Answering a First Merchant Funding Complaint: 5 Things to Check First

If First Merchant Funding has sued your business: Your first step is to answer. Check your deadlines, and see who can file an answer on your behalf. Second, confirm what kind of deal you made: was it a loan, or something else? Was there a “confession of judgment” or a “personal guarantee?” Then, find out which defenses must go in the answer.

1. Check the deadline

Figure out your deadline, because you must file an answer by the deadline. It should be on the papers. The deadline starts from the day that First Merchant Funding claims you were served. If the case is brought in New York and the summons is served on you in New York, you have 20 days to file an answer if it is handed to you in person; otherwise, you have 30 days after service is complete. If you miss it, First Merchant Funding can ask the Court for a default judgment against you. This is bad because it means they get their money, and you don’t get to tell the court why that is unfair. So, do not miss the deadline.

A request to open up a default should be filed as soon as possible. If you have a good reason for missing the deadline, such as not receiving the paperwork, the Court may let you respond late. If the court enters a default judgment, you can ask the court to vacate it, but only if you do so within a year of being served with the judgment and notice of entry and if there is an acceptable reason for the business’s failure to answer (excusable default).

2. Check who can answer

Businesses have owners, officers, employees, and lawyers. Some can answer the case, some can’t. In New York, if the business is a corporation, it can only be represented by a lawyer. So if you are not a lawyer, you will need to hire one. Before you file anything, you should contact a lawyer. Debt relief services are not usually law firms, so they are not allowed to represent the business. A phone call to the funder could make matters worse, as what you say can be used against you.

3. Check whether it is really a loan

These types of transactions may or may not be loans. Whether it is a loan or not depends on what was agreed. In New York, courts usually look at three things. First, does it have a reconciliation clause? Second, does it have a fixed end date? Third, can the funder still take money if the merchant goes bankrupt?

It makes a difference. New York has capped the interest you can be charged on a loan at 25% a year. If you are charged more, and it was a loan, it was a felony. So-called merchant cash advances, often marketed as not loans and exempt from the 25% cap, often charge in the triple digits. In 2021, New York’s highest court ruled that a business can raise criminal usury as a defense to a lawsuit, and so-called loans that are usurious are void from the start.

Back to the reconciliation clause: has the funder ignored your request to lower your daily ACH to match a decline in revenues? They have if they insist on making deductions at the same rate despite a fall in your sales. A written reply saying no is evidence that the agreement did not share sales, but required fixed payments. Save the replies and letters you get. You will need them.

4. Check the confession of judgment

“Confessions of judgment” give the funder the power to get a judgment against you in Court without having to prove the case, if the business defaults. Funders sometimes take judgments on them, without notice to the business. Review your documents and see if you signed one. If you did, you might still have defenses.

Since August 30, 2019, New York has blocked filing of confessions of judgment against individuals who live in another state and businesses without a place of business in New York. However, older contracts or people living or having a business place in New York still can be affected. The affidavit behind a confession must be filed within three years after signing.

Was there a personal guarantee? This is another clause in the contract. It says you, as the owner, promise you will pay the funder. This binds you personally to the merchant cash advance. You have signed a guarantee, but what does it guarantee? Some of them cover only specific misconduct. You may be able to use defenses to the agreement to fight the guarantee, too. A lawyer can help find these things.

5. Check what goes in your answer

Your answer has to set out what legal reasons you have to defeat the lawsuit. Failure to make these arguments timely can block your right to raise them later in court. Defenses like “illegality,” “fraud,” “payment,” or “release” are among the issues you may need to raise. Before filing, a lawyer can look at your documents, including your contract, bank statements, processing reports, and your messages with the lender, to see if any apply.

Until you talk to a lawyer, do not move your money into new accounts. Your creditors and the Court can call this fraud. Read your papers to see if you agreed to arbitrate any disputes. Strong answers to the lawsuit often bring the funder to the table to talk about an amount to pay. Don’t feel rushed or pressured, and don’t take another advance.

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.