MCA Fixed Payment Filed Suit: 7 Questions to Answer Before You Respond

1. Is it a filed lawsuit?

First, confirm that it is a legitimate lawsuit. It could be a demand letter from a lawyer or collection firm. It is important to know what type of document you are receiving, as it affects how you are to respond.

Don’t throw anything away. Keep every scrap of paper - including the summons and complaint, all exhibits, all envelopes, all e-mails, notices from the court, notices from your bank and processor, everything - that has anything to do with the case, particularly anything that has to do with how you found out about the lawsuit. Make sure you know who the plaintiff and defendants are. Make a note of the name of the court and the case number. Write down the date and time that you received the papers. Also, note how the papers were served to you (in person, by mail, etc.).

2. When is your deadline?

The specific deadline will depend on the court and how you were served. Know what the deadline is and know how to count the days correctly. Missing the deadline could lead to a default judgment against you. When in doubt about a deadline, assume that the deadline is immediate.

In New York State courts, you have 20 days after service to appear (answer, notice of appearance or motion) if you were handed the summons in person anywhere within New York; or 30 days after service is complete to appear if the papers were left with someone at your home or business (and mailed to you). In Federal Court, you have 21 days to answer.

Settlement talks don’t buy you any extra time in court. Even if you think service was defective or the claim is wrong, you still have to follow the court deadlines. Call the funder, apply for new financing, or initiate settlement talks if you wish, but also keep acting as if the case is full steam ahead in court because it is.

3. Who was sued, and where?

Look at the caption on the complaint and summons to see who the plaintiff is, who the defendants are and in what court the case is. There may be one or several defendants. An individual, the corporation and the LLC may all have to respond.

The question is whether the case is filed against you in your individual capacity or the company’s corporate capacity or both. If you have any doubts as to whether New York is the proper forum, talk with your lawyer right away. Moving a case is not an easy task and is not automatic. Do not delay the work on your case with the hope that a transfer will occur. Assume that the case will remain where it is and act accordingly.

4. Is it really a loan?

Some companies make cash advances that they claim to be purchases of receivables, not loans. But these deals are not always the receivables transactions they are claimed to be. To know whether it is a loan or not, you need to read and analyze the documentation.

A New York appeals court tackled this question in LG Funding v. United Senior Properties of Olathe in 2020. In general, the court said, it usually weighs three factors: is there a reconciliation provision, is there a finite term, and will the company have recourse if the business goes bankrupt.

In that case, the terms allowed the funder to adjust payments at its “sole discretion” and the agreement counted bankruptcy or admitted inability to pay as default. The contracts also included a personal guaranty and a confession of judgment. The court said the agreement showed the funder “did not assume the risk” of low or no revenue to the business. But there remained questions of fact to decide on whether the arrangement was usurious.

For you, the reason usury matters is that in New York, it is a crime to charge interest over 25 percent a year on loans. While a corporation generally can’t claim usury as a defense, it can raise criminal usury. And a loan that charges criminal usury is void, meaning the lender is not entitled to any of the principal or interest, the New York Court of Appeals decided in Adar Bays in 2021.

But in LG Funding the appeals court said criminal usury is a defense, not a counterclaim. In another case, Crystal Springs Capital v. Big Thicket Coin, a New York appeals court vacated the default judgment on a loan that allowed fixed daily debits of $4,000 with no duty to reconcile. The court held that was a criminally usurious loan, and threw out the case altogether.

5. Do the numbers hold up?

Check the numbers on the complaint against your records. Ask whether they factor in payments that were made. Are the amounts due in line with the agreements? Is it just the amount you owe, or does it include late fees and charges? Don’t assume that the lawyers have done the math correctly.

In addition to the agreement, you need all the amendments and the payment records. If you tried to ask for a reconciliation, you need the paper trail of that, and any bank statements and other records you sent. How did the funder respond to your requests?

6. Is there already a judgment?

If you missed the answer deadline, the funder may already have a default judgment against you. A default judgment does not mean you cannot do anything. But any motion to get rid of a default must be made quickly.

In New York, a motion to vacate a default for excusable default must be filed within 1 year after the judgment with notice of entry is served. And even then, there is no guarantee it will be granted. As for a confession of judgment, since a 2019 amendment to the law, the document must be filed in New York only in the county where the defendant lived or had a place of business, which has ended its use against out-of-state merchants.

7. Defend, settle, or hire counsel?

If there is no default judgment, your choices are to defend the case, try to settle, or do both. Defending a case can include both motions and discovery requests, in addition to an answer. The answer can raise one or more defenses, as long as each one is stated with factual support. A motion to dismiss is a possible tool, but there are other kinds of motions, and it isn’t always a required first step.

Settlement involves compromising. You may have to pay some of what the funder is demanding. But before you sign, check these points: the total amount and the payment dates; the credit for money already collected; which businesses, people and agreements are covered; the release of personal guarantees; how the suit is discontinued; and what happens if you miss a payment.

In the end, you have to decide how you want to handle the suit. Which choice is best for you depends on the unique circumstances of your business. The best way to decide is to talk to a lawyer who knows your options, rights, and risks and has a record of handling cases like this in the state where you need help.

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.