Formula 5 Capital Filed Suit: 7 Questions to Answer Before You Respond

A Formula 5 Capital merchant cash advance (MCA) case can really hit you where it hurts: your bank account and maybe even a personal guarantee. Before you respond, be sure that it is a court filing, and if so check the deadline to answer. Gather the MCA agreement and information about your payments, any default or service (or lack of service), whether there is a personal guarantee and whether there is any judgment or restraint on your bank account. Next, have a lawyer review the documents before you consider settling, and be sure to get any settlement agreement in writing.

1. Confirm who is suing

Anyone can send paperwork threatening a law suit, but that alone is not one. A judgment is also different than a case. The name of who is suing should be at the top of the document. If someone other than the original lender is suing, understand how the current owner obtained rights to sue. This information will also help your attorney defend you.

Keep every page of every document, including staples, stamps, writing, exhibits, notes, and envelopes. Write down when and how it arrived, including email and when you found it, and who received it and whether you had to sign something. Review the dates on these papers, and make sure to give this information to your lawyer.

2. Find the court and parties

The name of the court should be on the first page, often under the state’s name. The court name and the number will tell you what court (district and type of case) is involved. The defendant could be your business, another business with whom you are associated, or even you, if there was a personal guarantee. To check an actual court filing see if there is a number and enter it into the court’s search system.

3. Find your deadline

The deadline to answer depends on where the court is and how service was made, and when the defendant was actually served. In New York, an answer is due 30 days after service if served on the Secretary of State, or 20 days if handed to you in New York. If elsewhere check the rules for how service was made. Calls or settlement talks with a funder do not extend the deadline.

Even if you are sure that the service was bad, or the claim is not true, the court expects you to answer in time. Some defenses, even if correct, can get lost forever. If a settlement company is negotiating for you, confirm the case is being litigated by an actual lawyer and not the settlement company.

4. Check the claimed balance

Compare the original MCA documents with the court complaint to see what was collected and what is still allegedly owed. Reconcile what the funder asserts is owed with amounts paid and debits it received. A claimed balance is not proof that it is correct.

Next, ask: did revenues fall or was there an unexpected problem? Did you have the ability to ask for reconciliation? Does the agreement call it “advance” or “loan”? That word choice is not determinative. These are not hard and fast rules: New York courts will consider reconciliation, finite term, and whether recourse is allowed in bankruptcy. If this is a loan, the usury defense may apply; if it is not, there is no usury.

5. Check service and the guarantee

Confirm when service was made, how it was made and who was served. The funder’s complaint, and any affidavit or mailing, should set out the details.

Also, before deciding anything, check the wording of any clauses about which state or court applies, and whether they are permitted to go to arbitration. Being located in another state does not by itself get the case dismissed.

Was there a personal guarantee? Get the guarantee in case the claim is made against an individual. Read it to check your rights, terms, and duties under that agreement.

6. Look for a judgment

Be sure to look for a judgment, particularly if the amounts are a surprise. If you do not answer in time there could be a default judgment against you. In New York, the funder can ask the clerk for a default judgment within a year of the defendant’s default. In New York you can move to “vacate” the entry of a judgment under excusable default, but only within one year of being served with the default judgment and notice of entry. So, ask a lawyer if you have grounds to excuse the default.

If the agreement included a Confession of Judgment, these provisions let the funder get a judgment against you without going through the normal contested lawsuit process. The rules on how they work vary by state, but in New York, they must be filed within three years of signing, only in the county in which you live or do business, and they may not be enforceable in all states. They are subject to challenge in the proper circumstances, so check them with a lawyer.

If an account is frozen or closed, find the name of who did that, what power they claimed, and get a copy of the actual document. A Uniform Commercial Code filing is a different thing than a court restraint or actual seizure of money. Do not jump right to moving or hiding your assets. Ask an attorney before you act.

A funder can send a notice to your customers or processors telling them to pay the funder, not you. The most important things to check are the date it was served, who sent it, and what it claims to rest on. Don’t assume that just because a funder contacts your customers or processor that it is the actual owner or agent and entitled to be paid.

7. Weigh any settlement

There is nothing wrong with settling, but you should understand what is at stake. A settlement should be reasonable in view of potential liability and your financial position.

The terms of any settlement should be set out in detail, in writing, and signed by all the parties, to include: amount and dates of each payment, how dismissal is to be handled, who it covers, does it release the personal guarantee, what happens if a payment is missed, when and how any restraints will be lifted, removal of any UCC filings.

Even if your weekly payment is lower, your repayment obligation still exists. And you could still be in default if a single payment is missed. A deal with one MCA does not resolve the others. You also have to keep track of payments and check your bank records.

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.