What happened. A Fargo concert promoter that shut down in May after more than 30 years filed three adversary complaints on August 23 and 24 in the U.S. Bankruptcy Court for the District of North Dakota, asking the court to treat its merchant cash advances as loans and to order the money back.1 Jade Presents filed for Chapter 11 on June 6, listing roughly $2.9 million in liabilities against about $393,000 in assets.4 Court records show it paid three funders a combined $964,233 in the months and years before the filing.1
The named defendants are Rocket Capital NY, LLC, Direct Capital Source Inc. doing business as Capytal.com, and Unique Funding Solutions LLC. As of August 25, none of the three had filed a response in court.1
The complaints allege annualized costs of 62% and 78% on the Rocket Capital agreements, nearly 86% on the Unique Funding agreement, and nearly 149% on the Direct Capital Source agreement. These are the debtor's characterizations, not findings by any court.1
This is not a one-off. The same recharacterization argument is being run in bankruptcy courts around the country, and it does not always win. A Maryland bankruptcy judge rejected it in March 2025 and held the agreement in front of her was a sale.5
What Alternative Business Lenders Need to Know
What did the debtor actually file?
Three separate adversary proceedings, filed August 23 and 24, inside the Chapter 11 case in the District of North Dakota before Judge Shon Hastings.1 The clearest one to read is the Unique Funding Solutions complaint, because the arithmetic is simple: an agreement entered last July for $150,000, against which the company says it repaid at least $216,000 over roughly six and a half months.2 3 Counsel for the debtor asserts the purchase agreement "was misrepresented and didn't include an interest rate," and that "the sale was made at a time when the company was insolvent and Jade Nielsen received less than reasonably equivalent value."2 That second sentence is the tell. It is not a usury argument. It is a fraudulent transfer argument, and it travels on a different track.
The Rocket Capital complaint is the largest, covering $601,233 collected over roughly a year and a half, and Rocket Capital has a competing claim of $224,750 in the case.1 Reporting on the Direct Capital Source complaint also notes that the company has registered at least seven assumed business names, including the Capytal.com brand it funded under.1 Whatever the merits, a naming structure like that is going to be part of the story a trustee tells about intent.
Why does the loan-or-sale label decide who keeps the money?
Because it changes which body of law applies to money you have already collected and spent. If the agreement is a true sale of receivables, the payments you took were your own property arriving on schedule. If a court recharacterizes it as a loan, three doors open at once. The rate becomes an interest rate, which can be tested against a usury ceiling. The collected payments become payments on a debt, which can be attacked as preferential transfers if they landed inside the look-back window. And the whole transaction becomes reviewable as a fraudulent transfer if the merchant was insolvent and did not get reasonably equivalent value.
That is why the debtor here is not simply objecting to a claim. It is affirmatively suing to pull back $964,233 that already cleared. For a funder, the loss is not the unpaid balance. The loss is the balance plus everything you successfully collected, which is a materially different number than the one in your recovery model.
What test will the court actually apply?
Most MCA agreements are governed by New York law, and courts applying it use a non-exhaustive three-factor test drawn from LG Funding, LLC v. United Senior Properties of Olathe, LLC.6 A Maryland bankruptcy court restated it last year in exactly these terms: "(1) whether there is a reconciliation provision in the agreement; (2) whether the agreement has a finite term; and (3) whether there is any recourse should the merchant declare bankruptcy."5
Those three are a guide, not a scorecard. The same opinion says the factors "do not determine the outcome" but serve "only [as] a guide to analysis," and then names the thing that actually decides it: "The keystone consideration concerns the transfer of risk." Quoting a Southern District of New York decision, the court put the principle plainly: "The hallmark of a loan is that the lender is absolutely entitled to repayment under all circumstances, or put otherwise, the principal sum is repayable absolutely."5 Everything else is evidence about that one question. Did you actually take the merchant's downside, or did you build a document that looks like you did?
Are courts turning against advances across the board?
No, and it matters that you know why. In the Maryland case, the Chapter 7 trustee argued the funding agreement was a disguised loan and lost that argument at the pleading stage. The court applied the three-factor test and found "on the record before it, that the Funding Agreement is a sale," dismissing the counts that depended on it being a loan.5 The underlying deal was ordinary: $290,000 of future receipts purchased for $200,000, with roughly $145,000 collected before the petition.5 A well-built agreement survived a direct attack.
Cases have gone the other way too. Bloomberg Law reported that a Southern District of New York bankruptcy judge held merchant cash advances made to the collapsed law firm Kossoff PLLC were disguised loans rather than asset sales, in a matter docketed as No. 1:21-bk-10699.9 10 Law360 has described a further New York Chapter 7 ruling continuing the same recharacterization line.11 The honest read is not that the product is dying. It is that outcomes now turn on drafting and on conduct, and that two funders with similar-looking paper can land on opposite sides.
Which contract terms decide your case?
Start with reconciliation, because it carries the most weight. A reconciliation provision that says the funder "may" adjust remittances reads as discretion, and discretion looks like a lender protecting a fixed return.8 A provision that obliges you to adjust on request, on a defined cadence, with a defined method, reads as genuine exposure to the merchant's revenue. This is not a hypothetical reading. In LG Funding the court focused specifically on "the use of the term 'may' in the reconciliation provision, which could give the funder discretion whether to adjust remittances to reflect diminished receivables," and later decisions have added the aggravating facts that tend to travel with it: reconciliation requests refused in practice, and daily payment rates that did not appear to be a good faith estimate of receivables.12 If your reconciliation right is permissive on paper and ignored in practice, you are carrying both halves of that problem.
Then term. A stated end date, or a structure that functions as one, points toward a loan. An open-ended obligation that ends when the purchased amount is delivered points toward a sale. Then recourse. If bankruptcy is an event of default, if you hold a personal guaranty of collection performance rather than a narrow fraud or breach guaranty, or if you can reach the owner when receivables simply stop, you have written down that you expect repayment regardless. That is the definition the court is using.
The practical failure is rarely one bad clause. It is a document drafted as a sale and administered as a loan: fixed daily debits that never move, reconciliation requests ignored, collection calls that talk about a balance owed. Courts read the file, not just the contract.
How far back can a trustee reach?
Further than most funding files assume. Preference exposure generally reaches transfers in the 90 days before the petition, and up to a year where the recipient is an insider.7 13 Fraudulent transfer reach is longer, and the insolvency plus reasonably equivalent value theory the debtor is running here is the version that does not require proving anyone intended anything.2 Note the shape of the Jade Presents claims: payments stretching back roughly a year and a half are in scope.1
This is the number that belongs in your reserve model and usually is not there. A merchant who paid you in full and then filed can still cost you the full amount collected. If you are underwriting merchants in visibly distressed sectors, your realistic worst case on a completed deal is not zero.
What should funding and legal teams do this week?
Pull your current form and read the reconciliation clause against the three factors, in the order the courts use them. Change "may" to a binding obligation with a stated method and cadence. Check whether bankruptcy appears anywhere as an event of default, and whether your guaranty is drafted as a performance guaranty rather than a guaranty of collection. Then sample ten live files and check whether operations actually honored reconciliation requests, because that record is discoverable and it is what a trustee will put in front of a judge.
Separately, run a list of merchants who paid off inside the last 24 months and are now showing distress signals. That is your clawback pipeline, and it is knowable in advance.
Our Opinion
The instinct when a story like this lands is to read it as an attack on the product. We do not think that is what is happening. The Maryland decision is the useful one precisely because the funder won: a court applied the same test everyone is worried about and concluded the agreement was a sale.5 What separates that outcome from the ones going the other way is not luck and not sympathy. It is whether the paper and the servicing behavior both describe a real transfer of risk.
The uncomfortable part for the industry is that the strongest recharacterization arguments are usually built out of a funder's own operational habits. Fixed debits that never flex, reconciliation requests that die in an inbox, and collection scripts that reference a balance are all evidence that the funder never believed it bought anything. A firm can hold an immaculate contract and still lose on the conduct.
The other thing worth naming is the asymmetry in these three complaints. A promoter with $393,000 in assets is suing for $964,233.1 Even if the funders are entirely in the right, defending three adversary proceedings costs real money against a debtor with nothing to collect, which is precisely why cases like this settle. That dynamic rewards whoever has the cleaner file, and it is a reason to fix the form now rather than after a petition lands.
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A clean bank statement hides an open docket…
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Headlines You Don’t Want to Miss
Dallas Fed economists published an analysis on August 25 estimating that if tokenization made deposits 10% more rate-sensitive, banks would lose roughly $700 billion of capacity to carry long-term interest-rate risk, and that a 10% shortening of deposits' weighted average life would cut maturity-transformation capacity by about $580 billion.14 15 The line that should interest you is the one about what banks do next: they lean on term debt, and "the economics of such lending activity funded by wholesale debt would resemble those of non-bank financial firms and would thus likely adversely impact the cost of credit for consumers and businesses."15 Translated: the funding-cost advantage banks hold over you narrows, and the price of credit rises for everyone. This is a research scenario, not a forecast.
The FDIC released its Q2 2026 Quarterly Banking Profile on August 25: aggregate net income of $90.1 billion, up $9.7 billion or 12% from the prior quarter, with a 1.37% return on assets and annual loan growth of 6.8%.16 17 Read the composition rather than the headline. That growth was "led by loans to nondepository financial institutions and loans to purchase or carry securities, including margin loans."17 Loans to nondepository financial institutions is the warehouse line category. Banks are expanding credit to you faster than to the end borrower, which is good news for your cost of capital and a concentration the regulators are now watching closely.
Colorado's rewritten AI law, SB 26-189, was signed May 14 and takes effect January 1, 2027. It covers automated decision-making technology used to "materially influence" a consequential decision, and financial services is named as a consequential decision category.18 Deployers owe clear and conspicuous notice up front, an "easily understandable description" of the decision within 30 days of an adverse outcome, and on request a meaningful human review by someone trained and empowered to overturn it.18 Attorney General rules are due by January 1, 2027, and lenders have already asked publicly whether this duplicates what ECOA and FCRA require.19 If any model touches your approval decision, the human-review requirement is a staffing question, not a policy document.
Sources
1 Valley News Live | Bankrupt promoter Jade Presents sues cash-advance lenders over "predatory" cash advance loans (August 25, 2026)
2 KFGO | Jade Presents seeks return of cash advance repayment in bankruptcy court (August 24, 2026)
3 Fox21 Online | Jade Presents seeks return of cash advance repayment in bankruptcy court
4 Valley News Live | Jade Presents files for bankruptcy, lists nearly $2.9M in debt (June 8, 2026)
5 GovInfo | Guttman v. EBF Holdings, LLC (In re Global Energy Services, LLC), Adv. No. 23-00188, Memorandum Opinion (Bankr. D. Md. March 31, 2025)
6 CourtListener | LG Funding, LLC v. United Senior Props. of Olathe, LLC, 122 N.Y.S.3d 309 (App. Div. 2d Dep't, March 11, 2020)
7 U.S. Bankruptcy Court, N.D. Fla. | Merchant Cash Advance Claims in Bankruptcy
8 Levenfeld Pearlstein | Recharacterization of Merchant Cash Advance Agreements in Bankruptcy
9 Bloomberg Law | Merchant Cash Advances to Law Firm Were Hidden Loans, Judge Says
10 PacerMonitor | Kossoff PLLC bankruptcy docket, No. 1:21-bk-10699 (Bankr. S.D.N.Y.)
11 Law360 | NY Ch. 7 Ruling Continues Cash Advance Recharacterization
12 Carter Ledyard & Milburn | Merchant Cash Advance Litigation Is Getting Wilder
13 National Conference of Bankruptcy Judges | Characterization and Bankruptcy Treatment of Merchant Cash Advances
14 Federal Reserve Bank of Dallas | Tokenized deposits could affect bank liquidity, maturity transformation (August 25, 2026)
15 Decrypt | Tokenized Deposits Could Drain $700 Billion From Bank Lending, Dallas Fed Warns
16 FDIC | Quarterly Banking Profile, Second Quarter 2026
17 ABA Banking Journal | Quarterly Banking Profile: Banking net income $90.1B in Q2 2026
18 Norton Rose Fulbright | Colorado enacts revised AI law (SB 26-189)
19 HousingWire | Colorado AI proposal raises new compliance questions in mortgage
