On Second Thought: Update on MCA Law in Texas

Written by: Jason Medley, Esq, Partner, Spencer Fane

In a prior article regarding the new MCA law in Texas, I had advised that factors should procure a DACA over their customer’s bank accounts, to prevent the MCA from doing so and thereby preventing the MCA from being able to debit the bank account. However, while it is still advisable to get a DACA, I do not believe it is a necessity. Instead, simply having the first lien on accounts receivable should be sufficient to stop the MCA practice of debiting your customer’s bank account in Texas. In discussing the matter with our lobbyists and the authors of the legislation, I no longer believe a DACA is required.

That particular provision of the statute[1], which did not appear in the original proposed version, uses “deposit account” in the first clause, but then just “account” and “under Chapter 9” of the UCC in the second clause. Chapter 9 of the UCC defines “account” as an “account receivable”. See Section 9.102(a)(2) of the Texas Business & Commerce Code (the Texas version of the UCC). I think it is better for the factoring industry to have the requirement of a first lien on the account receivable because the factor will (should!) always have that, whereas the factor may not always have a first lien on a bank account (because they may not always go and get the DACA, although I still think it is good practice to do so, but not worth losing a deal over, upsetting your prospects or adding too much headache or expense to your transactions). A recent letter was provided by the authors of the new statute to the Texas OCCC, which in addition to confirming the above, also addressed the MCA’s attempted workarounds and loopholes to avoid violating the prohibition against establishing “a mechanism for automatically debiting a recipient's deposit account”. The authors intended this to be interpreted broadly and to not be limited to just the traditional ACH sweep.

[1] Sec. 398.056. CERTAIN AUTOMATIC DEBITS PROHIBITED. A provider or commercial sales-based financing broker may not establish a mechanism for automatically debiting a recipient's deposit account unless the provider or broker holds a validly perfected security interest in the recipient's account under Chapter 9, Business & Commerce Code, with a first priority against the claims of all other persons.