Sued by 11 Advance? 7 Steps to Take in the First 20 Days

Get sued by 11 Advance, or another merchant cash advance (MCA) funder, and the answers are short. You have twenty or thirty days to respond, depending on how you were served. A corporation must have a New York lawyer represent it, and any defense you want made had better be written into the answer. Fail to answer on time, and the funder’s next move is to ask the court for a default judgment against the business and the individual(s) who guaranteed the cash advance.

1. Pin down your deadline

Served with papers, you do one important thing first. Find the calendar. Getting a summons handed to you personally in New York gives you 20 days to answer. A summons left with someone at the business and then mailed back to you, or nailed to the door and mailed, gives 30 days once the whole process is finished. If you were served outside of New York, generally you have 30 days. If you’re in federal court, the deadline is 21 days. Write the date down where you will see it each day.

2. Read what you were served

Many merchant cash advance and receivables contracts choose New York law and courts. So even if the business is in Florida or Texas, you will likely be sued in New York Supreme Court, often in Kings County (Brooklyn) or Nassau County (Long Island). The name of the defendant(s) is probably at the top. If there is a personal guarantee, you will see your name there. Your summons might arrive without a copy of the complaint. Don’t let the deadline run out without the complaint in your hand. Demand it in time. When the complaint finally does get served, then you have twenty days to answer.

Worried about a personal guarantee? An equipment lease or cash advance contract that involves a personal guarantee means the funder will probably sue both the business and the person who signed for it. Read the guarantee itself and determine what it puts at risk. And if you’re the guarantor and the business still plans on fighting back, know that whatever defense the business has at law to raise might keep you afloat too.

3. Hire a New York lawyer

Unless this is a case in the Commercial Claims Part or Small Claims, the law says that a corporation always has to appear in a state lawsuit through a lawyer. So hire a New York lawyer who is near the court and who has done this before. Call one this week, not on day 19.

4. Know the cost of silence

If nobody in the case answers, then the next thing that can happen is a request by the lender’s lawyer, asking the court clerk to enter a default judgment in the amount demanded, plus costs and interest. A funder can then send your bank a restraining notice to freeze money for up to a year. The limit for a restraining notice is double the debt on that funders merchant cash advance, and that includes money already on deposit and any that comes in during the year. If the deadline already passed, an answer filed late must give the court a reasonable excuse for the delay. If a default judgment for your excusable default is entered later and served, you have one year from then to make a motion against it.

5. Ask whether it is really a loan

In legal papers, each funder gives its account its fanciest names, a future receivables purchase or equipment investment or revenue portfolio, for example. There is a fine line between a true purchase of something (good for the funder) and a loan (bad for the funder). Some New York cases, such as LG Funding in 2020, have turned on whether the true contract was for a purchase of future receivables, or was actually a loan. In these cases, the Court looked to see whether there was a reconciliation provision that worked, an ending date, and whether the funder had recourse if the business went bankrupt. If a court does decide that the contract is a loan, then the rates become the central question. First, a corporation can’t raise the defense of ordinary civil usury. But second, a corporation can raise criminal usury, the 25 percent limit beyond which it is a crime to loan money. Adar Bays held that a criminally usurious loan is void.

6. Check the numbers

There is a world of difference between what funders say in their opening case papers and what they finally prove at trial. Did the business really default under the agreement? And did the funder make a practice of not answering or making problems with reconciliation demands? And did they double charge fees or interest? Don’t take anyone else’s word for the numbers. Cases can turn at trial on the financial proof. Some funders will try to send notices to your customers or payment processors demanding they pay the funder directly. Those notices can be contested, and not every notice is a winner. Also, a confession of judgment has to be entered only in the county where the business had a place of business when the document was signed or filed. So a business with no place of business in New York usually cannot have a New York judgment confessed against it there.

7. Answer, then negotiate

Many merchant cash advance or receivables purchase contract lawsuits against a small business end in a settlement. That final negotiated result depends on how strong the defense to the case is. A business that has answered the lawsuit on time and is on the record with defenses has much more power in a negotiation than one that is looking at a default judgment. Separately, a bankruptcy filing triggers an automatic stay that stops the lawsuit from going ahead. But there are no promised outcomes.

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.