Superior Capital Lawsuit: 6 Defenses Worth Raising in Your Answer

If you are faced with an MCA lawsuit by Superior Capital and you are looking for the right defenses to raise in your answer, there are defenses you should consider. You likely have been “served” with a summons and complaint. The complaint is the document that actually brings the lawsuit against you, but the summons sets a timetable for you to defend. You should bear in mind that the facts of every case are unique, so some defenses may not apply to you. Other defenses may be able to be raised in your answer, but you will need evidence to support them.

Depending on your case, you may find you have one or more of the following defenses. Service of the complaint was defective. This is the wrong court or this complaint cites the wrong law. This was a loan, not a sale of future income. The cash advance was a criminal loan at illegal interest. The balance shown on the complaint is wrong. If a personal guaranty was part of the transaction, then the guarantee itself can sometimes be attacked, separately from the agreement for the merchant cash advance. To use any of these defenses you must get them into your answer on time.

1. Challenge the service

If you can prove that the summons and complaint were not properly served on you, then you have a “jurisdictional defense.” The way a complaint must be served is not the same everywhere. If there were problems with service of the complaint, you should raise that issue in your answer. If service is not proper and you ignore the claim, it is quite possible you will lose the case by default. So this is a situation where you should bring in a lawyer to assist.

In New York state, if the summons is handed to you in New York state, you generally have 20 days from that date to answer the complaint. If service is by some other allowed means the period is generally 30 days after service is complete. In New York, the objection to service must be raised in an answer or in a pre-answer motion to dismiss the case. The chance to object to service is also forfeited if you do not include it in any pre-answer motion you may make. If you put it in your answer and do nothing else, you then will have 60 days from the date of the answer to “move” on the defense. If you let the 60 days pass by, you generally cannot use it.

2. Question the forum and law

The contract for the cash advance may have specified a particular state in which the agreement had to be enforced. If the contract specified enforcement in a different state, the court where the case is pending could be the wrong court. If a different law was specified in the agreement then the plaintiff may have brought the action under the wrong law. It is up to a court to decide the merits of these issues. But these are arguments you should think about raising, if they apply to your case.

Just because the plaintiff is bringing suit in a different state than where your business has its office is not itself a reason to get a case dismissed. The court’s jurisdiction over the contract may be addressed by a forum clause. The applicable law may be addressed by a governing law clause. And the contract itself may have an arbitration clause. These three questions, the right court, the applicable law, and whether there should be arbitration, are all distinct. Be sure you check this in the contract and that you understand all of the contract provisions about how the dispute is to be resolved.

3. Argue it is a loan

The agreement you signed may say it is a sale of future income. If it was really a loan, or can be interpreted as a loan, that may affect the legality of the transaction, or the amount that is owed. A court will look at the essence of the transaction.

In LG Funding v. United Senior Properties (2020) a New York appeals court used three factors: (1) is there an agreement to reconcile accounts, (2) is there an end date for the advance, and (3) is there any kind of recourse if the merchant goes bankrupt? Your contract may or may not have the sort of provisions the appeals court in LG Funding v. United Senior Properties was looking for. Each factor has to be looked at.

Evaluating a merchant cash advance requires careful review of the actual contract terms and your own record of your income and your contact with the cash advance company. The question is what the agreement says, what you did, and what the funder did.

4. Plead criminal usury

If the cash advance can be viewed as a loan, then the interest rate charged may be illegal. The criminal usury statute in New York makes it a crime to knowingly charge more than 25 percent per year interest on a loan.

In a merchant cash advance case, a corporate defendant generally cannot use civil usury. But it can argue that the agreement was a criminal loan under New York state law. The defense can be used against the merchant funder, to defend against an enforcement claim, but it cannot itself be used to sue the funder. Even if the advance was usurious, you need to respond to a complaint and raise it as a defense, or else the court may never consider it. A defense of criminal usury is not always available. It is also a delicate topic and you would want to think it through and probably talk to a lawyer about it before bringing it up.

5. Dispute the balance

The complaint may assert the amount the defendant owes to the plaintiff. Any amounts owed must be shown to the court, but what the plaintiff shows is not necessarily accurate. You should do your own math to figure out what the balance might really be. Did you make all the payments you were supposed to? Did the funder actually collect everything it claimed? Another important issue is whether the payments made are for money actually advanced or for other charges. If you believe you have paid a lot of the debt or the amount the funder is claiming is wrong, you should say that in your answer.

If you have paid the money owed, or some of it, it is critical that you plead that as a defense in your answer. You also want to be sure the right party is suing you. Ask what gives the company that is suing you the right to sue you.

6. Separate the personal guarantee

A personal guarantee must be carefully considered and analyzed separately from the underlying merchant cash advance contract. The guarantee is itself a contract. There may be defenses to enforcement of the guarantee, which are separate from any defenses to the contract. There are situations where a personal guaranty can be used to make someone liable for a debt, but it depends how the guarantee agreement is written.

For claims against owners under personal guarantees, the guarantee should be reviewed to see how it is structured and what has to happen for liability to attach. A performance guarantee is separate and distinct from an unconditional payment guarantee. In cases where you sign both a contract for your business and a personal guarantee, the issues of the liability of the business and of you as the owner, may be separate and distinct. There can be issues in a case like that of conflicts of interest. You may need to consider separate representation.

Whichever defenses apply, making calls to the plaintiff’s attorneys or attempting to negotiate a settlement does not extend the deadline to answer the complaint. Do not miss the deadline. If you miss the deadline for answering, it can still be possible to vacate the default judgment. There may be specific time limits for when the motion needs to be made. In New York state, to vacate a default judgment based on excusable default, a motion must be made within one year of service of the judgment and notice of its entry. The issues this post highlights all require careful thought and very specific advice tailored to your unique situation.

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.