Lending Club Business Debt Lawsuit: What to Do First

If LendingClub has sued your business, the short answer is this: file a written answer with the court before the deadline on the summons runs out. If you don’t, then a default will be entered and LendingClub could get a judgment against you for everything the complaint asks for. Each state’s rules are different, and finding the right forms can be difficult. For this reason, if you have been sued, you need to act very quickly.

Filing an answer preserves your rights. It does not mean that you agree that you owe the money. In fact, filing an answer allows you to fight the case. But once you answer, the debt collector must prove the debt is valid and that you owe the amount alleged in the lawsuit. Once you answer, you can still try to settle with the debt collector.

First things first: get your paperwork together. Grab the promissory note, loan agreement, and personal guarantee. Also get the Uniform Commercial Code filings, the security agreement, and every letter or email the lender has sent you. Review the loan documents and email chain closely to see what happened. At this point, avoid saying anything to the lender that admits liability.

Most court rules base your answer deadline on how you were served with the lawsuit. If your lawsuit is in federal court, then the process is slightly different. Federal court requires that you file and serve your answer within 21 days after you are served with a summons and complaint. (Or, if you waived formal service, 60 days from when the waiver request was sent, and 90 days if you are outside every U.S. judicial district.)

In California state court, you have 30 days to respond to a lawsuit after it is served. If you’re served by substituted service, you’ve got 40 days. The clock starts counting the day after you were served. Weekends and holidays count, although if the last day is a weekend or holiday you have until the next business day to file your answer.

If you need more time, you might be able to extend the deadline by agreement. In California, the two sides can agree to extend the response deadline by 15 days (California Rule of Court 3.110(d)). It’s a good idea to get any agreement in writing from the lawyer for the debt collector.

| Court and situation | Days to respond | Clock starts | | Federal court, served with summons and complaint | 21 days | Date you were served | | Federal court, formal service waived on time | 60 days | Date the waiver request was sent | | Federal court, service waived, defendant outside every U.S. judicial district | 90 days | Date the waiver request was sent | | California state court, personal service | 30 days | Date of personal service, weekends and court holidays counted | | California state court, both sides agree to the 15-day extension | 45 days | Date of personal service |

If you miss the deadline to respond to a debt collection lawsuit, you run the risk of having the court enter a default. A default is a court’s ruling that you’re liable on the claim because you did not respond to the lawsuit. The court will then enter judgment in favor of the plaintiff for the full amount of the complaint, plus any additional costs like filing and service fees. If that happens, you’re on the hook for the money, you can be charged interest and other costs, and the debt collector can seek a lien against your property. But, according to California court rules, after a default has been entered, the court won’t let you file an answer and won’t hear any other arguments or evidence from you. The court can then decide the case without you. (In federal court, if the amount of the claim is a fixed sum, the court clerk is required to enter judgment against you for that sum plus costs when the plaintiff files an affidavit showing the amount due.)

Sometimes the court can let you back in the game. But you’ll need a good reason why you weren’t heard. And you’ll need a good legal defense. And you’ll have to move quickly.

After a judgment, a collector can go after your wages, put a lien on your property, and even freeze your bank account depending on where you live. Federal law caps wage garnishment at 25% of your weekly disposable earnings, though it’s less for people with very low incomes. For a business, one of the worst things that can happen in a collection proceeding is when a creditor garnishes your accounts receivable. A judgment creditor can do this by serving an order on any customer who owes you money and telling them to pay the creditor instead of you. This can wreck your operations. Before you move funds out of your operating accounts, talk to a lawyer.

Respond to Each Specific Allegation

When you answer a lawsuit, you respond to each specific allegation and “admit” or “deny” each one. Be careful, though, because anything you don’t specifically deny counts as admitted, whether you say “I don’t know” or “No Comment,” or leave it blank. You can also file a general denial of all allegations if you want to fight every last point in the complaint. Use this only if you honestly dispute everything including jurisdiction.

In California, you can use form PLD-C-010 to answer a breach-of-contract suit. Expect to pay $225 to $435 to file your first appearance in court, depending on the size of the claim, but amounts may change. Look for form FW-001 if you can’t afford to pay the filing fees.

There are a few defenses you might consider. One is the statute of limitations (many states have a four- or six-year limit on written contracts, though the time can be complicated by installment payments or acceleration of the full balance). Another is that the lender skipped required written notice of default and a chance to cure. Most commercial loans come with an acceleration clause letting the lender demand the entire balance all at once, instead of just the missed payments. There can be defenses to this, such as the lender never gave the required notice, it lacked contract authority, or the default had already been cured, meaning you’d caught up with payments. Then the claim could only be for the missed payments. Defective service might support a motion to dismiss but won’t wipe out the claim. If the lender sued in a place with no connection to you or the loan, you may challenge the venue or jurisdiction. Forum-selection clauses complicate the question but aren’t always enforceable.

In debt cases, the plaintiff is often a different company from the one that referred the loan. The complaint must say who the plaintiff is (and they often are not a lending company you’ve heard of) and what interest they claim in the debt. Don’t assume the plaintiff has proper standing just because they say so. Of course, if you think you owe the debt, then these defenses will only buy you time. But if the debt collector has to jump through more legal hoops to win a lawsuit, it may be more willing to settle for a lower amount or even to accept a payment plan.

Personal Guarantee

LendingClub loans required a personal guarantee, so if you had to sign this and they come after you for more money, they would be going after you personally. What you may not understand is that a personal guarantee is treated as a separate contract between you and the lender. It can survive if your business dissolves or goes bankrupt. What’s more, a lender can choose to sue you for payment in the same lawsuit in which they sue the company. And if you have multiple guarantors, like co-owners of the company, the lender can go after any one of you for the whole amount. In community-property states like California, Texas, or Arizona, it’s possible that if one spouse signs a guarantee, the lender can go after community assets even if the other spouse never signed anything. How far that goes depends on when the guarantee was signed, whether the debt counts as community property, and any exemptions under state law.

The federal Fair Debt Collection Practices Act covers only personal, family, or household debts, so its protections generally don’t apply to business debts. State laws on commercial collection practices may vary.

In federal courts, corporations are not allowed to represent themselves. They have to be represented by a lawyer. Usually courts apply this rule to partnerships and associations, too. Calendar the answer deadline as soon as you get the lawsuit, and leave yourself time to sit down with a debt defense attorney before it. The earlier you can sit down with one, the more options you’ll have.

Negotiating an Out-of-court Settlement

Even after you answer, negotiating an out-of-court settlement while the litigation is ongoing may still be a way to save money. Negotiating during a lawsuit can make the debt collector more willing to settle for a smaller amount. That’s because the debt collector has to pay legal fees and wait even longer for a judgment it might or might not win. A negotiated settlement often means a lower total balance due, an agreed payment plan, a mutual release, and a dismissal of the lawsuit. A forbearance agreement, where the lender stops collecting while you make catch-up payments or fix other problems, is also possible during the lawsuit. But the conditions can be strict and any slip-up can bring the lender right back into court.

Settlement negotiations generally can’t be used in court to prove the debt is owed. But you should always get any settlement agreement in writing before you pay a single cent. Forgiven debt is taxable income unless an exclusion applies, like bankruptcy or insolvency. But the exclusion is limited to the amount you’re insolvent.

While you’re in Chapter 11 bankruptcy, most creditor lawsuits, judgments and collection on pre-filing debts are put on hold. Bankruptcy tends to shine when the business is viable but buried in debts it can’t service, or several creditors are suing at once, or one large judgment threatens its operating cash. But if the company’s just never going to be profitable, all you’ll do is string things out at cost, and filing for the business alone may not end your personal guarantee without a separate personal bankruptcy.

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.