Sued by Merchant Advance LLC: 7 Things That Happen Next

If you are being sued by Merchant Advance LLC, you probably want to know what to expect next. You need to take this situation very seriously. Unless you respond to the lawsuit, you could have a judgment entered against your company. A common misconception is that “ignoring the lawsuit will make it go away.” This can’t be farther from the truth. Failure to answer could leave you out of options in the case.

Here is the basic sequence. The plaintiff files the case and serves papers on you, and you must answer by the deadline to avoid a default judgment. After a judgment is rendered, a bank account could be frozen, but a lawyer can still test the claim and negotiate a settlement. Keep reading below to learn about common outcomes in a merchant cash advance lawsuit.

1. The papers arrive

The first step in any lawsuit is to be served with a summons, which is the document that notifies the defendant a suit has been filed. When the Plaintiff serves you with papers about the lawsuit, the details of the claim and the amount allegedly owed will be spelled out. Always remember that a demand letter or an email is not a lawsuit. But once you are served with papers, time is critical. Keep all pages of the summons, complaint, and exhibits that came along with them. Note the identity of the plaintiff, the court and case number, and who else is named, including co-defendants. Be sure to write down the date and how the papers came.

2. A deadline starts running

Check the summons and see if it provides a deadline for an answer or response to the complaint. Depending on the state, the window of time allowed can vary, and its very important to stick to the deadline.

In New York, if a defendant was handed the summons in person, there is a 20 day window, but when served another way such as through the post office, it is 30 days after the date that service was complete. Be aware that calls or settlement discussions with the funder do not reset or extend this deadline.

3. Silence invites a default judgment

The risk in ignoring a summons is that after the deadline has passed, the plaintiff can ask the court for a default judgment. A default judgment is one that goes against the defendant due to his or her lack of a response. In New York, if you don’t answer and the claim was for a fixed sum of money, the plaintiff can ask the court clerk for a default judgment for that amount, plus costs and interest, within one year of the default. A business served via the Secretary of State will get an extra copy of the summons mailed to its last known address, at least 20 days before the court clerk moves on the default judgment.

If the judgment has already been entered against you, get a copy of the court record and get your options reviewed promptly. You may be able to get relief, but it will depend on the court and you’ll need proof as to what happened. Nothing is guaranteed.

4. A lawyer tests the claim

Aside from simply denying the Plaintiff’s claims, there may be defenses you can use against the funder’s claims. Most complaints look the same, but their details vary, so its important to read closely, paying attention to the dates of the agreement, specific monetary amount claimed, transactions cited and its exhibits. It is also necessary to look over the actual contract to see what the terms really were.

Labels don’t decide what the deal is. New York courts usually weigh three things: whether there is a reconciliation clause, a finite term and funder recourse if the business goes bankrupt. Most companies in New York can’t claim a usury defense. However, if the court finds that it is a loan and not a cash advance, and that the interest is over 25% a year, the defendant may have a criminal usury defense. In 2021, the state’s highest court held that a loan deemed criminally usurious was void from the start and no principal or interest could be collected.

5. The owner may be named too

When a small business owner has provided a personal guarantee, he or she may have to answer individually for the lawsuit. Dig out the guarantee you signed, and read it. It matters what the Plaintiff is claiming that you did or didn’t do to trigger the guarantee. A guarantee of performance differs from an unconditional payment guarantee, so be sure you know what yours says. If a settlement or other resolution is reached by the LLC, the case may not end for the owner.

6. Collection can reach your bank and customers

A bank account can get frozen or held, or your customers can get sent a letter about a lawsuit. Get the actual document, and be clear on what is a UCC financing statement, a notice of assignment or a subpoena. A court restraint is another matter. A customer notice can matter even before there is a judgment, but it does not prove every demand valid.

At the close of the case, if there is a judgment and funds are still due, the Plaintiff can go into action to enforce it. In New York, a restraining notice can freeze up to twice the amount due, lasting up to a year. Any business judgment earns 9% interest a year. And a docketed judgment is a lien on real property in the county where it was recorded for 10 years.

If your company bank account is frozen, the important first step is to call the bank and ask to see the restraining notice and any other paperwork from the court or the creditor. Before you switch bank accounts, redirect income to someone else or move assets, get legal advice first. Just getting a lawyer or sending a letter won’t automatically undo a freeze and stop collection.

Collection can also come through a confession of judgment clause in a contract, which authorizes a creditor to bypass the ordinary lawsuit procedure by just asking the court for a judgment when they say the contract conditions were triggered. Since Aug. 30, 2019, the state of New York doesn’t allow confessions of judgment to be filed except in a county where the debtor lives or does business. A business with no presence in New York can’t be the target of a confession of judgment filed in New York. A debtor can still be sued and must respond or risk a judgment by default.

7. Settlement is still possible

A lawsuit can still be settled by talking. Weigh the offer against your legal defenses and how they fit your cash flow, other debts, and the court schedule. Lower payments can still leave a large balance, and one missed payment can mean new trouble.

Before you sign a settlement, be sure the terms are written out in detail. Check the total due, the payment dates and amounts, and if money already collected will go toward the balance. See whether the settlement covers only part or all the debt, and which companies, owners and agreements are included. Look at when the release will start, which guarantees will be released, and what happens to the lawsuit or any judgment after the deal is done. Have the releases include any bank account restraint, UCC filing or customer demand that has been filed. Lastly, double check what happens if there’s a missed payment.

A payment plan with one lender doesn’t resolve every cash advance you have taken or stop the rest of them from suing you or from pursuing you for payment, so keep each deal’s separate records.

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.