Pdm Capital Litigation: Why Default Judgment Is the Real Risk

If you borrowed from a merchant cash advance funder like PDM Capital, the lawsuit that results if you can’t pay it back isn’t the real danger. It’s what happens afterwards: you lose by forfeit because you don’t even get in the game. A default judgment comes when you’ve failed to respond, the plaintiff asks the court to decide without a fight, and the judge obliges. The judgment permits the plaintiff to garnish the defendant’s bank accounts and compel the owner to appear in supplemental proceedings.

There’s no trial when a default judgment is issued. The defendant gets no chance to explain or correct the amount the lender claims is owed. You’ll find an order entered against you for the full accelerated loan, along with fees and attorney costs and interest, all of which will be turned into a lump sum judgment. In New York, on a sum-certain claim, the clerk is empowered to act in the judge’s stead. The numbers that the lender claims to have lost get approved without court scrutiny or even a judge’s review.

You don’t have forever to react. In New York state court, there’s 20 days to answer if you were handed the summons, or 30 days if served via the Secretary of State. If you file nothing by these deadlines, the plaintiff gets a default judgment against you. Federal court offers only 21 days.

Active lawsuits can be shaped; they’re not final yet. Before the merchant cash advance lender has the default judgment, there’s a better chance of negotiating the case.

Many businesses, particularly small firms, aren’t looking for lawsuits. The people who run the office don’t have legal training, so they won’t spot papers that aren’t familiar. They may not see the summons and complaint for what it is. They may expect the boss to have taken care of it, or for someone else in the office to have done so. The papers can get left with the receptionist. Many MCA borrowers will ignore the lawsuit papers thinking it’s junk mail. Or they’ll hire a registered agent to receive them, and move offices without updating the address.

When you see the lawsuit papers, don’t hesitate. Don’t leave the complaint unread on the secretary’s desk. Don’t wait it out, hoping it’s junk mail. If you can, look for a lawyer to handle the lawsuit quickly.

Old loan agreements, signed before August 2019, may have had a confession of judgment provision. It’s a clause that allows the lender to get a judgment against the merchant without the need for a hearing. This sort of judgment skips litigation entirely. New York clerks no longer take these agreements against a business located out of state.

Without that clause, it goes the usual way: borrowers skip ACH payments, get notices, loans accelerate. There’s a demand for the accelerated balance, then a lawsuit to collect. The lawsuit often is a great distance away from the borrower’s home state. After a few weeks of inaction, the plaintiff gets a default judgment without input from the merchant.

A Restraining Notice Goes to Your Bank

The lender that got the judgment now uses the court order as a club to whack your business. Your money gets stuck in the bank and can be taken out. A restraining notice goes to your bank to freeze assets up to twice the amount the judge decided. The bank can start blocking accounts the same day it receives the restraining notice. First the money in the account is locked. Then it gets seized. A marshal is sent to the bank to empty the account.

The judgment starts growing the day the judge signs it. In New York, at 9% a year, on top of the charges and interest that are already there. It builds interest for twenty years. Pay something to the lender and the clock goes back to zero. The debt just got another 20 years to hunt you.

A creditor with the judgment can take more than just the bank account. It can learn about other accounts to levy, and how much is in them. How do the lenders find the bank accounts? They force the merchants to tell them. Once the judgment has been taken, a merchant cash advance lender can make the owner answer questions about business assets. It can ask for personal funds if the principal signed a guaranty. A judgment can get recorded as a lien in the county that the property is in. And a judgment in one state can be sent to another state to be enforced.

Even before a judgment, as soon as the loan goes into default, the MCA funder can push for payment. Your customers can get collection letters in the mail telling them that their payments should go to the funder.

Motion to Vacate

When the court issues a default judgment, the debtor often hears nothing about it until money gets stuck in the bank. When you’ve got to pay people and find out the money’s not there, then you’ve got a crisis on your hands. When you know about the judgment, then you can move to vacate it. This must be within the time the court gives you.

If you don’t answer in New York state court, you have to start by making a motion to vacate. You have up to a year to file it, after the plaintiff serves you with the notice of entry of judgment. Your lawyer will have to argue and explain the delay: why didn’t you answer the complaint? The defendant also needs to show that they have an actual, valid defense to the claim. Both facts are often hard to prove, particularly when the lawsuit has been going for some time. A real mistake, and not just laziness, will excuse missing a deadline to respond.

There’s another route open. The defendant can say it was never properly served with the lawsuit. If the court agrees, it can cancel the default judgment entirely. Unlike with the motion to vacate, there’s no one-year deadline, and the defendant doesn’t have to show any good excuse or actual defense. The judgment goes away and the case starts over.

A process server has to say who it served and where, and that evidence has to go into the court record. Any of those parts can be challenged, including whether the address is wrong. Although there’s no deadline, waiting to fight a default judgment can cost you. Any money that’s blocked can be given to the lender, and money that’s already in their hands is tough to pry loose.

New York gives another option to defendants, a motion under CPLR 317. If the defendant was served with the suit papers only through the Secretary of State, and it never actually got the complaint, it can ask the court to throw out the default judgment. But there’s a deadline: a year, starting from when they learned that the judgment was entered. This motion can’t be filed more than five years after the judge entered the judgment. As well, the defendant has to show that there is a good, reasonable defense.

It’s possible to fight the default judgment by claiming fraud. Or if new evidence has come up, the defendant can put it forward to show why the judgment needs to be cancelled. A corporation served with the lawsuit through the Secretary of State also needs the summons mailed to it 20 days before the judgment.

It’s different in federal court. The defendant can get the entry of default set aside if they have good cause. Failing that, the judge can still set aside a final default judgment, but not just for good cause.

The default judgment disappears; the claim doesn’t. The trial hasn’t been had yet, so the funder’s still got to prove their case. The defendant business now has to file its answer to the lawsuit, and then the process of discovery, negotiation, and trial or settlement starts.

The most obvious defense is that it’s a disguised loan. Because the agreement calls for the borrower to pay a fixed sum back, the high daily repayment can seem like interest. It can be argued that it is unenforceable as an illegal loan with a usurious rate of interest. The contract can also be attacked as being unconscionable. A common defense is that the MCA funder breached first.

Negotiation Shouldn’t Be Handled Alone

Once a judgment is entered, the lender will have the upper hand. A serious motion to vacate can bring the lender back to the bargaining table. The defendant is then in a stronger position, because a strong chance of losing the default judgment lets the borrower take a harder line. But negotiation shouldn’t be handled alone. The lender has done this many times before. The borrower usually hasn’t. Even for borrowers with good defenses, it may work better to negotiate than to litigate. You aren’t trying to get vindication, but to limit the damage.

Tread carefully in negotiations after the court has ruled. What you say in the talks can be used as proof against you later, if you try to overturn the judgment. A partial payment, a signed document, either of these things can reset the judgment.

Before you call anyone about your business or your loan, get everything together. The agreement, the guaranty, the ACH authorization. The statements and notices showing that you defaulted. Every message, email, or letter that you got from the funder. Print it all out and bring it with you. The record of how much was paid into the MCA agreement is important.

Once the restraining notice goes out, you should think about talking to the bank. There’s nothing improper about checking for notices. It’s useful to know who at the bank has the power to act. If your bank finds a restraining notice on its account, don’t just move the money over to a different account. It looks like trying to keep the money from the lender. Don’t move assets to hide them. This can be fraud.

Keep the calendar of when the vacate deadline arrives. You want a lawyer that handles MCA cases, not one to start learning from your lawsuit.

A free contract review costs nothing and takes a day or two. Call (888) 837-7053, or send the agreements to Delancey Street for a straight read on your options.