Sued by Sos Capital: 7 Things That Happen Next

If your business just got hit with a lawsuit from an MCA funder called SOS Capital, you should take that as a very urgent matter. You probably have only 20 to 30 days to respond before the funders’ lawyers file for a default judgment. They will go for your bank account, take control of your revenue, and really make things hard for you. But you probably have a lot more defenses than you think, and a lot more leverage than you know, and your chances of settling are good.

1. A deadline starts running

If the summons was handed to you in New York in person, you have 20 days to answer; outside New York or by other service it’s 30 days. Don’t assume that you will have more time. Get an attorney on the phone to at least tell you where you stand. Don’t call the funder’s lawyer and explain things. You are defending a lawsuit, so put your defenses in your response. Your written answer keeps your defenses alive.

2. Silence becomes a judgment

If you don’t respond to the funder’s complaint within 20 to 30 days (less if they served it on you in person in New York), the lawyers are going to ask the court for a default judgment right away. They have to do a bit of paperwork, and the courts take their time, so from filing to judgment can take 30 to 60 days. The judgment will bear interest at 9% per year.

A default judgment can often be undone. You have one year after notice of entry is served to make a motion to vacate it for excusable default. Don’t waste time getting started.

3. Or no lawsuit at all

Just as quickly as an MCA funder can sue, some have the option of skipping the whole process and just filing the signed Confession of Judgment itself in court to start the collection process, so never assume no collection can happen without a lawsuit. New York limited the practice in 2019 against out-of-state businesses. A Confession of Judgment must be filed within three years of the date on the confession, and only in the county where you live (or said you lived) or are doing business at the time it is filed.

4. Your bank account freezes

As with many kinds of funders, as soon as an MCA funder gets a judgment against you, its lawyers can serve the bank that holds your account with a restraining notice, freezing the account. The bank may have warned you, but more often does not. The freeze on your account has no certain time. It may stay for up to one year, or until the judgment is paid off or the court undoes (vacates) the judgment.

What good does it do you if you ignore the restraining notice? None. The notice is court process. To ignore it is contempt of court. With a levy, an objection often has to be made in 10 to 20 days from notice. A lawyer can ask the court to undo the freeze, if it does not comply with the law, or if your bank account contains exempt funds. A lawyer may be able to propose a partial release, depending on the strength of the argument, to at least pay for payroll.

5. They go after revenue

An MCA funder that gets a judgment can start legal process to take control of your customers’ payments and credit card receipts. These can be especially disruptive: In extreme cases, it can shut down all your business’ regular revenue stream, and leave you with no way to pay rent, staff, or operating expenses.

And if you signed a personal guarantee, the funder can come after you too: you will very likely be named as a defendant in the lawsuit. That means you, the person, owe the money even if your business is a separate corporate entity. You risk a judgment against you personally, and a judgment can be used to try to garnish your wages. Amounts vary but are usually capped at about 25% of disposable earnings.

6. Your strongest defense

Often the most powerful defense in these cases is that the advance was a loan disguised as a sale, in order to hide from state laws that regulate usury (illegal interest charges). Courts have said they will weigh three things to see if a deal is really a sale or loan. They are the presence of a reconciliation clause, i.e., does the contract itself provide for a reckoning-up of payments; whether the term of the contract was finite; and whether the agreement, as written, allows the funder to come after the business owner even in bankruptcy.

If the funder regularly skims a fixed amount from your daily business receipts and never reconciles or rectifies the amount, chances are it is a loan and not an advance. New York usury laws say that knowingly charging over 25% interest a year, no matter what it’s called, is criminal usury.

7. Most cases end in settlement

As a rule, MCA lawsuits do not actually go to trial. Most of the time the funded business is able to make a deal to pay a fraction of what’s owed, or perhaps settle the case for a lump sum that is less than the unpaid balance, in order to resume control of its revenue. Settlements have been reported as high as 60% of the balance of the account. They may be as low as 30% or less. The major question for you is what level of a settlement offer you have leverage to present. That leverage depends mostly on how strong a defense you can raise. Usually most of the negotiations happen fairly soon after a credible defense is on file, often within 60 to 90 days.

Don’t let fear of a lawsuit panic you into a lump-sum deal for more than you can afford. Bankruptcy is the last resort. Bankruptcy’s automatic stay immediately blocks outside efforts to collect debts without court approval, but it is not for everyone, and has serious other effects.

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.