Court Rules $350K Was Equity, Not a Loan: What Your Contracts Might Be Missing
A Michigan court just ruled that $350,000 NEXA Mortgage transferred to Platinum One Lending was an equity investment, not a repayable loan, because there was no promissory note, no interest terms, and no repayment schedule on file. Platinum One was awarded $281,000 in damages on its counterclaim.1 7
The ruling came out of a co-founder split between NEXA CEO Mike Kortas and ex-president Matthew Grella, who left in March 2024 and joined Platinum One. NEXA said the money was debt. The court said: show us the paperwork. There was none.1 2 6
Key facts:
$350,000 transfer reclassified from debt to equity by Michigan court1 2
$281,000 in damages awarded to Platinum One Lending1
Arizona judge separately called NEXA's related claims "quite weak"6
NEXA's own operating agreement limited it to mortgage brokerage without unanimous owner consent6
Sources
1 HousingWire | NEXA Lawsuit Equity Ruling
2 NMP | NEXA Expands Poaching Lawsuit Against Grella and Platinum One
3 NMP | NEXA Expands Legal Fight Over Poaching Scheme
4 NMP | Platinum One Lending Coverage
5 NMP | Judge Grants Grella's Motion to Dismiss NEXA Lawsuit
6 NMP | Court Sides With Platinum One Lending
7 FDIC | Supervision and Examination Resources
8 CFPB | Supervisory Guidance on Lending Documentation
9 Uniform Law Commission | UCC Resources
10 SBA | Business Loan Programs
What Alternative Business Lenders Need to Know
Why Does a Mortgage Industry Lawsuit Matter to MCA and RBF Lenders?
Because the court ruled on basic contract law, not mortgage-specific regulation. The principle is universal: if you transfer money without signed loan documentation, a court can reclassify that transfer as an equity contribution.1 2
Most well-run MCA operations have contracts in place. The real risk sits in the gray areas: deals with company insiders where the paperwork is informal, verbal side agreements with repeat borrowers, revenue-based financing where variable repayment structures resemble profit-sharing more than fixed debt obligations. The court looked for four specific elements and found none of them: a written loan agreement, an interest rate or factor rate, a repayment schedule, and default provisions.1 2
MCA factor rates of 1.2x to 1.5x and daily ACH pulls as a percentage of revenue can look more like equity participation than lending to a judge who has never funded a deal. If your contracts do not explicitly state that the advance is debt, not equity, you are relying on a judge to infer your intent. This case shows what happens when that inference goes the wrong way.
What Red Flags Should Your Underwriters Be Watching For?
Based on this ruling and the broader pattern of founder disputes we are seeing in deal flow, train your team to flag these patterns:
Multiple signers with equal authority: If two or more principals have signing authority on the business account, any transfer between them or to related entities can be reclassified in a dispute. Require personal guarantees from all principals, not just one.
Recent ownership changes: If the business had an ownership change in the past 12 months, dig deeper. Request the operating agreement, buyout documents, and any pending litigation. NEXA's own operating agreement restricted the company to mortgage brokerage, which undermined its legal position.6
Cross-entity funding: If the borrower operates multiple entities and you see transfers between them on bank statements, get written confirmation of how those transfers are classified before advancing. The NEXA case turned on exactly this: money moving between related parties without documentation.
Active or recent litigation: Any mention of lawsuits, arbitration, or partner disputes should trigger enhanced documentation requirements. Do not fund into an active legal dispute without understanding which assets are at risk.
Founder splits are not rare. The post-2023 rate environment has squeezed margins across lending, forcing buyouts and partnership dissolutions. We are seeing more of these disputes in our pipeline, and anecdotally, other operators report the same. Each one creates a scenario where your advances get caught in the crossfire between warring principals.
What Should You Change in Your Contracts Today?
If you take one thing from this newsletter, let it be this: review every template in your lending stack for anti-recharacterization language.
Add explicit "debt, not equity" clauses: State in your agreement that the advance constitutes a debt obligation, not an equity investment, capital contribution, or gift. Courts look for this language when classification is disputed.
Require UCC-1 filings for advances over $50K: Even for MCA products that do not traditionally use UCC liens, filing a UCC-1 creates a public record of a creditor-debtor relationship. It costs under $100 per filing and provides significant protection in recharacterization disputes.9
Document factor rates and repayment terms in writing, every time: Verbal agreements about pricing are worth nothing in court. The written contract must state the factor rate, the total repayment amount, and the repayment method.1 2
Include a "no partnership" clause: Explicitly state that the lending relationship does not create a partnership, joint venture, or equity relationship between the parties. This is standard in bank lending but often missing from MCA contracts.
Audit existing deals for documentation gaps: Review 2024-era deals where the paperwork might be thin. If you find advances without signed agreements specifying debt classification, contact the borrower to execute retroactive documentation. It is imperfect, but it is better than nothing in court.
The cost of proper documentation is negligible: $500-2,000 in legal review per template, under $100 per UCC filing. The cost of losing a recharacterization fight is your entire principal plus potential damages, as Platinum One demonstrated with its $281,000 counterclaim award.1
How Does This Play Out in Bankruptcy Court?
Bankruptcy trustees love recharacterization arguments because converting your debt claim to equity pushes you to the back of the repayment line. In a Chapter 11 reorganization, equity holders get paid after all debt holders, which often means getting nothing.
The NEXA ruling gives bankruptcy trustees a fresh precedent to cite. If a Michigan court reclassified $350K from a sophisticated mortgage company, your $75K MCA advance to a two-person LLC is not getting special treatment. The documentation standard is the same regardless of deal size: either you have the paperwork proving it is debt, or you do not.
For factoring companies, the risk is slightly different. Invoice purchases are sale transactions, not loans, and the UCC framework provides stronger classification protection.9 But factoring agreements that include recourse provisions or guaranteed minimum payments can start looking like loans to a court, and from there the slide to equity is one bad contract clause away.
Our Opinion
This ruling should be a wake-up call, not because it changes the law, but because it confirms what sloppy operators have been getting away with ignoring. The distinction between debt and equity is not academic. It is the difference between getting repaid and getting wiped out. The NEXA case is a mortgage industry story on the surface, but the legal reasoning applies directly to every MCA advance, RBF deal, and equipment finance contract that relies on trust over documentation.
The smart play is defensive. Spend the next 30 days auditing your contract templates and your active portfolio for documentation gaps. Add anti-recharacterization language. File UCC-1s on anything over $50K. Require signed promissory notes even when you have a long relationship with the borrower, especially when you have a long relationship with the borrower. The borrowers who never cause problems are not the ones who end up in court.
One caveat: this case involved a co-founder dispute where both parties had equal control at the time of transfer. Your typical MCA advance to an unrelated borrower has a cleaner lender-borrower structure. But "cleaner" is not "bulletproof." If your borrower's business partner, ex-spouse, or bankruptcy trustee decides to challenge your advance classification, the court will look at your paperwork first. Make sure it says what you need it to say.
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