Ein Capital Litigation: Why Default Judgment Is the Real Risk

A business sued by EIN Capital, a merchant cash advance funder, may have much bigger problems if they never respond. The real danger when you are being sued is not that you’ll lose, but that you won’t respond. That means a default judgment, and the plaintiff gets everything he asked for without even having to hear you out. That default judgment can be used to get collection efforts started on your bank accounts almost immediately.

Default judgments are easy to get. A court defaults the other side if they fail to respond in time to the complaint that was filed and served on them.

You may want to know if this funder is bluffing when he says he’s suing. How do you know it’s a real lawsuit? If you have received a letter from a lawyer saying you are being sued and you’ve gone out to the clerk of the court and verified it’s true, that is no bluff.

You have twenty days to respond to the summons if it was handed to you in person. If it was handed to another person on your behalf or you received it through the mail, you have thirty days to respond to the summons. You are required to respond in writing to this complaint or petition.

Your New York corporation can’t represent itself in a case where you’re sued - you need to hire a lawyer. A corporation is a “person” as far as the law is concerned. It can do things and buy and sell like a person. Just because you own that “person,” that doesn’t mean you’re the same as it - and you aren’t qualified to represent it in a case where it’s sued.

Even if you think you have a solid argument or dispute the amounts claimed, don’t wait to get an attorney. You don’t have the luxury of investigating or arguing first. Your first priority is finding a business lawyer to represent you in court. If you wait, you could forfeit the right to be heard in court. Gather up all the contract papers, correspondence, credit application, monthly statements, loan application and all payment records - for your lawyer.

What can happen if you don’t respond on time? Every claim against you is considered true, whether it’s right or not - because no one can raise objections. It doesn’t matter if you would otherwise have a winning defense. It doesn’t matter if your defense justifies part of what’s claimed. You don’t get a hearing on your side, because your side of things is “deemed” to be not worth hearing.

Thing is, EIN Capital doesn’t need to come into court to get this judgment - which gives it a leg up on collection options (garnishment, lien registration, seizing property in an execution). If you don’t respond, the Clerk can make you pay every dollar you owe, plus nine percent a year interest, and other expenses, if they’re identified in the forms. If what’s due isn’t fixed, the plaintiff has to go to a different hearing. That hearing will assess (figure out) what the right amount is, and after that, the money judgment will be entered. It’s still important to have a lawyer representing your side if the amount due isn’t fixed. Otherwise you’ll have no way to object to the amounts claimed, even if there are valid and important objections.

Restraining Notice

After judgment, the attorney representing EIN Capital can send any New York bank a restraining notice on his own initiative. No court order is needed. When the bank gets it, everything from your account up to twice the amount of the judgment can be frozen. Any funds that were locked up stay frozen until a year after the notice is served, unless the judgment is paid or set aside (vacated). Judgment debtor examinations, garnishments, liens and executions can follow.

This is where even smart people get caught up. They have the cash to meet their payroll or pay their suppliers. They actually have enough in their business account to pay off the entire judgment. But their bank gets slapped with a restraining notice to freeze their accounts. And it doesn’t matter to their bank that they need some of that cash to cover payroll and pay their suppliers.

Collection lawyers are not afraid to issue restraining notices to every bank you use. All checking accounts are fair game. Rent tenants owe you, brokerage accounts and cash in PayPal accounts get snatched too. The money that was frozen in your bank accounts will be applied to the judgment. The judgment creditor can have the sheriff put things up for sale at public auction. That stuff can include your interest in property, money in the hands of a third party like a customer or client who owes you money, or even your stake in your business.

After winning a lawsuit, the creditor can file the judgment in the clerk’s office. It becomes a lien on any real estate you own in that county. The lien lasts for ten years. Until that lien expires, or the judgment gets paid, you won’t get clear title to your property when you sell it - and refinancing or selling that property can be difficult, if not impossible. Default judgments also look bad to lenders when you’re trying to find financing, which isn’t much of a surprise.

A Confession of Judgment Clause

Some merchants never get sued to begin with. A confession of judgment clause in a contract is something the other party can use if there’s a claim against you. They can skip suing you. You admit you’ll owe money if they meet some standard set in the agreement (like missing payments). When you don’t pay, they can file that confession in the county clerk’s office. If that’s done right, the clerk will enter a judgment against you. There’s no lawsuit, no notice of lawsuit, no right to defend yourself. That judgment affects your credit score, and can open the way for garnishments, liens, restraining notices - the whole megillah.

The oath needed for confessed judgments has to include: the sum due; it has to authorize judgment for that sum; it has to say what county you live in; and a brief description of how the money came to be due. If you signed the confession of judgment too long ago, the creditor may be too late to file it. It must be filed within three years after you sign it. A judgment confessed on these terms can be filed in the county clerk’s office in your county. Your business “lives” where it maintains a place of business.

New York used to let EIN Capital file these cases in any county they wanted, even for owners who lived outside the state. But no longer. Cases are now filed where the signer of the confession lives. Just because you have a business interest in another state doesn’t mean you’re exempt from the consequences of the judgment against you. Even if a New York judgment doesn’t reach assets in another state automatically, it can be enforced there by registering (domesticating) the judgment in the court system in that state.

Vacating a Judgment

Sometimes you can undo a default judgment. Make sure to follow up quickly on this, since you only have 1 year after the judgment is served with written notice of entry to object. If more than a year has passed, your options are much more limited. You will also need to make an argument why you have a “meritorious defense” to the case the plaintiff brings. The consequences of not acting, which might include things like having your bank accounts restrained, can be far more harmful than the bad things you’re anticipating.

If your answer’s late because you weren’t served with the complaint, you can apply to defend the case anyway. But when a judgment has been taken against you without giving you a chance to defend, you can raise objections if you can show a meritorious defense within a year after you find out about it. The court can “vacate” the judgment (undo it) even after it’s filed, if it’s no later than five years after entry. Bring it on the ground of lack of personal jurisdiction because you weren’t properly served with a summons and complaint.

It’s not a given that the court will undo the judgment against you, even if you try. You will probably need an attorney. Vacating a judgment costs money and it will probably be more expensive than simply answering the lawsuit would have been. If the court undoes the judgment against you, the case continues as if you were never defaulted. You can serve an answer in the case.

Default judgments are a pain to deal with. They don’t win the war for your creditor though. If you have money to pay it, you can still negotiate with your creditor after the judgment. You may be able to negotiate a deal with them for less or a payment plan. Whatever you do, get the judgment satisfied and make sure they file satisfaction of judgment with the clerk (so a lien can’t be enforced).

If you can’t negotiate, you could possibly stop a restraining notice by filing bankruptcy. Once the bankruptcy is filed, the creditor is blocked from continuing collection action against the debtor’s assets. Bankruptcy puts a hold on the lawsuit.

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.