Sued by Smarter Merchant: 7 Things That Happen Next

If The Smarter Merchant, which says it provides cash advances for up to $500,000 to merchants, has sued your business, the first thing to know is that the clock is ticking, and it’s the court’s clock. Failure to respond can mean an avalanche of negative events, starting with a judgment. The terms of the agreement and the balance due, though, can be re-negotiated or even defended, depending on the circumstances.

1. A response deadline starts

Response deadlines depend on court rules, on whether a process server handed the papers, and on how the papers were served. In New York, for example, a defendant has generally just 20 days to answer after being handed the papers personally, counting weekends and holidays. But if served any other way, a defendant has 30 days to answer. Don’t, however, assume that the starting date is whenever you open the envelope. Making calls to creditors or trying to settle with a payment plan without also filing an answer doesn’t stop the court clock. If you think the papers may have been served incorrectly or on the wrong party, or if the claim looks wrong or unjust, have the papers reviewed by an attorney promptly. Some objections evaporate if they’re not made the proper way.

2. You gather the papers

You’ll have many papers with the lawsuit, so put the whole packet in one folder, envelope included. Write down the plaintiff’s name exactly as it appears, any names for other defendants, like your business or you individually, the court, and case or index number. Collect all the documents you have that are related to the debt, including agreements, guarantees, payment history, and bank statements. If a settlement or loan broker is negotiating payments, ask who has agreed to handle the court case and appear in court for every defendant. Negotiating payments and defending a lawsuit are separate jobs.

3. Ignoring it means judgment

If you do nothing, the court can enter a judgment for the plaintiff. That judgment means you or the business are now legally obligated to pay as ordered by the court. But for the plaintiff to get the money from you or your business, it has to take further legal steps.

Found a judgment you never knew about? You may not be out of options. First, get the actual court file, and have the procedure and outcome reviewed by someone with legal knowledge. In New York, for example, if you lost by a default judgment, generally you have one year after the judgment is served on you with written notice of entry to file a motion to vacate for excusable default. It does not guarantee a result, though.

4. The agreement gets tested

After checking to see if The Smarter Merchant’s agreement matches the complaint, a lawyer looks at how the parties handled the balance advanced, amounts collected and applied, and other charges. The agreement might refer to the amount provided as a loan. But courts in New York do not decide based on the label but on the contract’s substance. New York courts look at three factors to decide if a merchant cash advance is really a loan: whether the agreement reconciles periodically between the advance and receivables collected, whether it has a finite term, and if the funder has recourse if the business goes bankrupt. If the court deems it a loan, it matters what interest rate was charged. In New York, criminal usury applies to agreements where the lender is not authorized and knowingly charges more than 25% per year. That’s a class E felony.

When an individual is named, and a business is also sued, it may create questions about who is handling the defense and for whom. Find the guaranty. A performance guarantee is different from a payment guarantee.

5. Where the case is heard

A lawyer first checks how each defendant was served. Then a lawyer will check the agreement’s choice of law clause, which selects which state law should govern, and any arbitration clauses, which send the dispute to arbitration rather than a court. But being outside New York does not by itself require dismissal. A confession of judgment skips the usual contested lawsuit. But in New York, for affidavits filed on or after August 30, 2019, a private creditor can file only in the county where the defendant lived when signing or lives at filing; a business lives where it has a place of business. Don’t assume, though, that confession of judgment is unchallengeable.

6. Your bank and customers

Even with judgment, not all a business’ money is frozen. Restraining notices issued to bank accounts last up to a year unless the judgment is paid or vacated. But once the bank holds twice the amount due, other funds are freed.

Requests that customers or processors pay someone else do not necessarily mean there is judgment, but how they are labeled matters, and so does the agreement behind them. A UCC financing statement, notice of assignment, subpoena and court restraint are not the same. A notice doesn’t make every demand valid, so check who sent it and the authority they rely on. Counsel can identify who has asserted rights, inquire into the support for those rights, and explore a range of options for relief, whether negotiation or court relief. But hiring an attorney or sending a letter does not automatically unfreeze your accounts. Ask a lawyer about moving your accounts or assets before you decide.

7. Defend it or settle it

The case can be defended or settled. A lawyer may file an answer and defenses or a motion, such as one to dismiss, or seek records through discovery, or negotiate. A motion to dismiss is no promise. Just because a deal offers a lower payment doesn’t mean you won’t owe a lot of money. Make sure to get every detail agreed to in writing, especially if there is a payment plan. A settlement should state the total, dates, who is covered, whether guarantees are released, how the lawsuit ends, and what a missed payment triggers.

The fight doesn’t end with the first response. There can be conference dates, discovery requests, motion deadlines and other dates that require showing up or putting something on paper. Settling or paying one funder doesn’t resolve every other MCA.

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.