Motions to Dismiss MCA Complaints: 5 Grounds New York Courts Can Consider

If a Merchant Cash Advance funder filed suit against your company in a New York state court, you can move to dismiss the case before even answering it. There are eleven grounds listed in the law (Rule 3211(a)), but five tend to matter most with these plaintiffs:

• (1) personal jurisdiction,
• (2) service,
• (3) the allegation that it is really a loan (usury),
• (4) the agreement’s own terms, and
• (5) statute of limitations.

There is no guarantee any of them will work in any particular case.

Unless you were actually in New York when you ran your business, chances are a funder sued you in a New York court just because the paperwork you signed said so. When a funder decides to sue, it picks Supreme Court, and very often the Kings and Nassau County courthouses. If you go to a MCA case index and look for a name, you will probably find the business and each owner who signed a guarantee named individually.

The time period starts ticking the day your company is served. The answer or motion to dismiss is usually due on the 20th day after service, though if service took place by an alternate method or occurred outside New York, the deadline moves to the 30th day. Also, you can typically only file one motion before answering. Wait too long and you could end up hit with a default judgment.

The Case Can Be Thrown Out

The first ground is personal jurisdiction. The contracts frequently have their own choice-of-forum clauses, requiring any disputes be litigated in NY state courts; yet New York’s statute allows businesses to choose New York courts, but only when a transaction is worth at least $1 million. If you are a business that is not located here, then a dismissal based on jurisdiction may be well worth exploring. Careful, if you file a dismissal motion before answering, jurisdiction must be one of the grounds, or the right to raise it is waived. It also must be raised if you choose to file an answer instead of the dismissal motion.

Ground two is service, or lack of same. If the funder did not do its job right on service, you can raise that defense. It is less a defense than a technicality, since the merits of the claim are beside the point. In New York, you can generally raise an improper service defense in the answer and continue litigating, but only if you move for judgment within 60 days after serving the answer.

Ground three, by far the most interesting argument with these contracts, is whether they really amount to the funding of a loan. The funders call it a purchase of future receivables. If they are loans, the tricky usury laws are the next shoe to drop. To make the call on what is right, a judge could look at (1) whether the reconciliation provision actually works, (2) if the agreement has a fixed end-date, and (3) whether the merchant could walk away from any left over obligations even if it had to file bankruptcy. Under criminal law, charging more than 25% interest a year amounts to usury, a criminal offense. In 2021, New York’s top court ruled businesses can raise criminal usury as a defense, and that if it is usury, the entire loan is void. You can use usury as a defense (not a counterclaim) to avoid paying a loan. Still, there are no guarantees. One New York appeals court in 2021 went the other way, finding that repayment turns on whether the Merchant has sufficient receipts to continue paying the funder. That makes it a conditional contract, not a loan, according to the decision.

Ground number four often boils down to the math. Just by way of example, maybe the ‘default’ under the agreement really did not happen under the contract’s terms. Or maybe fees were counted twice? Sometimes it is as simple as asking for your reconciliation requests to be taken into account, and other times it can take getting expert advice to add up what has been paid and what you owe as a result.

Ground five is the statute of limitations. Most contract lawsuits in New York are subject to a six-year deadline to bring the case. If a plaintiff waits too long to file suit, the case can be thrown out. Some exceptions exist, including sale of goods, and you need to know if one applies.

Confessions of Judgment

Plenty of the agreements actually include confessions of judgment clauses. Since 2019, though, the law prevents funders from filing those against an out-of-state business unless it has a place of business in New York.

Third party payment stoppages are another tool; they happen where a company sends a demand to your customers or business partners demanding that the payments you are due instead be sent to the company itself. Think of them as demands to “pay us instead.” Funders often use them, and merchants can challenge ones that don’t make the grade. They too have to be read carefully and a response may be required. Get advice on the tight deadlines if you face one.

If you signed a personal guarantee, and a Merchant Cash Advance funder sued your company, it also usually sues you. The math for your exposure depends on that guarantee’s terms. The defenses your business raises can have a bearing on whether you will personally owe anything, though there are no guarantees.

Figure Out a Deal to End the Suit

Often there are ways to figure out a deal to end the suit before the trial actually starts. The stronger your defenses, the better your result is likely to be. The advantage is clear enough: you can avoid the risk of a bad result at trial, but it works best when you have entered an answer with strong defenses that are on the record.

If you are facing a lawsuit, there is usually no advantage to delay. Know the number of days left on the clock by counting from the day you were served. You should also pull out and keep a copy of the agreement, payment records, and any reconciliation requests. One last thing: you might think that things are hopeless, or that ignoring it will make the problem go away. It won’t.