Eight Mistakes to Avoid After MCA Lawsuit Papers Arrive

There are eight big mistakes I see in merchant cash advance lawsuits, which really come down to two things: time and assumptions. People misplace or lose papers, or guess at the deadlines. They think talks with the funder will pause the case, or answer the lawsuit themselves. Or they ignore the case. They trust that the funder’s balance is the right number. They move money around. And they end up signing a settlement to just be rid of it all, when they often don’t know what the settlement says. None are dramatic mistakes. They all happen too often. Talk to a lawyer.

These cases begin with documents: the funding agreement, the schedule of payments, the loan amount, and so on. I find that, even in cases that a client has everything, they often forgot one piece that can provide proof they don’t owe what the funder says they owe, or that the debt is paid. Don’t lose these. Keep every page that a funder sends you. Write down the date the process server gave the papers to someone, how, where it all happened, and who received the papers.

The Time You Have to Answer a Lawsuit

It sounds odd, but it is true: your period to file an answer to a lawsuit can be less than 30 days. It also varies. In New York state court, you have 20 days to file an Answer if handed the summons, 30 if served another way and service is complete. In federal court, 21 days to file an Answer. These things are not clear. Don’t assume: know. Talk to a lawyer.

Often, talks start with the funder’s lawyer, or the funder itself, over the phone or by email after the lawsuit begins. A client thinks that these talks stay the lawsuit, or that they are working together to fix the problem. But this has been a trap. Businesses have let weeks or even months go by talking with funders, only for a default judgment to appear soon after. But a phone call itself does not buy time or stop a suit. What people often don’t realize is that a court case is a stand-alone process.

Another risk is that someone who is paid to handle the case is not actually in court defending it. So if someone is on your case, you need to know that they are in court and defending the lawsuit. But also, there are people who decide to answer the lawsuit themselves. Maybe there is no budget, or a judgment is less expensive than an attorney’s fees. In New York, corporations must appear in court through an attorney, except in some small-claims-type cases.

You think that, because a lawsuit was not right to begin, it can just be ignored. But ignoring a lawsuit is a bad risk. So long as the case goes on in the courts, and you do not defend it, a judgment can happen. And if you are out-of-state, that does not on its own mean a win in these cases. In some courts, if you do not object to the court’s power over you soon enough, you can lose that defense.

No matter the paper in your hands, if the judgment already exists, open the court file quickly. A fast look can show much. Since 2019, New York requires confessions of judgment to be filed only in the signer’s county of residence. Even without a confession of judgment, in New York there is a window to reopen a judgment. A motion to vacate for excusable default must be made within one year after service of the judgment and a notice of entry. It is not guaranteed either. But do not put it off.

The Funder’s Math

You might trust that the funder’s math is correct. Confirm all amounts taken, and at what times. All payments made, and when. Does the number make sense? Saying it’s an “advance” does not always settle it. In 2020 a New York appeals court said courts usually weigh three things: a reconciliation clause, a finite term, and recourse if a merchant goes bankrupt, to judge whether it is a loan. Put the contract next to the timeline. What events changed your revenue, and when? What did you ask for in writing? What did you give? What was the funder’s answer?

Accounts frozen. Processed payments that the funder holds. Threat letters, including letters that go to your customers. Notices: UCC filings, assignments or notices, subpoenas, court restraints. They are not all the same. You should get the actual document, the one in the file. A notice’s demands might not be legal. Don’t change banks, redirect your receipts or move assets on your own. A lawyer’s letter might not put the money back.

Settlements Sometimes Appear a Fine Fix

Go slowly on a settlement. You want to know what you agree to, your payment terms, and what a payment is toward. Settlements sometimes appear a fine fix at first, but much turns on the details. Who are all the companies, all the owners, all the guarantors released? How does the suit end? What happens if a payment is missed? Which UCC filings get withdrawn and when? What about bank restraints? Without more, a deal with one funder does not end a case with the others. The contract is fine print, and fine print can carry great weight.

In short: assume nothing, get all your papers, and call someone who does this for a living.