Splash Funding Litigation: 5 Reasons Default Judgment Is the Real Risk

The small business owner who finally gets sued by a funder like Splash Funding often needs to answer the same question: do I have a good enough defense to fight this case and win, and should I take the risk of fighting it? A lawsuit isn’t the reason to worry about an unpaid merchant cash advance. You can defend it. It’s the default judgment that’s the problem, if you never answer the summons and complaint. Answering on time keeps your defenses and gives you leverage, which you lose as soon as you miss the deadline.

1. The clock is short

The court will give you only a set amount of time to answer the complaint and you have to answer on time. The law assumes you have some defenses, and it gives you the right to present them to the judge. But you have to tell the court you want your day in court, which you can only do by answering the summons and complaint. One way or the other, you have to take some action, and you have to do it before that clock runs out. If you miss the deadline, you might never get to tell your side of the story to the judge.

If you are served personally in New York, that’s twenty days. If you are served in a special way that New York allows for a business outside the state, it’s thirty days after service is complete. In federal court, a defendant gets twenty-one days, which runs from the date the summons was served. If you don’t file an answer or appearance, the funder can ask the court for a default judgment. In federal court, if the funder sues for a set amount of money and the defendant doesn’t appear, once the funder asks and files an affidavit of the balance due, the clerk must enter judgment for the plaintiff.

2. Your company cannot answer alone

You may be sued in New York state courts, even if your business is located elsewhere, since most merchant funding agreements are written under New York laws and then call for New York State courts to have jurisdiction. One of the first things you will notice about the summons is that the company that sent you money, which you did not pay back, has sued you personally as well, if you signed a personal guarantee. The personal guarantee is a contract that tells how much the guarantor could pay, and if the business has a good defense, it can help the guarantor too. In New York Supreme Court, a corporation cannot defend itself or represent itself in court. That means you need a lawyer, because your lawyer is your company’s voice in court.

3. Default buries your defenses

A default judgment deprives you of any defenses you could have raised, since you ignored your chance to file and answer the complaint and prove you should win. For example, the agreement can call the deal a purchase of future receivables, but that will not stop a court from treating the cash advance as a loan. If a judge finds a reconciliation clause does not function to treat the deal as a true sale of receivables, or finds the advance is not really a purchase of receivables, and is really a loan in disguise, the court could apply usury laws to the contract. In New York, charging more than twenty-five percent interest annually is criminal usury. The state’s highest court has held that a corporation sued over a loan can raise criminal usury as a defense, and that a loan above the legal limit is void.

Another risk is a confession of judgment. To be valid under New York law, a confession of judgment must be filed with the clerk of the county where the defendant was living when signing it, or living when the judgment is filed. A business lives where it has a place of business. Without a place of business in New York, there is generally no place in New York to file a confession of judgment for a defendant who lives outside the state.

But was the supposed default actually a default? Can a funder claim there is a default when it failed to respond to repeated reconciliation requests? Are fees counted twice? A case can turn on the question of whether a breach happened under the agreement itself. You don’t get all those rules for free, though. They are only there for you to use if you answer the lawsuit.

4. A judgment has teeth

A default judgment can be a deadly setback for the business owner and ruin a business, because New York judgments can grow with interest at nine percent per year, long after they are filed. On top of that, the judgment creditor can throw your bank a restraining notice to freeze your account. That could be money your company relies on to make payroll. The restraining notice freezes up to twice the amount of the judgment, which can sit there for a year. It can be lifted sooner than that, if you pay or vacate the judgment. A money judgment in New York is presumed satisfied after twenty years. A written acknowledgment of the debt, or a payment by you, can restart the clock for another twenty years.

5. Undoing it is harder

If you want to try to turn it around, that’s called vacating the judgment. In New York’s civil practice law, a motion to vacate a default for excusable default must be made within one year after you are served with the judgment and written notice of entry. If you were not personally served and did not get notice in time, you may be allowed to defend within one year of learning of the judgment, but not longer than five years after entry of the judgment. You would have to have a meritorious defense. You are pleading for the court to forgive your mistake and give you another chance. Judges do not have to give you another chance.

Merchant cash advance cases often end with a negotiated settlement. The strength of the defenses to the contract matter a lot. A business that answered and registered defenses before the deadline is in a very different position from one that defaulted. At first it can be tempting to avoid contact with the funders. Eventually, it turns out to be smarter to return fire with an answer that preserves your options.

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.