Pdm Capital Litigation: 5 Reasons Default Judgment Is the Real Risk

PDM Capital, a merchant cash advance funder, shows up on one law firm’s list of funders it has sued or settled with, though no public court filings for it turned up. There is a popular assumption that MCA lawsuits are easily settled and, therefore, hold no real risk. This is not true. Failure to take any action in a lawsuit, including not serving an Answer, can result in the court entering a default judgment against the merchant. That judgment can then serve as the basis for freezing the merchant’s bank account, or some other collection activity. The full reality is that default judgment presents a far more serious risk than most merchants would like to believe.

1. The answer deadline is short

The merchant only has 20 or 30 days to respond to the lawsuit (in New York, depending on how you were served). Many of you will fail to recognize the date you were legally served with the lawsuit until it is too late to effectively respond. Usually, that recognition only comes when the bank account is frozen.

For New York corporations, the process server can deliver the summons and complaint to the Secretary of State. The law requires the funder to also mail a copy to the corporation’s last known address at least 20 days before a default judgment is entered.

In New York, a corporation is required to be represented by an attorney, and to answer to a lawsuit through that attorney (except for lower courts handling small-claims-type matters). By contrast, in a federal court, the defendant gets twenty-one days to answer after formal service of process. If the corporation does not appear, then there is a risk of a default judgment being entered against it, with all that implies.

2. Nobody checks the numbers

A default judgment is based on what the other side claims is owed. In an MCA lawsuit, that typically means the total amount the contract requires, plus court costs and legal fees. The number they come up with may simply be wrong in many different ways. This could lead to a larger judgment in the end.

When the suit is in federal court for a sum certain, and the defendant never appears, then the clerk will enter a default judgment on request and affidavit. No hearing is needed. Once entered, a business judgment in New York accrues interest at the rate of nine percent a year.

3. It unlocks enforcement

Once there is a default judgment, then the creditor now has certain rights. It may obtain a Writ of Execution and take bank funds, personal funds, or other assets of the defendant. A judgment creditor can also conduct depositions and force you to turn over documents under oath, among other things.

In New York, the creditor’s attorney can send a restraining notice to your bank, without any court order at all. The account can remain frozen for up to a year, and banks tend to comply with restraining notices almost instantly, leaving you without access to payroll or funds needed to pay vendors.

4. It is hard to undo

Once a default judgment has been entered, and especially after it has been enforced, it is hard to undo. In New York, the defendant has the right to move to have the judgment vacated. But courts can be very picky when it comes to default judgments and may require the defendant to explain in detail the reasons why it failed to answer the case when the complaint was served on it. For an excusable default there, you will have one year from service of the judgment. The time limit in a federal court is set by the rules and runs for a reasonable time, never more than one year after the entry of the judgment. That, of course, presupposes you even find out you have a judgment, and do something in a timely way. This is no time to wait.

There is no simple way to wait it out, since the New York statute presumes a judgment is paid only after twenty years, and the clock can start over on payment or a signed written acknowledgment by you. It may be possible to have the judgment vacated, if the defendant was not properly served. This is in fact a common ground to vacate a judgment.

5. It flips the leverage

If you chose to settle out of court or to fight the case on the merits, you had a degree of leverage in shaping your outcome. After judgment, the creditor gains an ability to push for bigger settlements, or to demand a full recovery.

A motion to vacate the judgment can bring the funder back to the table, if it seems you have a real defense to the claim or have some procedural hook you can use. One can never promise an outcome, and this is not a guarantee of success, but it can be done.

The First Few Hours Count

The first few hours count. You need to pull the judgment, and read it, the entire docket, and everything that was filed to back it up. In particular, you need to look at the proof of service and see if that matches what actually happened, since it is a major area of error. You also need to calendar every deadline, and stay on top of what is happening with the case. The worst possible move is to try to negotiate on your own.

The upshot is never to ignore a lawsuit, and never to give the other side a judgment by default. Once you are on notice of a lawsuit (i.e. once you have been served), seek legal counsel for that case without delay.

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.