March 15 will be the eighth anniversary of the First Department’s decision in Champion Auto Sales, LLC v. Pearl Beta Funding, LLC, 159 A.D.3d 507 (1st Dept. 2018), the first New York intermediate appellate court to determine—albeit with little substantive analysis—that a revenue purchase agreement (RPA), also known as a merchant cash advance, was not, and could not be, criminally usurious because it was not a loan.
Since Champion Auto, RPA litigation has exploded in New York lower courts. A veritable body of caselaw guiding the substantive analysis of what constitutes a loan versus purchase of future receivables has developed in three of four Appellate Division departments. This survey of the cases will assist both litigators in their arguments and transactional attorneys refining their RPAs.
RPA Transactions
In an RPA, the funder purchases the “purchased amount” of a merchant’s future receivables at a discount “purchase price,” and the merchant remits the purchased amount to the funder as a “specified percentage” of its daily, weekly, or monthly receivables until the full purchased amount is delivered.
As a convenience, the parties agree to a “remittance amount” that is a good faith estimate of the specified percentage of the merchant’s average daily, weekly, or monthly receivables in the period prior to funding.
To constitute an RPA, the remittance amount must be subject to reconciliation (sometimes referred to as adjustment) at the request of the merchant if its average receivables fluctuate, in order to reflect the specified percentage of the changed average receivables. In other words, the remittance amount must be capable of being tied to the actual receivables if business slows down—which could indefinitely delay the period over which the purchased amount is delivered—and reduced to zero if the business completely fails.
While the RPA transaction structure is straightforward, it is routinely challenged by merchants arguing that their agreement is really a disguised loan, and as such, should be subject to New York’s criminal usury cap of 25% interest per annum. If they succeed in their arguments, criminal usury is a complete defense to enforcement.
Second and Fourth Departments
In LG Funding, LLC v. United Senior Props. of Olathe, LLC, 181 A.D.3d 664, 666 (2d Dept. 2020), the Second Department developed a three-factor test for determining whether an agreement is an RPA or a loan. This has been the authoritative test in both the Second and Fourth Departments for six years:
Whether there is a reconciliation provision in the agreement;
Whether the agreement has a finite term; and
Whether there is any recourse should the merchant declare bankruptcy.
This test has also been adopted by the Second Circuit.
LG Funding found an issue of fact as to whether the agreement’s reconciliation provision was illusory—i.e., whether reconciliation was mandatory or left to the funder’s discretion. It also questioned whether provisions tied to bankruptcy or personal guarantees indicated the agreement functioned as a loan.
However, in more recent cases, the Second and Fourth Departments have strictly applied only this three-factor test in concluding that RPAs were legitimate purchases of receivables.
In Apollo Funding Co. v. Dave Reilly Constr., LLC, 241 A.D.3d 1508, 1509 (2d Dept. 2025), the Second Department added an important limitation: to challenge the reconciliation factor, the merchant must provide nonconclusory evidence that it actually attempted to use the reconciliation process. Courts will not entertain hypothetical arguments where the merchant never invoked its rights.
Similarly, courts have held that agreements failing the three-factor test may be recharacterized as loans. For example, in Crystal Springs Capital, Inc. v. Big Thicket Coin, LLC, 220 A.D.3d 745, 747 (2d Dept. 2023), the agreement was deemed a loan because the funder was under no obligation to reconcile payments.
In Oakshire Props., LLC v. Argus Capital Funding, LLC, 229 A.D.3d 1199, 1201 (4th Dept. 2024), a motion to dismiss was denied where all three factors weighed against RPA characterization: the reconciliation provision appeared illusory, there was an implied finite term, and the funder retained recourse in the event of business failure.
Notably, two dissenting justices in the Fourth Department proposed an alternative framework. Instead of focusing on the existence of reconciliation provisions, they suggested evaluating:
Whether the remittance estimate is reasonably based on actual or anticipated receivables; and
Whether reconciliation is practically available rather than merely theoretical.
The dissent did not address which party would bear the burden of proof under this proposed test.
First Department
Although the First Department was the first to hold that an RPA is not a loan in Champion Auto, it has not formally adopted or rejected the three-factor test. Instead, it evaluates case-specific facts.
In cases involving a particular funder, the First Department has looked beyond formal contract terms and focused on actual conduct. For example, courts have considered whether funders refused reconciliation requests, imposed unrealistic payment obligations, treated bankruptcy as a default, or enforced personal guarantees despite business failure.
In Kapitus Servicing, Inc. v. Ragtime Gourmet Corp., 242 A.D.3d 638, 638–39 (1st Dept. 2025), the court denied summary judgment where certain provisions—such as a broad security interest—suggested loan characteristics, even though other aspects aligned with an RPA structure.
Third Department
The Third Department does not appear to have addressed RPAs in any published opinions. However, given the volume of litigation, it is likely only a matter of time before it adopts either the three-factor test, the First Department’s case-specific approach, or a new framework.
Given the continued growth of RPA litigation in New York, further refinement of these standards by the Appellate Divisions—and potentially the Court of Appeals—is expected.
After the submission of this article, the First Department adopted the LG Funding three-part test in Kapitus Servicing, Inc. v. Suburban Waste Servs., Inc., 2026 N.Y. Slip Op. 01127 (1st Dept. Feb. 26, 2026).
Authors:
Jacob H. Nemon (nemon@clm.com)