Knight Capital Demand Letter or Lawsuit? 6 Differences That Matter

If the envelope from Knight Capital holds a demand letter, here is the good news: your business has not been sued. Not yet, anyway. Even if you disagree with the assertion of a past-due balance, with a demand letter the matter can be handled outside the court system. But there is a penalty if you ignore a lawsuit. It is called default.

1. What you are holding

A demand letter is not a court summons and complaint. The purpose is to see if you and/or your business are willing to pay a debt. With a demand letter, the funder is telling its side of the story and listing out what it believes are possible legal claims. Typically, a demand letter arrives ahead of a lawsuit. Usually, the funder wants to settle without going to court. While that may not be possible, a demand letter offers the chance to avoid court.

2. Whose rules apply

The federal Fair Debt Collection Practices Act generally covers individual debt, and a business debt would not typically fall under that law. A debt may also not fall under the Act if it is the original creditor collecting its own debt. So the collection practices law that protects individuals is not likely going to protect your business from a funder that wants to collect on its own advance.

3. The clock starts

A lawsuit has a court deadline. In New York, a summons handed to you personally must be answered (or met with a notice of appearance or a motion) within 20 days. If the lawsuit is not handed to you, then the rules change. In New York, the defendant has 30 days after substituted service is complete. For federal courts, the time is generally 21 days. Unless there is a lawsuit, there is no court clock. In New York, the time to start a lawsuit on a breach of contract claim generally is 6 years.

4. Who can answer

Many business owners can write their own reply to a letter. But if your business is an LLC or corporation, you may need an attorney if a lawsuit is filed. With New York state courts, a corporation must respond to a lawsuit through an attorney. There are some exceptions, including some small-claims and lower-court cases.

Be careful when you write back. You may not be a lawyer, but something you write in reply to this letter could be used in court. So make sure what you write is not going to come back to haunt your business. Whatever you do, try to keep your angry side out of the reply.

5. What silence costs

In New York, if you never appear or respond to a lawsuit, and if the amount sought is a specific dollar sum, the funder can ask the court clerk for a default judgment within one year of the default date. If a default judgment hits your business, is there any way to get rid of it? Sometimes, you may be able to go to court to ask for that default to be vacated if the default was excusable. This type of motion must be filed within one year after you were served with the judgment, and a written notice of entry of the default judgment.

A signed confession of judgment skips the lawsuit and jumps to the end. In New York, a signed confession must be filed with a county clerk within three years after it is signed. Under a state law signed in 2019, a private creditor may file only in the county where the debtor lived at the time of signing it, or lives at the time of filing. That puts out-of-state businesses on much stronger footing.

6. The cheaper window

Compared to going to court, a demand letter may be the least expensive way to resolve things. This is your chance to settle the matter without years of court delays and hearings and trials and appeals. A lawsuit is much harder to settle than a demand letter. With a lawsuit, both sides already have invested more time and money.

Even when your business has a physical address, there is a possibility that the location for the court is somewhere else. It could be in another state. So where a company is located will impact where a lawsuit will be held, and that can be a significant factor in how expensive it will be. If you have business insurance, it may be to your advantage to call the insurer and ask about coverage. There may be no coverage, but it could be worth the call to check.

Once a lawsuit is threatened, you will likely be expected to preserve any documents that are pertinent to the dispute, including hard drives. So be careful about disposing of anything related to the debt. If you decide to destroy anything, first talk to a lawyer about it. Otherwise, hang onto it.

If the MCA funder broke the terms of the agreement and hurt your business, then you may be able to counterpunch. Think of a counterclaim as leverage you can use in settlement talks.

There may be an attorneys’ fees clause in the agreement. If there is one, read it carefully. The clause may be written so that both sides get to recover legal fees if they win. If the funder wins, you may owe the legal fees for both sides.

Sometimes, the advance provider just files a lawsuit. Either way, do not gamble on an agreement with no legal advice.

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.