Westfair Filed Suit: 7 Questions to Answer Before You Respond

When a merchant cash advance funder like Westfair files a lawsuit against your business, the first thing to understand is that the court’s deadline comes first. If your business doesn’t respond to a lawsuit by the court’s deadline, the funder may ask for a default judgment. So before you call anyone, check the clock: How much time does your business have to respond to the funder’s complaint? Once you’ve answered that question, then call your attorney and work on a response to the lawsuit.

1. What did you receive

Has the funder sued your business and named you as a defendant? If so, your business needs to answer the lawsuit by the court’s deadline. Have you signed a confession of judgment? If so, the funder may have already obtained a judgment against you. Is it a notice of default, a bank restraint, or a notice that the funder is contacting your customers for the payment? Each raises its own issues. There is a huge difference between these notices, and the time to find the difference is before you take a step.

As of August 2019, funders can no longer file a confession of judgment against out-of-state debtors in New York. A UCC notice may lead some of your customers to hold payments. You need to know if that was a financing statement, a court restraint or an assignment notice, because the laws around those are very different.

2. When is the answer due

In NYS courts, defendants have 20 days to respond if served in NY by personal delivery and 30 days if served another way. Federal courts generally give defendants 21 days to respond. Emails and phone calls don’t stop the clock: if your business is in the middle of a dispute with the funder, you still need to answer by the deadline.

Hang on to every page you were served. Write down the date you received it, and remember how the papers arrived. It makes a difference. Have a lawyer confirm the exact deadline.

3. Who is being sued

Does the funder say your business owes it money? Or does the demand say you and your business? If the latter, do you have a personal guarantee? Many funders sue the business and the guarantor together in the same lawsuit. Get a copy of the guarantee and make sure you know what it covers, who signed it, and whether it lets the funder sue the guarantor or require payment. A notice to a guarantor isn’t a judgment: it’s a notice. Make sure you find the answers before you respond, because those differences matter.

4. Who can answer for the business

Can your business respond without a lawyer? In New York, the owner of a corporation cannot just file papers in a lawsuit to represent the corporation: it must appear through a lawyer. There are exceptions, but in most cases, they are limited to disputes about small amounts of money. If you’re unsure whether an exception applies, ask before you file a paper.

5. Do the numbers add up

Look at the amount that the funder says your business owes, and compare it to the business’s records. Match every withdrawal against the contract. Are there any duplicates? Also check to see if any withdrawals were returned. Look at how the funder applied any payments that you made to the balance. Did your business sign an agreement that lets the funder decide if the business is in default, or do you get a chance to fix it? If the agreement lets you fix the default, did the funder send a notice and give you time to fix the default?

Every merchant cash advance contract is different. If your business pays a funder by automatic debit, a sales drop doesn’t pause the payments unless the contract lets it. Review the agreement and see whether it has a reconciliation clause. Sending a funder a payment request to reduce withdrawals does not by itself stop the withdrawals.

6. Is it really a loan

In LG Funding, a New York appeals court looked at three things to tell if an advance is a loan: a reconciliation clause, a finite term, and the funder’s recourse if the merchant went bankrupt. Separately, criminal usury in New York means knowingly charging more than 25% a year. If a funder makes advances without reconciliation, or you and the funder have a reconciliation dispute, that does not by itself decide whether the contract is void. The answers aren’t always easy to get: sometimes a court has to decide. Only a lawyer can say whether those defenses apply, so call one before you respond.

7. What happens if you wait

Missing a court deadline can be expensive. If your business doesn’t answer by the deadline, the funder may ask the court for a default judgment. If the court grants it, the funder may send a notice to your bank. In New York, a restraint notice may allow the funder to freeze up to twice the judgment. Moving to vacate a default judgment for excusable default has a one year time limit, so don’t wait.

If the funder froze your bank account, ask the bank which paper allowed it. In New York, a restraining notice on a bank lasts one year after it is served, or until the judgment is paid or vacated if sooner.

If a lawyer hasn’t looked at the numbers and papers, don’t switch bank accounts, freeze funds, or change how money goes to the business. Do not sign a payment plan, settlement or another financing to get more time, especially under pressure.

So when is it time to talk to the funder? That depends on the documents, the cash flow, and how far the case has gone. Before you open that line, weigh the business’ other debts, the funder’s case, the offer it makes, and how badly a judgment would affect you. A restructuring changes the payment amount or the timing. Settling usually resolves the claim and should deal with the releases and pending case. Be clear which claims you are settling and see if the guarantor’s obligations are part of the settlement. New financing might leave old payment amounts in place.

If a repayment plan’s cost is going to drive the business under, talk to a bankruptcy lawyer sooner instead of later. A business bankruptcy may not end a personal guarantee.

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.