Detailed Answer
Merchant Cash Advance (MCA) transactions work as purchases of future receivables rather than traditional loans. With careful drafting, owners can shield personal assets from claims in probate if the business shuts down or the owner dies. Below we explain how proper structure and contract language accomplish this and outline North Carolina legal strategies to challenge unfair or unlawful MCA practices.
1. Structuring MCAs to Avoid Personal Liability
To keep personal estates out of probate claims, MCAs must look and act like a sale of receivables, not a loan:
- Sale Recitals: Include clear statements that the funder purchases a specified dollar amount of future sales for a discounted price.
- No Promissory Note: Avoid drafting a promissory note or calling it a loan agreement.
- Non-Recourse Language: State explicitly that the owner has no personal obligation beyond assigning receivables and that recovery is limited to those receivables.
- No Personal Guarantees: Exclude any personal guarantee section unless the owner chooses to provide it. A guarantee can expose personal assets when the business fails.
- Carve-Out Clauses: Limit default remedies to withholding receivables or setting off future payments. Prohibit funder from seizing personal bank accounts or real estate.
2. Probate Considerations When an Owner Dies
If the contract qualifies as a non-recourse sale of receivables, the MCA funder holds only an asset claim of future receivables. It cannot file a creditor’s claim against the owner’s personal estate in probate under N.C. Gen. Stat. § 28A-12-1. If a document inadvertently creates debt, the funder may seek repayment through probate, placing personal assets at risk.
3. Challenging Unlawful or Predatory MCA Practices in North Carolina
Even where MCA language looks proper, funders sometimes slip predatory terms into fine print. Business owners and their estates can use these strategies to fight unfair practices:
- Recharacterization as Loan: Ask a court to treat the transaction as a loan subject to North Carolina’s usury laws (G.S. 24-1). If the effective rate exceeds legal caps, the agreement may become void or capped at a lawful rate.
- Unfair and Deceptive Trade Practices: File a claim under the Unfair and Deceptive Trade Practices Act (G.S. 75-1.1) for misleading terms or hidden fees.
- North Carolina Predatory Loan Prevention Act: If a court finds the transaction effectively a high-rate consumer loan, it may invoke G.S. 24-2.1 to cap or void excessive rates and fees.
- Unconscionability: Argue common-law defenses when terms shock the conscience, such as massive discount rates that bear no relation to risk.
- Equitable Reformation: Seek court intervention to rewrite or strike oppressive provisions and restore fairness.
Key Takeaways
- Draft MCA contracts as non-recourse sales of receivables to keep personal estates out of probate.
- Exclude personal guarantees and limit remedies to receivables recovery.
- Use North Carolina statutes on usury, unfair trade practices, and predatory loans to challenge abusive terms.
- Consider recharacterization, UDAP claims, unconscionability defenses, and equitable reformation.
When MCAs threaten your personal estate in the event of business closure or death, you need clear guidance and strong representation. Pierce Law Group’s experienced attorneys understand how to structure receivables purchases and how to challenge predatory MCA provisions under North Carolina law. Contact us to protect your assets and rights. Email us at intake@piercelaw.com or call (919) 341-7055.
