Served by Biz2Credit? 5 Deadlines That Decide the Case

Being sued is scary and expensive. It is hard to deal with while running a business, but the first thing to know is simple. In New York state court, depending on how the papers were served, your business has only 20 to 30 days after being served to prepare and serve its answer to a lawsuit. Once that time passes, a creditor like Biz2Credit can seek a default judgment that condemns both the business and any owners who personally guaranteed repayment. But it is only the beginning, because the case continues after that, and there are several other dates that can make a big difference in the outcome.

Why New York? It is common for business funding agreements to say that they are governed by New York law and by the jurisdiction of the courts of New York. Even if your business is in Texas or Florida, a funding company can sue in New York Supreme Court. To make matters worse, the lawsuit usually names your business and every owner who signed a personal guarantee.

1. The answer deadline

The answer deadline is critical and should be the first date on the calendar. You must count 20 days if handed the papers in person, or 30 days for out-of-state process.

If the funder sued in federal court instead, the clock is different: you have 21 days after being served with a summons and complaint to file an answer; or if the summons had a waiver request with it, you have 60 days from the date the waiver request was sent to file an answer, as long as you waived formal service on time.

A proper defense has to be raised in your answer, and your answer has to be on time, to keep your business defenses alive. Some funding deals in fact are too expensive, or are not a loan at all, or do not go into default for the reason stated in the complaint, or are not in default at all. Whether it is really a loan is a major question. The courts look for a working reconciliation provision, a finite term, and recourse if the merchant goes bankrupt. An interest rate on a loan above 25 percent a year is criminal usury in New York and such a loan is void.

2. A summons with no complaint

Some creditors will sue with a summons but not file the complaint right away. This can be confusing. You can serve a written demand for the complaint. Make sure to do it within the time you have to appear in the case. When you do it right, the funder is then required to serve you with a complaint within 20 days.

3. The confession of judgment

Many financing agreements have a confession of judgment that authorizes the funding company to collect if you default. Effective August 30, 2019, New York clerks can enter one only in a county where the business has a place of business. Thus an out-of-state business generally cannot have one entered in New York. So it may be important to know where you had a place of business when you signed the agreement, and whether you still have one there at the time of filing. What is more, the confession of judgment must be filed with the court within three years after the affidavit is signed.

4. The default judgment clock

If the business does not file an answer, the funder can get a default judgment. But the court must dismiss the complaint as abandoned if the funder does not seek a default judgment within one year after the default, unless the funder shows sufficient cause for the delay. If the business was served through the Secretary of State, the funder must first mail an extra copy of the summons to its last known address at least 20 days before judgment is granted.

5. The one-year window to undo a default

Even a default judgment is not the end of the line for the business. To vacate a default judgment for excusable default, you have to make your motion within one year after being served with the judgment and written notice of its entry.

Freeze the Debtor’s Account

Once a creditor gets a judgment, the creditor can freeze the debtor’s account by serving a restraining notice on the bank. Such a notice is effective for one year unless the judgment is satisfied or vacated sooner. Funders also often send notices to your customers or payment processors to demand that the payments be routed to them instead. But you can challenge those notices, and the timing matters.

Many of these cases end in a negotiated resolution. A business that fails to answer and gets hit with a default is in an entirely different position when the creditor calls to negotiate.

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.