What Happens if One Funder Refuses to Settle?

Its Contract Rights

The situation is that one MCA funder won’t settle while others have worked out settlements with your business. This MCA funder’s contract is separate from the others, so settling with them doesn’t bind it to a deal. It can keep its contract rights. It may demand the balance due, contact a guarantor, notify customers to send payments to them, and sue in court. None of that happens automatically, and it’s not on any fixed schedule.

A funder with a security interest in receivables can tell your customers and payment processors to pay it directly if the agreement says so. If not, it might not be able to do that until it finds you in default. In any case, don’t forget that some customers hang onto their money until they know for sure where to send it.

The funder might file a lawsuit if you settle with everyone else and leave it out. And the funder may sue the guarantor too, if the funder has a guarantee. You can’t rely on payment talks to extend the deadline for answering the lawsuit. When you see the lawsuit, don’t wait. Get a lawyer to find the deadline for responding and see if you have defenses.

If you signed a confession of judgment, the holdout can bypass a lawsuit and try to use the confession to collect instead. It’s not always permitted. New York since August 30, 2019, for example, has barred filing such a judgment against businesses with no place of business in the state, even if they signed the confession before August 30, 2019.

If the holdout wins a judgment it will have ways to enforce it. It may impose bank restraints on your account to keep money in it, or seize money in the account with a bank levy. In New York, a judgment is collectible for 20 years and then a court assumes it’s paid.

A UCC financing statement is not itself the basis for a freeze; it’s a public filing giving notice of a claimed interest. A freeze usually follows a judgment. If your account is frozen, identify which document caused the bank to freeze it.

Question How the Numbers Were Worked Out

A demand from the holdout doesn’t prove that every amount or fee in it is correct. You still have a chance to question how the numbers were worked out. Start by comparing bank withdrawals with the contract. How do they compare? And look for reconciliation, notice and cure terms in the contract. They might limit the holdout’s demands. Don’t rely on any universal grace period to answer a demand.

If the holdout’s advance is based on a share of future revenue, look to see if its contract calls for a reconciliation that ties withdrawals to actual collections. Still, don’t assume asking for reconciliation automatically stops withdrawals or waives the default. Keep copies of your request and any response.

While the holdout pushes its case, save every notice and court paper that comes in. Get legal advice before you switch bank accounts, block withdrawals or otherwise try to make the holdout’s claim harder to collect. A second account doesn’t resolve the debt.

Keep your messages about the dispute accurate. If it’s not settled, don’t say it’s settled, and don’t say a lien is released if it isn’t. Wait to sign new contracts or payment plans until they’re reviewed and you know for sure that they work.

With the holdout, consider restructuring the deal. It’s the process of changing your MCA terms in some way. See if you can get a holdout to accept less payments or more time to pay. Don’t overlook settlement. If you settle be sure the agreement covers what’s to happen to releases, guarantees, and any pending court case. As another option, you can use a new cash advance to pay off the holdout’s balance. It’s refinancing. Before you do it, compare the total cost of the new arrangement with the total cost of the current one. Know whether each MCA will actually receive payoff.

Run the numbers: Be specific about every funder’s repayment amount and frequency. Add up what you owe on each to make your list of total balances. Then forecast how much cash is coming in and how much you need to spend to stay alive, always separating any hope-to-happen sales from ones that are confirmed. Keep them up to date, especially when you talk to funders.

Talk to a Bankruptcy Attorney

If the holdout’s collection looks too risky, talk to a bankruptcy attorney sooner rather than later. You don’t have to wait until every negotiation fails. A bankruptcy petition stops lawsuits and efforts to collect on any earlier debts, including the holdout’s debt.

In a Chapter 11 case, creditors have the right to vote on the plan and classes can vote for or against it. To accept the plan, a class needs yes votes from creditors holding two-thirds of the dollar amount of claims voted, and more than half the number of those voting. If the plan creates multiple classes a creditor like the holdout may end up in a class that votes yes. In that case, the other creditors in the class can outvote it. But a plan has to meet other tests too. Plan acceptances don’t guarantee a court will confirm the plan.

The court also may confirm a subchapter V plan that no impaired class accepted if it’s fair and equitable, doesn’t unfairly discriminate, and commits projected disposable income at least three years, up to five. Subchapter V applies to debtors with debts of $3,424,000 or less.

Filing bankruptcy has a catch. The bankruptcy trustee may be able to claw back as preferences what you paid non-insider creditors in the 90 days before you filed. That could include settlement payments to funders who settled.

Personal guarantees: if you signed a personal guarantee for the business, the holdout may come after you for its balance. You still have questions to answer, such as who signed the guarantee and what triggers your liability. A business filing doesn’t automatically resolve your separate guarantee. Consult a lawyer to work this out.

Also, watch out for possible tax issues after settling with multiple funders. Debt forgiven in settlement is usually taxed as income unless it falls into an exception, such as discharge in bankruptcy or insolvency.

When one MCA funder takes its own path to collect its balance, don’t assume the worst automatically. Still, don’t underestimate the legal powers it may have, depending on your facts and agreement. Don’t miss the deadlines on any court paper, and bring it and all your key documents to a lawyer for advice.

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.