Square Business Debt Lawsuit: 5 Things to Do First

Getting served with a Square lawsuit is a stressful event. The worst mistake you can make is to sit on the lawsuit paperwork. When a court case is filed, you only have a short window to respond and defend yourself before a default judgment can be entered against you.

Once Square pulls the trigger on legal action, the clock starts ticking. Answer the complaint by the deadline stated in the summons. Read both the complaint and your loan agreement with Square for terms and the amount of debt. Organize your records of payments. Know your exposure. Hire a business lawyer to represent you.

1. Don’t ignore the deadline

After Square has filed the case, the next and most important deadline is for your answer. Don’t ignore it. California courts generally allow 30 days after service to respond. In federal courts, the time limit is generally 21 days, though check your summons to see. If you miss the deadline, then Square can try to resolve the case by default, which means it gets a judgment with very few requirements.

Default is when the court gives the case to the plaintiff if the defendant has not responded. In California, once the plaintiff gets a default, the court will not let the defendant answer. In federal court, the clerk can then enter judgment for the amount owed plus costs.

2. Read the complaint and your agreement

First: Check who the plaintiff is. Newer loans are usually made by Square Financial Services, which is a Utah-chartered industrial bank. Next: Read the terms of your loan agreement. Compare them with what the complaint says. What are the amount and the claim? Check the venue, or what court system the case is in: state or federal? Which county or district?

Pay special attention to what rules govern your contract, and where the complaint says the court case is filed. Square’s 2019 agreement names Utah law and San Francisco courts, both state and federal. Check your contract to see if your clause gives venue to a different court, or if it requires arbitration. According to the 2017 Square Capital loan agreement, court cases are to be governed by arbitration. Arbitration is an out-of-court process, instead of using a courtroom and judge.

3. Gather and preserve your records

Once you’re involved in a legal dispute, the rule is to keep every record you have relevant to the case. This includes all email and texts, accounting records, and loan payment records. At first, you only know so much about the case. You don’t know exactly what evidence will help your side of the story. Later, when you know more of the details of the case, it’s too late to recreate records.

If your small business has employees or independent contractors, tell them to stop with any routine deletion of files and emails. Erasing files, even accidental, can bring court sanctions. Litigation hold means that normal record-keeping practices must change temporarily. If any of your records are missing, the court can draw a “negative inference” against you.

4. Know your real exposure

If you miss a minimum payment or don’t pay your loan balance by the end of the term, Square can raise your repayment rate of your daily card sales, debit your Square balance or debit the linked bank account. If your loan has gone to court, it’s possible that Square is coming after you for the full amount of the loan. In the 2019 loan agreement, if the borrower defaults, Square Capital can demand the full balance, and then you have 5 business days to pay. The contract also says borrowers must pay Square’s “reasonable” enforcement costs, including reasonable attorneys’ fees.

If you default on a Square loan, Square Capital has the right to pursue only business assets. You still owe Square Capital the full outstanding balance, plus costs. The lending bank keeps its own rights to collect.

You might think the federal debt collection laws apply, but usually they don’t. There is a law in Utah that sets a limit on how long a creditor has to file a lawsuit in court on a written contract. Utah law says that a lawsuit on written debt generally must be filed within 6 years. The 6-year clock restarts when the debtor makes a payment on the debt, or when the debtor gives the creditor written notice that they acknowledge the debt.

5. Hire a business attorney

Once you’ve been sued, you need a business lawyer. That is an attorney who is trained to represent a business organization in court. These lawyers are experienced in court, as well as in negotiation, and can work with Square to try to resolve your loan default without losing your company. A corporation or LLC must have a lawyer in federal court cases.

Once a small business loan default is litigated, it’s very common for the case to settle and not go to trial. Many business court cases are resolved in mediation, an out-of-court negotiation process. Mediation is where a trained, neutral third party will try to help the parties resolve their differences. The mediator doesn’t give a ruling. Outside of settlement, filing for bankruptcy can bring temporary relief by automatically stopping civil lawsuits on debts from before the filing, called a stay.

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.