LoanMe INC Business Debt Lawsuit: What to Do First

Miss That Deadline and You Can Lose the Suit

The deadline to answer LoanMe’s lawsuit is printed on the summons, and you have from 20 to 30 days to get a lawyer, get an answer on the record, and start negotiating. If you ignore it, you lose. Hiring a lawyer and filing an answer keeps all options open and makes it possible to negotiate.

The summons usually spells out the deadlines for action. In California, if it’s a personal service, the deadline is usually 30 days. In Arizona, the deadline is only 20 calendar days. Miss that deadline and you can lose the suit. They show up and ask for a default, and in comes a judgment.

Since you aren’t there to argue, the judge generally signs off on it.

After getting the default judgment, the lender can proceed to get their money, usually by garnishing the company’s bank account or a lien on property. If they levy money from a payroll account they can leave the owner broke and the employees unpaid. They can also reach into checking accounts, take money from incoming payment streams, garnish your paycheck, and record judgments that can become liens on property you own, from your home to business assets.

Like any legal move, getting a default judgment can sometimes be reversed. A very good court will always ask if you have a real defense and if they will consider an excuse for missing the deadline. These are ’excusable neglect,’ an actual defense, and acting swiftly when you realize your mistake. Different courts are better at lenience than others, and state law varies, too. The basic fact is that preventing the loss is far better than trying to fix it.

The lender cannot freeze your account before they get a judgment, but they can ask for pre-judgment attachment, based on a claim that you’re hiding money or preparing to shut down and disappear. If LoanMe filed a UCC-1 lien on assets, it may go after the collateral outside the lawsuit and redirect your receivables.

You may be shocked to find out your business cannot represent itself or even send an officer as a representative to defend itself in court. This is the case with any corporation in California civil court. In California, at least, it’s a 1978 Supreme Court decision.

Some lenders use a personal guarantee with small businesses. That means that they can sue both the business and the signer personally, even going after personal accounts and homes. If the signer doesn’t show up or answer separately, they get a second default judgment. California is one of the community property states, and a guarantee signed by one spouse may expose community assets, that is, property that belongs to the non-signing spouse as well.

In the first few days you need to have two things: a complaint in hand and a lawyer found. You also need to start pulling everything together related to the loan: loan agreements, note, personal guarantees, any changes, UCC filings, and every letter or email from the lender, including the last demand or threat. Those first days are to think hard before you admit owing anything to the lender, before you review everything with your lawyer.

Like the summons, the answer is a court form (in California, Answer - Contract, PLD-C-010). When you answer a debt suit the court will also want the ‘first appearance’ filing fee that you would pay for any lawsuit. It can be up to $450. A defendant can ask to have the fee waived in writing if they cannot pay.

The Answer must be the whole defense. Missing a defense means giving up the right to use it. The Answer must include any claims that the lender made mistakes: failing to credit payments. It must include every reason the amount should be adjusted or it cannot be mentioned in the trial. Other issues, like the amount of money is only a hardship, usually are not valid defenses. A defense can be that a collector waited too long to collect and should be denied.

The lender’s time is limited, and there is a point when they can no longer file the suit. In California, a plaintiff has four years from the date of a breach to sue on a written contract. However, if they are trying to collect on a defaulted note, payments may have been made over a few years and the date of the breach may be unclear. Do your research to see if the plaintiff waited too long to sue.

An acceleration clause allows the lender to ask for the whole remaining balance instead of just the late payments. A borrower can sometimes challenge it, especially if no notice was given and a default was very minor and quickly cured.

Other defenses include failing to give proper notice before suing, a claim that the lender broke the agreement in some way, or a defense that LoanMe filed in the wrong court, violating jurisdiction rules or even your rights to be heard in a place that has some real connection to your business. Work with a lawyer, and decide carefully whether these challenges are worth making.

The lender must prove a right to sue, that the debt is valid, and that the amount owed is right. If you can make them prove those three things, you can deal from a position of strength. If you can’t find a clear reason why LoanMe has no claim, try to make them prove their case. Start by sending them written requests for proof of the debt, the right to sue you, and the payment history. These are written discovery requests made to both the collector and the lender. Examples are the Request for Production and the Interrogatories.

Summary judgment, an attempt to get an early win, is a common move in lawsuits. Some suits can be resolved in six months. Others can go on for 3 years and beyond. Many claims never get to trial at all, and many lenders don’t want to be in court either.

Does your contract give them a right to make you arbitrate? Or the option to choose it? LoanMe has tried it before (Mendez v. LoanMe, 2020, it moved to compel arbitration). Your lawyer can read the contract and tell you whether it’s there or not.

In 2018 the California Supreme Court issued a ruling in De La Torre v CashCall that said that rates on consumer loans of $2,500 or more, issued by a licensed lender under the California Finance Lenders Law, can be challenged for being ’unconscionable.’ That is, any interest rate that ‘shocks the conscience’ may not be enforced against the borrower. CashCall had issued unsecured loans of $2,600 at an APR of 96%. Later loans carried 135%. The court held that borrowers could claim that the lender was engaged in unfair competition, which is actionable.

To be an unconscionable interest rate, it must be ‘so harsh as to shock the conscience’. It must be unjust, unreasonable, and unduly oppressive. The court also said that higher rates on high-risk unsecured loans may be acceptable.

AB 539 caps annual interest rates at 36% plus the Federal Funds Rate for consumer loans in California of $2,500 to under $10,000. The Federal Reserve publishes it in the H.15 release. The rate used is the rate on the first day of the month before the loan was made. Each of these rules covers consumer loans only and cannot be relied on directly by a business borrower.

Even so, courts have recognized unconscionability defenses to a business loan contract. The defense is that the deal was unfair, or the terms are very one-sided. It can be a trickier argument to make, but it is more often seen in MCA cases, with very high costs.

Settlement

Whether LoanMe will settle depends on the stage the dispute is at and the strength of the defense. A good defense makes them offer more to settle. A settlement is possible at any stage before the case is decided, but filing the Answer gives the lender reason to believe you will put up a fight. They may well prefer to negotiate rather than put up the money for their lawyer and the time in court.

The lender can accept a lower amount in exchange for avoiding the risk and cost of a trial. Your business may accept a payment plan instead of a judgment that might empty its bank account. The negotiations may work out a reduction in the balance owed, a payment plan, mutual releases, and a dismissal of the case. Part of the negotiations will be seeing that these are included in the release papers. It is possible that Rule 408 of the Rules of Evidence may prevent using the offer of settlement to prove that you owed the money.

Some companies use a forbearance agreement as part of a workout. This is a formal written agreement by the lender to delay their legal options (lawsuits and foreclosure) for a set time while you make agreed payments. They have strict conditions and breaking one can give them a quick path to legal action.

When a settlement forgives a part of the debt, the lender reports the canceled debt on a Form 1099-C. That can mean that the canceled debt is taxable income. There are exemptions, though. They include debts discharged in bankruptcy or ones canceled when the debtor was insolvent.

A good resolution for many debt disputes is for the court to let you pay on a plan. In California, if a judgment is entered in a limited civil case ($35,000 or less), you can ask the court at any time to let you pay in installments.

Bankruptcy is a separate process, but once it starts by the filing of the petition, most other legal processes come to a stop. Bankruptcy law creates an “automatic stay” that stops most lawsuits, levies and garnishments in progress at the time. Chapter 11s allow the business to keep operating while they restructure. Chapter 11 is expensive and slow, but Subchapter V is a new, streamlined version of it for small business debtors under a ceiling. Note that in some cases a bankruptcy filing does not end a lender’s ability to collect from the business owner personally.

Knowing you owe money can make you think about moving money or assets to keep them out of the creditor’s reach. LoanMe will see this as trying to avoid paying. It’s called a fraudulent transfer, and it can add to your liability, not take it away. Fraudulent transfers are barred by law and can be reversed by the court.

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.