An article published by New York Law Journal, “How New York’s Appellate Departments Examine Revenue Purchase Agreements,” examines how New York courts evaluate disputes involving revenue purchase agreements (RPAs)—financial arrangements commonly used in merchant cash-advance transactions.
RPAs are typically structured as purchases of a business’s future receivables rather than traditional loans. However, litigation frequently arises over whether these transactions should instead be treated as loans subject to state usury laws. Courts evaluating these disputes often look beyond how the agreement is labeled and instead analyze the transaction’s economic substance.
As discussed in the article, New York appellate courts have increasingly relied on the analytical framework articulated in Champion Auto Sales v. Pearl Beta Funding when determining whether a receivables purchase agreement is a legitimate sale of future revenue or a disguised loan. Courts typically examine several factors, including whether the agreement contains a reconciliation mechanism adjusting payments to actual revenue, whether the repayment term is indefinite or fixed, and whether the financing company has recourse against the merchant if revenue declines.
Different appellate departments within New York Supreme Court Appellate Division have applied these factors with varying emphasis, but the broader trend reflects increasing judicial scrutiny of merchant cash-advance structures as litigation involving these agreements continues to grow.
From a legal and governance perspective, the cases illustrate the importance of transaction structure and contractual language in alternative financing arrangements. Courts are increasingly willing to examine the underlying economics of these agreements rather than relying solely on their contractual labels.
The broader takeaway is that companies involved in receivables-based financing should ensure that agreements are carefully drafted and aligned with evolving judicial standards, particularly in jurisdictions like New York where litigation over merchant cash-advance products remains active.
Outside Legal Counsel LLP advises companies, executives, and boards on commercial finance disputes, fintech regulatory issues, and litigation strategy involving alternative financing arrangements. Contact us today.
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