Sued by Gibraltar: 7 Things That Happen Next

A lawsuit is not the end of the world, it’s the beginning of a process. Your time to respond is limited. You need to answer the lawsuit to prevent the lender from taking a default judgment against you. If you do nothing, Gibraltar might win. That means Gibraltar gets judgment and can go after your bank accounts, property, etc.

1. The clock starts

When you’re sued, a legal clock starts ticking. Read the summons carefully, with a highlighter. It should tell you how much time you have to respond. In New York, with in-person delivery, you generally have 20 days to answer the complaint after you’ve been served. Some other methods allow longer. In federal court, you generally have only 21 days. Whatever your time limit is, mark the date on your calendar. Whatever you do, don’t wait until the last minute.

2. Missing it means default

If you don’t file a written response within the time limit, Gibraltar can ask the court clerk for a default judgment. The clerk can then enter a judgment against you for the amount of debt Gibraltar claims you owe, plus interest and court costs, without a hearing. Once served with the judgment and notice of entry, you have one year to ask a judge to cancel it. So there’s still time to stop it, but you’ll need a good excuse.

3. A confession of judgment

A confession of judgment, unlike a default judgment, isn’t an accident. If you signed an admission that you owe the debt, also known as a confession of judgment, the lender can ask the court to issue a judgment and declare that you are responsible for the debt. In New York, a confession of judgment can only be filed in the county where you lived or had a place of business. It must be filed within three years after you signed it. Read your credit agreement carefully.

4. Your customers get a letter

With a security agreement, such as with a business loan, the lender can swoop in and tell your clients they need to pay directly instead of paying you if you default. If that happens, you might lose the very customer revenue you need to dig yourself out.

5. The usury argument

In the New York court case Spin Capital, LLC v. Bridgelink Engineering, LLC, the business borrowers stopped paying and defended the case by saying it was a criminally usurious loan. The appeals court finally rejected this argument, saying “where there is no loan, there can be no usury.”

The judges asked if the repayment was absolute and whether it depended on how the business did. Courts generally weigh three questions. Is there a reconciliation clause? A finite term? Recourse if the merchant goes bankrupt? If the repayments were adjusted by receipts, the term was indefinite. And bankruptcy wasn’t a default. This meant it was a purchase of receivables.

So pull out your own agreement. Courts judge a deal by its real character. And not by the name or form the parties gave it. Is the funder entitled to repayment absolutely? Under all circumstances? If the funder isn’t absolutely and unconditionally entitled to repayment, it is not a loan.

6. The guaranty follows you

If you had to sign a personal guaranty, the lender can try to pursue collection against you personally. That means your personal property can be at risk. In the Spin Capital case, a financing company bought $7.5 million of future receivables for just $5 million. Two guarantors signed a personal guarantee. The business paid a total of $210,000, then debits started bouncing and the account was closed. The court ruled against the business and guarantors, finding there had been a breach of contract and the guarantee. A judgment was entered against the defendants for over $8 million. The appeals court agreed.

7. Collection after judgment

A judgment sets off a chain reaction. A restraining notice can freeze your bank account for up to twice the amount you owe. The freeze could last a full year unless you pay it off or vacate the judgment. The amount you owe grows by 9% a year, and if the judgment is docketed, it’s a lien on your real property in that county for ten years.

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.