HVAC and Plumbing Contractors: 6 Questions About MCA Claims Against Receivables

Let’s say you have an outstanding business loan, something like a merchant cash advance. Maybe you took the loan with a new HVAC or plumbing business, things were going well for a while but now you’re deep underwater. Can the funder demand payment from your card processor, insurer, or customers? The short answer is that the funder can indeed send out letters to those parties, letters asking them to pay the funder, not you. But here’s the thing: that letter is not proof that the funder’s claim holds up in court, and your card processor, insurer, or customer should realize that, which may mean holding off on payment for now to see what happens.

Did you assign the receivables to the funder or just take a loan against them? Under the Uniform Commercial Code Article 9, a lender can claim receivables that it bought, not just the ones it accepted as collateral. The lender can file a UCC lien and follow the rules of Article 9. It can notify your customers to pay it instead of you, at least after a default. Now, your agreements with your clients may ban this. Maybe there’s a clause in there that states you can’t assign payments. Maybe the agreement states that you can’t assign without the customer’s consent. Under the Uniform Commercial Code, usually that clause won’t block an assignment.

Once notified, under Article 9, if the customer pays you instead of the lender, they may end up paying the full amount to the lender eventually. A customer can refuse to make any payment until the matter is sorted out. That is especially true when your cash flow depends on one or two large customers. That is risky for any business, but especially so for contractors.

Let’s say a plumbing contractor had been working for a developer on most of its jobs. The developer gets a letter from the plumber’s lender. The lender demands payment, and the developer decides to hold off paying until the legal matter is sorted out. Meanwhile, the plumber’s cash flow stalls. Keep in mind that whether the developer releases the money depends on the law, the circumstances, the parties’ agreement, any orders from the court. There is no set share the funder must get or anything like that.

Nobody wants to be involved in your dispute with your lender. Who has the assignment? Was there an assignment? Your customer can ask for proof of assignment. If the funder fails to produce it promptly, the customer might go ahead and pay you, rather than the funder.

The same issues arise with respect to your card processor. The processor can freeze your account until they get proof of a valid lien. But a freeze is not a final decision. Your merchant processor is not siding against you with that freeze. They are just stopping the payments until the dispute is worked out, or a court order is issued. If you settle but fail to notify the card processor of the settlement, the freeze may not be lifted until the processor gets informed.

Insurers who pay you when you are due a payment may also get a letter. The letter will ask the insurer to pay the lender instead of you. As with card processors, insurers can hold off payment until you settle or the lender wins in court. But even there, a freeze, and a demand for proof of assignment is not proof that you or your insurer owes anything to the funder.

First in Time Is First in Right

Is there an issue with the priority of the loan? Does your bank, or the SBA get first dibs, with their liens on the merchant receivables? In general, first in time is first in right, which means whichever lien was perfected first gets paid first. But it depends on the validity of the claim, the quality of the assignment and the applicable law. A UCC-1 filing puts the world on notice that there is a claim, but there is no presumption that the claim is valid. It also has a five year life unless continued in time. Once nothing is owed, the lender is expected to send a notice of termination within 20 days of a signed demand.

Whoever has priority, the worst move is to ignore a lawsuit. Even when you have a good defense. You have to raise that defense in time. Miss the deadline to answer a lawsuit, and you may end up with a default judgment, and find yourself behind the eight ball. A friendly collector or paralegal does not mean the lender is bluffing. Even if you’re in talks with the creditor or its lawyer, you can get sued. A process server does not always have to serve the papers on you personally.

Some lenders skip the lawsuit with a confession of judgment, a contract or document signed by the debtor that admits their debt to the lender and permits the lender to use it as a judgment to enforce the debtor’s promise to pay. Some states severely limit its use. For example, as of 2019, New York only allows them if the debtor lived in New York at the time of signing the agreement or filing the confession.

You may be tempted to make partial payments when facing default. Nothing is settled until a new agreement is in writing and signed by the parties. With a funder, it’s important to have a signed agreement about how they will credit the payment. But you might find that there are fees and other charges added, resulting in your payment not affecting the balance as much as you hoped.

Keep every document. You will need copies of UCC filings, bank statements, payment records, letters from the funder, the MCA agreement, its demand notices and court papers. A lawyer can look those over and figure out whether the funder has a good case, whether you can refute it, what their claim is worth, and what defenses you have. Then you’ll know whether it makes sense to offer to settle or offer a payment plan.