Sued by Bsf Capital: 7 Things That Happen Next

Some of the things that happen are probably inevitable. Some are completely avoidable but nevertheless common because companies sued for a default on a merchant cash advance just don’t know enough about how litigation works, or they are relying on “common sense” that applies to everyday legal matters, but not to something as serious as a merchant cash advance lawsuit. The bad news: if you ignore the lawsuit and do nothing, you can get defaulted in court and so lose much of the power you had to defend or settle the lawsuit. Here are seven things that, in general, will happen as a result of your lawsuit.

1. The papers arrive

If you get a notice that you are being sued, save everything related to the lawsuit, including envelopes and receipts that were mailed with it, as well as any emails associated with it. Take notes on when and how the papers were delivered and keep them with the papers. Be alert to who the plaintiff is, who the defendants are, which court it’s in, and the case number. Collect anything to do with the transaction described in the lawsuit: contracts, agreements, anything signed, any guarantees, anything involving any co-defendants, along with anything showing payments and costs associated with the deal. Keep in mind that a demand letter is not a lawsuit.

2. The clock starts

The deadline to answer the lawsuit depends on which court, which state it’s in, and how you were served. In the State of New York, if you’re sued there and served in person in New York, you have 20 days to appear; if service is any other way, you have 30 days after service is complete. Calls or settlement talks with the funder do not extend your deadline. An attorney needs to carefully read the summons, the proof of service, the court rules, and any orders.

3. Someone tests the numbers

A good attorney will start by getting a copy of your full agreement and comparing it to the allegations in the lawsuit to see if what’s in the lawsuit matches what you have. An attorney or bookkeeper needs to gather all statements showing what was advanced, collected, and credited. Is the “principal balance,” “default balance” or some other “balance” the right one? An amount demanded in a letter is just that - a demand, but not proof of a fact. No defense comes automatically.

Then look at what actually happened during the agreement, beyond what’s in the contract. In particular, look to see whether your revenue dropped or there was some clear reason why and whether you asked for an adjustment. If so, the funder’s failure to take action there might be an issue. Saying it’s an advance does not make it one or calling it a loan does not make it a loan.

4. The fight over where

An important but often-overlooked part of the lawsuit is where the court case is. Was there an agreement for a court of a particular state? There may be a choice-of-law clause that affects what state law will apply. Should this case actually be in arbitration? Check the agreement and any addenda that change the forum or choice-of-law clauses. Ask your attorney to look at the proof of service as well. For example, New York State courts can have power over out-of-state businesses under certain circumstances. These jurisdiction issues need to be checked right away.

5. You may be sued personally

If you are personally named in the case, along with the business, the owner’s separate legal position and defenses must be considered. Particular attention must be paid to find every guarantee and review exactly what conduct triggers the guarantee. Equally important is knowing if it’s an unconditional guarantee of payment or a performance guarantee. If you gave the guarantee separately, get a copy of that too.

6. Pressure on your money

If a funder (or anyone) freezes an account, get a copy of what document caused the money to be frozen. If a payment company like a credit card processor starts holding onto your money, find out what document authorized it. If there are collection letters to your clients, get a copy of the actual letter. A UCC lien notice is one thing. An assignment notice is something else. A mere notice is not proof. Before touching anything, you need to find out exactly what kind of demand or order this is, what bank, and what account is affected.

New York banks served with a restraining notice must freeze non-exempt funds up to 1 year, or until the judgment amount is paid or the judgment is vacated by the court, whichever comes first. UCC liens from MCA lenders usually expire after 5 years. Better not move money around or sell assets without advice.

7. A judgment, or a deal

A default for not answering a lawsuit on time may be able to be corrected if prompt action is taken. In New York, a motion to vacate a default for excusable default has to be made within one year of the date that you were served with a copy of the judgment and the notice of its entry. Since 2019 in New York, an acknowledgment or affidavit of confession of a judgment, in order to be valid, must be filed in the county where defendant resided when it was signed or when it was filed. In New York, a business resides where it has a place of business.

Before settling a lawsuit, find out what defenses you have in the case and look at the immediate financial impact of a settlement. Sometimes a low monthly payment means the balance stays high. When a settlement agreement is being drawn up, it should spell out exactly how much is to be paid, on what dates, which claims are settled, whether any related personal or co-signer guarantees are being released as well, which court case is being dismissed, and which of your UCC liens and restraints will be released. The agreement should address what happens if a payment is missed.

Taking prompt action and thoroughly reviewing the agreement can make the difference between success and disaster. Remember that you have rights. But just the same, when a lawsuit comes through, please, don’t ignore it.

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.