2026. First, you need to show that you assessed the merchant's actual revenue before funding, not just their self-reported numbers. Second, you need to demonstrate that your payment collection mechanism was designed to fluctuate with that revenue. Third, you need records proving reconciliation occurred or was offered. Fourth, if challenged, you need the underlying data to reconstruct the entire relationship.
Manual processes cannot produce this chain reliably. A funder whose underwriter eyeballed four PDF statements and typed numbers into a spreadsheet has no defensible audit trail. The statement files might be lost, the calculations might be inconsistent across deals, and there is no timestamped record of what was analyzed or when.
Platforms like Let's Submit solve this by creating a persistent, encrypted record at the moment of collection. When a merchant uploads bank statements through a secure link, the documents are stored with metadata: upload time, file hashes, and the merchant's identity. AI extraction then pulls every deposit, withdrawal, and balance into structured data. That structured data is what a funder's counsel can present to a court as evidence that the deal was underwritten against real revenue and that the payment structure was designed accordingly.
The stakes are growing. As we covered in our analysis of how MCA lawsuit risk shapes bank verification software for funders, the volume of legal challenges to MCA structures is increasing across multiple jurisdictions. New York remains the epicenter, but state attorneys general in California, Virginia, and Connecticut are all examining similar questions.
What Funders Should Change Right Now
Collect More Statement Months Than You Think You Need
Four months of bank statements is the industry standard for underwriting. For legal defense purposes, funders should consider collecting six months or more. The longer the deposit history, the stronger the evidence that your payment structure was calibrated to real, observed revenue patterns. More data also makes it harder for a trustee to argue that the funder ignored seasonal dips or revenue volatility.
Automate Reconciliation Records
If your contracts include a reconciliation clause, and most MCA agreements do, you need to prove you honored it. The simplest approach is to build automated reconciliation into your servicing workflow. Pull the merchant's recent bank data at regular intervals and compare it against what you collected via ACH. Even if the merchant never requests an adjustment, the fact that you ran the comparison and documented it creates a powerful legal record.
Timestamp and Hash Every Document
Courts care about provenance. When did you receive the bank statements? Were they altered? Can you prove the document you are presenting today is the same one the merchant submitted at origination? File hashing and timestamped storage answer these questions definitively. Any bank verification software for funders that does not produce immutable document records is a liability in litigation.
Extract Daily Deposit Data, Not Just Monthly Averages
Monthly average revenue is useful for sizing a deal. Daily deposit patterns are useful for defending one. The Kossoff court looked at whether payments tracked daily revenue, not monthly aggregates. AI extraction models that categorize individual deposits by source, flag irregular patterns, and produce daily revenue curves give funders the evidentiary granularity courts now expect. We covered the depth of analysis required in our piece on how cash flow data depth separates winning MCA underwriting from guesswork.
The Broader Market Context
This ruling does not exist in isolation. The MCA industry is simultaneously attracting more institutional capital and more legal scrutiny. Fundworks just extended and upsized its investment-grade corporate notes to $40 million, and Credibly's blockchain warehouse line through Figure is now live for retail and institutional investors. Capital markets participants demand clean documentation. A warehouse lender or note investor who discovers that underlying MCAs might be reclassified as loans faces writedowns, covenant violations, and reputational damage.
The pressure runs in both directions. Funders who want access to cheaper capital must demonstrate that their deals will survive legal challenge. That demonstration starts at origination, with the quality of bank verification data they collect, and extends through servicing, with reconciliation records and payment tracking. The funders who build this infrastructure now will be the ones who attract the next round of institutional money. The ones who do not will find themselves on the wrong side of a 36-page opinion.
Frequently Asked Questions
Why did the bankruptcy court reclassify the MCAs as loans?
The court found that the funder's payment collection structure functioned like fixed loan repayment rather than a true purchase of future receivables. The judge examined whether remittances varied with the merchant's actual revenue, whether reconciliation was performed, and whether the economic substance matched the contract language. When daily payments stayed constant regardless of revenue fluctuations shown in bank statements, the court concluded the transactions were loans.
How does bank verification software protect an MCA funder's legal structure?
Bank verification software creates a documented record of the merchant's actual revenue at the time of funding. When a funder can show that it analyzed daily deposit patterns, sized the deal proportionally to real cash flow, and built payment structures that tracked revenue, it has evidence that the transaction is a genuine purchase of receivables. Without this data, a court has no basis to distinguish the deal from a fixed-rate loan.
What bank statement data should MCA funders collect to defend against reclassification?
Funders should collect at least four to six months of complete bank statements, extract daily deposit amounts and sources, calculate daily and weekly revenue averages, flag NSFs and negative balances, and document the analysis with timestamps. Platforms that use AI to extract this data automatically produce consistent, auditable records. Manual review of PDF statements does not meet the evidentiary standard courts are now applying.
Does contract language alone protect MCA funders from reclassification?
No. The Kossoff ruling explicitly held that calling a transaction a "purchase of future receivables" in the contract is not dispositive. Courts look at economic substance: how payments were collected, whether they varied with revenue, and whether the funder bore any risk tied to business performance. Contract language matters, but it must be supported by operational evidence, which is exactly what bank verification data provides.
Conclusion
The Kossoff ruling is a turning point. For the first time, a court has issued a detailed, data-driven analysis reclassifying nearly $11 million in MCAs, and the evidence that mattered most was cash flow data. Funders who collect bank statements manually, skip reconciliation, and rely on contract language alone are exposed.
Bank verification software for funders is no longer optional infrastructure. It is a legal necessity. The data you collect at origination, the extraction quality your platform delivers, and the audit trail it produces will determine whether your deals survive judicial challenge.
Let's Submit helps MCA funders collect bank statements asynchronously, extract daily deposit patterns with AI, and build the evidentiary record that courts now demand. Visit letssubmit.ca to see how async verification fits into your workflow and strengthens your legal position from day one.