Body Shops: 6 Questions About Insurance Receivables and MCA Liens

Notify the Account Debtor to Make Payment

Most body shops get paid by insurance companies, not by the drivers whose cars they fix. Can a merchant cash advance funder tell an insurer to pay it instead of your shop? Often, yes. Under section 9-406 of the Uniform Commercial Code, adopted in some form in every state, an MCA funder with a valid lien on your contract receivables has the right to “notify the account debtor to make payment” to it instead of to you. Until the insurer gets that notice, it can simply pay you the money it owes you and that will be that. An MCA funder is still not a court. Get a copy of the notice, make sure it applies to your company, and check what your agreement with the funder actually says.

Why would an insurer get such a letter? Funders often send out letters like this after they don’t get a required remittance from a shop. Remittances are often required on a daily basis. Now the funder is trying to protect its own interests, and you’ll have to deal with it.

Does an insurer have to obey such a notice? A notice usually doesn’t have to be signed by you. A notice sent to an insurer that does not reasonably identify the assigned rights is ineffective and can be ignored. The insurer can usually ignore a notice that asks it to pay less than a full installment. If the insurer asks the funder to prove its assignment, and the funder doesn’t promptly provide satisfactory proof, the insurer can keep paying you. The insurer is not then liable even if the receivables actually were assigned. One analysis in the trade press thinks insurers must pay a funder once it has given notice if the funder actually has a valid, senior and enforceable assignment. The notice alone, however, creates no rights to be paid.

Make sure you get the entire notice, including any attachments. Keep the envelope, too, and make a note of the date it arrived. Make sure you get a copy of your MCA contract. It may help you determine exactly what your funder can and cannot do. Do not tell insurers to ignore a letter like this. Talk to your own lawyer as soon as you can.

UCC Filing

A UCC-1 is a financing statement, and it is a public notice that someone has, or may have, a lien on your property. It is not a judgment. The claim of the funder may or may not be correct. Just because you see a UCC filing in your name does not mean that you defaulted, or even that there’s a dispute. It is sometimes filed when you get your first advance. The funder’s note of a security interest is not itself a court order to freeze your bank account. If your bank or credit card processor is holding funds, ask for a copy of the document it is relying on, and its reason.

One check you can do is to find out what the UCC filing actually covers. The contents of the filing may be very broad, or may be limited only to specific things. The fact that a collateral description is broad doesn’t mean it automatically covers every asset you have. Think about whose assets are involved. A filing against the assets of your LLC does not mean a funder has a legal right to your home or your personal assets. Personal guarantees are contracts, and you will have to do a separate analysis of every guarantee. If there are several claims against the same collateral, check all the agreements and filings.

To find the official filing record, search by the exact legal name of your business at the right filing office. The office in the letter you received may or may not have the actual filing history. Look at the entire filing history, not just the first document. The filing history may include amendments, assignments, continuations and terminations. Check every detail on the record, including the collateral description, filing number and date. Compare these with your MCA agreement. Even if there is an apparent match, this is only the beginning of the process, not the end.

How long does a filing last? The effective period is often five years, but not everywhere. The length of time a filing lasts can also be continued. If the only UCC filing in the records is more than five years old, check to see whether it was renewed. The fact that a filing lapses does not by itself release you from any debt you actually owe.

Paying a debt or reaching a settlement agreement does not necessarily mean the filing will automatically disappear, or that anyone will send an insurer a release. The contract may tell you what the funder is obligated to do after you reach a settlement or payoff. If you get a deal to settle, make sure you also get a detailed written agreement saying what the funder will do afterwards. It is a very good idea to agree on the steps and timing of releases, terminations and withdrawals. When the trigger has been met, and you send a signed termination demand, the funder must file the termination statement (UCC-3) with the filing office, or send it to you, within 20 days. Where the filing covers sold receivables, the important event is when the insurer pays, not when you pay the funder. If a funder fails to timely terminate, it may have to pay you a $500 penalty plus your actual damages. A UCC-3 termination filing may terminate the effect of a previous filing. It does not automatically erase the filing history. Don’t just write the filing office yourself unless you are sure you have authority to terminate.

Disguised Loan

When the fight gets serious, New York courts may ask if the agreement is really a disguised loan. Three things that are significant in New York are the reality of the reconciliation, whether there is a finite term for the funding, and whether the funder has recourse against you if you become bankrupt. In a bankruptcy case, a bankruptcy stay stops creditors from acting to enforce liens against property in the bankruptcy estate. The stay also stops most efforts to collect claims based on events before you filed the case.