Sued by Diamond Stone Funding: 7 Things That Happen Next

Once Diamond Stone Funding issues a lawsuit against your business, the race against the clock is on. There are immediate deadlines which your case starts to bring. You need to quickly comprehend all the legal paperwork sent to you so you can track all of your responses and court hearings. Your and the company’s bank accounts could be frozen. You could get a court judgment against your business.

1. Confirm it’s a real lawsuit

In the flurry of a normal week, sometimes it’s easy to lose sight of the difference between a lawsuit and the earlier (and more easily forgotten) run-of-the-mill credit collection demand letter or email. A demand letter or collection email is not a lawsuit. A “judgment” is not a lawsuit, but it can follow a lawsuit. So carefully record what the summons and complaint say and keep them all together (along with the envelopes). Look for proof of exactly who filed the lawsuit and what names were used for the defendants and which court system it’s been filed in. Record the date each person was served, how they were served and by whom.

2. The response clock starts

The countdown on the critical first response starts right away, according to the rules in whatever court system the case is filed. The exact deadline also depends on the papers. For example, New York Supreme Court’s civil lawsuit timetable calls for a responsive pleading within 20 days if service was made in person within New York, and within 30 days of completed service in any other circumstance, including leaving the summons and complaint at a business. Don’t assume that calling up the funder or getting into settlement talks will extend that deadline for you. If you miss a lawsuit’s deadlines, you could find yourself unable to challenge the allegations in the lawsuit.

3. Your lawyer tests the court

One of the first things a lawyer checks is whether service of the complaint really went to the defendant in the correct legal way. What jurisdiction over you does that court have? Did they name the right people and companies as defendants? What does the agreement’s governing-law clause call for? All are key questions you won’t know to ask on your own. Now is the time to look for any agreements with the lender that require arbitration. And even if you’re outside of the location where the funder filed the lawsuit, that doesn’t necessarily mean the court can’t get jurisdiction over your business.

4. The balance gets checked

Gather the funding agreement, payment history, ledger, checks, receipts, statements, amendments and guarantees. Go over the payment history and compare all that to the complaint and lender’s calculations. The lender’s complaint just recites the balance; it does not prove it’s accurate. Look to your own books to find out if that’s the right calculation. There are a lot of different types of legal right you could have that can be up for grabs in a lawsuit, but your argument is still going to start at arithmetic.

One of those rights can turn on this: what’s the difference between calling something an advance and a loan? A New York Appeals court has decided state courts usually look at three key points to see if a business funding deal really is a loan and the owner must repay it: Did the financing agreement have any reconciliation clause? Does the lender have a limited time to let the borrower repay? Can the lender collect the balance from the borrower if the business goes bankrupt?

Why it matters: in New York, the criminal usury cap is 25% a year, and a top court case said corporate loans over that cap are void and the lender can’t collect principal or interest. The courts will look closely to see what form of protection for the funder the deal set up, how they crafted the contracts and what any reconciliation clause there is says.

5. Pressure outside the courtroom

You’re going about your business and, out of the blue, your bank account is frozen; payments that came in aren’t deposited. You hear about letters the funder sent to your customers. Now you need to go through and find out, first, just what the funder did and what the record of it is and how the state where it happened defines this maneuver. Check any paperwork; a UCC filing is not a freeze, a notice of assignment of your accounts receivable is not a freeze; a subpoena to the processor is not a freeze. Not every note you get sent with a lender’s name in the letterhead on it means that lender now has a collection right over you and against your customers.

Just hiring a lawyer doesn’t unlock accounts automatically. Get legal advice before you move accounts or close an account. Before you switch processors, redirect funds or move assets, know how the agreement describes the event and know if changing those will make things worse.

6. A judgment, if you wait

The road to a default judgment is short. If a timely answer isn’t filed on behalf of all the defendants, the lender can apply for judgment. In New York, the balance grows at 9% a year interest and is a lien on your real property for 10 years, renewable. Waiting out the case or hiring a lawyer later when the lender has already picked up a judgment puts you behind in defending or undoing the judgment and then dealing with its consequences. If you’ve gotten this far, you need professional advice without delay.

Confession of judgment clauses aren’t the sure thing for lenders they once were. A confession of judgment is a written promise that says if you fail to make the required payments, the other side can ask the court to pass judgment against you. New York law used to make confession of judgment clauses for people outside New York pretty useful, because the county clerk would enter it without a suit. An August 30, 2019 change put a stop to that.

7. Settlement is on the table

Settlement of a business law case is possible, but it may have to be more than just your best-guess down payment. Your company may have defenses to the claims the lender made, but there may be other circumstances pointing toward negotiation instead of litigation, no matter how strong the defenses. Weigh any offer against your defenses, overall cash flow and the case schedule. It also depends on your other business debts. If the lender offers a lower payment, that offer doesn’t mean you won’t still owe the rest of the money. But just cutting a settlement deal without looking closely at the terms can be a time bomb.

Be sure to get it in writing and then be sure to read it. Also look at the payment plan for its due dates, payment methods, total to be paid and what companies it covers. Make sure all of the original defendants from the lawsuit are covered. If an owner signed a guarantee, get a release for it too. Ask how dismissal of any lawsuits works. Check for a full release of the UCC filings and of the notice letters to your customers. And watch to see if the settlement agreement sets a future nonpayment deadline that could restart the lender’s ability to get judgment.

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.