Flash Advance Lawsuit: 6 Ways These Cases Usually End

A flash advance lawsuit usually ends in one of six ways: a default judgment, a confession of judgment, a defended case that runs its course, a ruling that the deal was really a loan, a negotiated settlement, or a bankruptcy filing that stops the case. Your chances of ending up at each of those outcomes, in turn, are affected by a variety of factors. It can therefore be impossible to predict what the most likely outcome would be in any individual case. Nevertheless, if you are involved in a cash advance lawsuit, it is important to have some understanding of how those six outcomes can arise.

1. A default judgment

If the defendant fails to respond to the complaint within a specified period with an answer or other responsive pleading, the plaintiff may seek a judgment by default. In New York state court, that period is 20 days after service by personal delivery in the state, and 30 days after service is complete for other methods, such as out-of-state service or by publication. Other court systems can have different deadlines, so be sure to look up the deadlines that apply in your state. Verbal promises are no response. Notes or memos of any verbal exchanges with a representative of the funder are no response.

A default judgment means the case is over in a way similar to a defendant’s loss at trial. Although a defendant may be able to undo the default judgment within a period of time, this usually requires not only challenging it, but also demonstrating that the defendant’s failure to respond was excusable. In New York, that motion must be filed within one year after the judgment is served with written notice of its entry. Meanwhile, the default judgment can be readily enforced against the defendants.

2. A confession of judgment

A confession of judgment is like a default judgment because it is a method of ensuring a quick termination of a cash advance lawsuit without any defense put forward by the defendant. It is different because it is not even necessary for the defendant to be served with a summons and complaint. Though New York State allows the filing of confessions of judgment, the county in which it can be filed is very limited. It must be filed in the county where the business resides or has a place of business. If the business does not have any location in New York, there is no way to file a confession of judgment there. The funder also has to file it within three years after you signed it. But the defendant can potentially attack this procedure in court.

3. A defended case

A defendant who is served with a complaint in a merchant cash advance dispute can file responsive documents to set out the defenses and objections that it intends to assert. A primary decision the defendants must make is what to assert in their answer and in any pre-answer motions. Compare the papers you signed with the complaint to see what the numbers add up to. Just because a company says you owe a certain amount does not prove anything. A creditor may not be able to prove that it owns the rights to enforce the debt.

There may be more than one defendant; each would have to be properly served. Being out of state does not automatically mean dismissal. A defendant who wants to defend the case must be careful to stick to legal deadlines. A motion to dismiss is one tool, not a promise that the case will end.

4. A ruling that the deal was a loan

Another way to challenge a merchant cash advance is to argue that it was actually a loan. The crucial question is not whether the defendant defaulted, but whether the original arrangement was a commercial cash advance deal, and not simply a plain, old, hidden loan. Calling the deal an advance in the contract won’t necessarily decide the case. A court looks at more than that. One important New York ruling looked at whether the contract called for reconciliation based on the merchant’s sales, whether the contract lasted for a specific length of time, and what was supposed to happen if the merchant went bankrupt.

If it was a disguised loan after all, the defense of criminal usury can apply in New York if interest is above 25% a year. In June 2023, a federal appeals court (Second Circuit) sided with a merchant on this issue. Neither fixed debit nor a personal guarantee in the contract settles what the deal was.

5. A negotiated settlement

The merchant and funder can agree to resolve the case through settlement. When deciding whether a settlement is right in a particular case, a key question is what the settlement covers. A written settlement deal should give the settlement total, with the payments broken down by date. It should state clearly which businesses, owners, and agreements the deal applies to, whether any personal guarantees given are being released, what it will take to end the lawsuit and satisfy any judgment, what will happen to any bank restraints or UCC filings, and what happens if a payment is missed.

Lower monthly payments from a settlement may be tempting to a cash strapped business, but watch out for a big balance remaining at the end. Workouts with one funder do not automatically settle agreements with other funders. If the deal is to forgive all or part of the amount owed, you may find you owe income tax on what the cash advance company agrees to not collect, unless a legal exclusion applies like the result of bankruptcy.

6. A bankruptcy filing

One option when a merchant is being sued over a cash advance is to file for bankruptcy. As a general rule, filing the petition puts an automatic stay into effect, stopping collection actions by cash advance companies. That stay covers pending lawsuits and the enforcement of judgments obtained before the filing. The choice and timing are major decisions.

Whichever of these six outcomes applies, it is best to have a thorough understanding of the documents governing the merchant’s relationship with the cash advance company, along with the facts of how the deal played out.

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.