Forward Financing Litigation: 5 Reasons Default Judgment Is the Real Risk

If Forward Financing or another merchant cash advance company has sued your business, default judgment is often your biggest risk. A default judgment is a judgment entered against a defendant who did not appear in court to defend against a claim. When a business owner simply ignores a lawsuit, they are not allowed to provide testimony. They cannot submit documents. They are not allowed to tell their side of the story at all.

1. The clock runs fast

When a business owner is focused on the day-to-day operations of the company, the court’s deadlines may slip by until it is too late. Once a merchant cash advance company serves a complaint against your company, you generally have 20 or 21 days to file a response with the Court. If you miss that deadline, the merchant cash advance company can ask the Court to issue a default against your company.

Some of the major agreements typically allow them to serve the complaint through “service by certified mail.” That means they can drop an envelope in the mail, pay for certified mail and send you a copy of the complaint. No process server. No return receipt. Just a couple court forms dropped into a mailbox. Many funders then wait at least 30 days to file for default. If you happen to check in with the court after those 30 days, you could be out of luck. The court might already have entered a default judgment against you.

2. A clerk, not a judge

You might think that only a judge can review all of the evidence and documents against your business before deciding what action to take. That would be wrong. In federal court, the Court Clerk may enter default judgment against you before you ever get your day in court. Under the Federal Rules of Civil Procedure, if the funder makes a claim for a fixed sum, the clerk must grant default judgment on request. No hearing. Rule 55 requires the clerk to enter default judgment once the funder files an affidavit about its damages.

Outside federal court, Rockland County, New York appears to be the go-to court for small business funding companies and other merchant cash advance lenders. Rockland County has seen hundreds of commercial claims filed by funding companies each month. Many end in default judgment. In most of the cases, the defendants are small companies in another state. Few bother to hire a lawyer to challenge the funders in a New York court. Often, the businesses have no connection at all with Rockland County or New York.

3. Your defenses go unheard

If a small business funding company has filed a lawsuit against your company, you may have some good defenses. You may not have done anything wrong. Default judgment stops your ability to tell your side of the story. You cannot raise issues and legal defenses like usury and other state laws that might make the contracts unenforceable.

On usury, the federal bankruptcy court in New York City decided that a merchant cash advance agreement was a loan in disguise. The case is important because it looks past the labels the funding company gave it and found usury. The reconciliation terms were one-sided. They forced merchants to deliver fixed payments. The funders took little risk of loss.

New York has strict rules to prevent overcharging on loans. For most individual borrowers, interest is capped at 16% a year. A criminal rate is set at 25% a year. One funding company allegedly paid an Arizona recycler $17,100 for $24,460 of receivables. The payoff stretched out over 82 days at a rate of $299 a day - a rate of about 288% a year if treated as a loan. If the funding contract is treated as a loan and 288% usury is shown, the contract might be void.

Some debt collectors make it sound like you can simply show up in court and handle things without a lawyer. That is not the case. In New York, outside small claims, a corporation cannot represent itself in court. It has to have an attorney.

4. Undoing it is harder

Once a court enters a judgment against your company, it is much harder to reverse that decision. You have to make a “motion” to open a default judgment. Courts set a high bar.

In federal court, the Court can set aside a default for good cause. If the Court already entered final judgment, though, it gets much harder. You also have to act quickly. The federal rules limit the time to one year after the judgment is entered to bring a mistake or fraud motion. In New York state courts, parties can move to vacate a judgment of default within one year after it was served with notice of entry.

5. The judgment follows you

A judgment against your company by a funder or other debt collector in one court can follow you to another court. Once final, a federal judgment can be registered in any other federal district court. Once registered, the judgment will work like a local one. New York also has laws that allow funders to apply interest rates that work against you. If a funder gets a money judgment against your company, that judgment will grow by 9% each year. A judgment-creditor can record a copy of the judgment in the county clerk’s office in any county where you own real estate. That creates a lien that can hang there for ten years, and cloud a title.

If your company has a New York bank account, a default judgment can cause serious trouble. In New York, this takes the form of a restraining notice that can leave your bank accounts frozen for a year. That means no payroll, no payments to suppliers, no rent.

You may think, “Well, if the company gets a judgment against it, that is fine. They cannot collect from me.” Merchant cash advance lawsuits often name the owners as personal guarantors, in addition to the business. A default judgment in those cases can give the funding company the right to go after the company and the owner. The Arizona recycler and its owner were sued in Rockland County, NY. Its default charges included a $5,000 default fee, $2,500 for a blocked account fee, and almost $200 for a UCC lien filing fee.

If a funding company files a lawsuit in New York against your business, open the letters you get and count carefully. Keep track of the days. If your company has been sued by Forward Financing or another merchant cash advance lender, it is important to talk with an attorney quickly.

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.