Your Arcarius Agreement: The Terms That Matter Once Suit Is Filed

A few clauses decide whether the funder can win at all, or who gets to win what: the arbitration or forum clause, choice of law, default and reconciliation wording, and fee clauses. Just because the complaint says you’re in default doesn’t make it so. The funder still has to prove it. You have to respond, but not necessarily to pay. You first have to preserve the right to challenge the lawsuit, but in most cases you have to do that by a specified deadline and through a special process. All it takes is one wrong move and you could waive any defenses you had.

The funder has to prove that it had a valid contract, that it fully performed it (it paid the purchase price), that you breached a specific obligation, and that the funder has been damaged because of it. It can’t skip any of these.

Start with the summons. It tells you how long you have to respond, and that clock started when you were served. Your response is called an answer, and it is where you dispute each allegation you think is wrong. Miss the deadline and the funder can ask for a default judgment without you. In federal court, a defendant has to file its answer within 21 days after being served the complaint or 60 days if service was waived. In state courts, the time limits differ from state to state. New York’s courts often require an answer within 20 or 30 days after service of the complaint. Your business must appear in court through an attorney licensed in the state where the case is being heard. Corporations and limited liability companies do not have the right to appear on their own behalf through their officers or other agents.

Dealing with the funder doesn’t stop the court’s clock. Go back and find the funding agreement and any guaranty you signed. Get every bank statement since the first one showing the first advance. And keep a file for every contact with the collector or the funder.

Arbitration and Venue Objections

See whether your agreement included an arbitration clause. After the plaintiff files the complaint in court, a defendant can ask the court to “stay” the lawsuit until arbitration is complete. Under the Federal Arbitration Act, section 3, a federal court must stay the trial until arbitration is finished if a party applies, but not if that party is in default in proceeding with arbitration.

Don’t file that answer right away. If you do have an arbitration clause, and you don’t do it right, you can lose your chance to arbitrate. Then your claim will be resolved in the court where the funder sued you. In Morgan v. Sundance, Inc., an employer raised 14 defenses in its answer, all without mentioning arbitration and took part in mediation, which dragged on until the defendant finally tried to compel arbitration, nearly eight months after the suit was filed. The Supreme Court held that trial courts may not insist on prejudice to find a waiver. When courts consider whether a party has waived arbitration, their focus is on whether the arbitrating party knowingly acted inconsistently with its arbitration right.

No matter whether you file the answer or go straight to arbitration, be sure you don’t lose the right to argue that the suit’s in the wrong place. In federal court, a party waives the improper-venue objection unless it includes it in a pre-answer motion or in the answer. Read the clause closely. Look at the case name and the court. Check whether it fits the forum clause. Ask yourself whether the forum clause says a state court or a federal court. Atlantic Marine Constr. Co. v. U.S. Dist. Court for W. Dist. Tex. held that a motion based on a contract’s forum clause is a transfer motion under 28 U.S.C. § 1404(a), not a true dismissal under 28 U.S.C. § 1406. If the forum clause names the venue for a state court, you want to argue forum non conveniens. Transfer is the rule rather than the exception in such cases. You’ll only lose in the most extraordinary circumstances.

Is there something wrong with the way the suit was filed? Improper service of process or a court that can’t decide your case could both be fatal mistakes.

Because arbitration and venue objections can be lost by your first filing, the first move for many of these cases is to get a litigation attorney to review the agreement before you answer. If the agreement has an arbitration clause, an attorney can start by moving to compel arbitration.

The choice of law clause tells you which law controls. The odds are you’re looking at New York law. A great many of these deals say so, and New York lets a deal of $250,000 or more choose its law without any connection to New York at all.

A frequent defense is usury. The law on usury is written for loans, but it can knock out advances too. To do that, you have to prove it really is a loan. On the face of it, the advance is called a sale of future receivables. But you say it’s really a loan. Usury is a state-law defense, so New York law is usually the law you’ll end up with. The basic criminal usury rate in New York is 25% a year. If a contract is criminally usurious, New York’s usury law makes it void and unenforceable. The lender can’t get anything from the borrower, including any principal the borrower still owes. You have to prove it, though, and just an allegation of usury won’t get you very far. The case law in New York now says a corporation can raise criminal usury.

The basic way to tell a loan from a sale of future receivables is by looking for a true reconciliation provision. But the reconciliation has to be the real thing. The court also looks at whether the contract has an end date and whether the funder can go after you if you file for bankruptcy protection.

Before you get too excited about usury, remember it doesn’t work on every deal. The funder won in True Business Funding v. Guerrero A Construction (2025), where the funder came up with a true reconciliation clause, no fixed term, and a clause excusing bankruptcy. Remember too that the New York usury law has limits and doesn’t apply at all to deals of $2.5 million or more.

Events of Default

Another clause to look for is the events of default. Nearly every agreement has one, and many funders include a list of prohibited acts. Typically these include blocking the debits to your bank account, switching to a new bank, using a new processor, or selling the business. Remember too that a returned payment isn’t always a default. For that, look at the contract’s wording. The funder does have to say exactly how it thinks you’ve defaulted, and you can fight over what counts as a default and whether the funder proved it.

Just because your revenues have fallen, that doesn’t automatically excuse your payments. Courts look at how a deal really works in practice. This is why you need every reconciliation request you ever sent. In the People v. Richmond Capital case, there was a true reconciliation clause, but the funder never actually did it. Have you requested reconciliation and included records the contract says you have to? Then ask whether the funder ever sent one. Did it come when the contract says it’s supposed to? Look for any clause that lets the funder not reconcile at all.

If you’ve also signed a personal guarantee, read it. There are all kinds of personal guarantees, and some only cover performance obligations like not moving accounts, while others guarantee payment. The usury defense could affect a personal guarantee if the whole agreement is a loan. If you signed a guarantee but it only covers specific obligations and you shut or slowed down for ordinary reasons that didn’t breach those duties, you might have a defense.

Then check whether the contract includes a confession of judgment clause. These let the funder ask the court clerk to enter a judgment in favor of the funder if there’s a default. New York CPLR 3218 says to file it only in the county where the defendant lives or does business, and the funder has three years after signing to file it. If you’re in business outside New York, there’s good news. A New York confession of judgment isn’t much good against a business outside the state.

Fee clauses are where a claim can swell into something scary. What does the complaint say about attorney’s fees? The usual claim is for the balance, plus default fees and NSF charges, attorney’s fees at a fixed percentage, and interest. First, check the math. Review the funder’s payment history. Compare it to your bank statements. Missing debits? That too goes in the answer. Is the fee working as a penalty, not a fair estimate of loss? That could be a point for your answer. Some contracts give the winning party attorney’s fees. If you lose, the court can award them.

While you’re defending the suit, the advance is still going on. Still be careful not to do anything that the contract treats as a default. Don’t redirect your receivables, change the debited account, or transfer any assets. Don’t sign a new advance either. You don’t want to give your funder fresh claims. Even if you do everything right, the funder can notify your customers to pay it instead of you. When the funder does that, their paying you no longer discharges their debt.

The next step is to determine whether to try to settle. That’ll depend on what the evidence shows, how strong each side’s position is, and the terms. Look hard at any broad release.

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.