Texas Business Sued in New York Over an MCA: 5 Questions About the Forum

Is it surprising that this happened in New York? Only if you didn’t notice the forum selection clause in the merchant cash advance agreement. A forum selection clause is an agreement by both parties to the agreement about where the parties will conduct any potential litigation. In other words, you agreed to it, as part of your contract. That’s pretty common in the merchant cash advance industry. Since the contract picks New York law and courts, the funder sued you in the New York Supreme Court, rather than in a Texas court. Many of the merchant cash advance cases filed in New York courts are filed in Kings County or Nassau County. The suits typically name the business as well as each owner who signed a personal guarantee. Texas merchants are not a particular rarity, among those sued in New York courts. But a business can defend a case there.

New York Jurisdiction

A New York state statute 5-1402 lets New York courts exercise jurisdiction over an out-of-state party (1) if the contract expressly chose New York law; (2) if the out-of-state party consented to New York jurisdiction; and (3) if the transaction is at least $1 million. But what about that $1 million minimum? That only affects the “guaranteed-forum” rule in Section 5-1402. For contracts under $1 million, the forum-selection clause is judged by the ordinary rules. And it may still be enforceable. Is there a way out? Ask the court to stay the action or dismiss it because, in the interest of substantial justice, the case should be heard in another forum. New York CPLR 327(a). The other option is to ask for removal of the case to a federal court. Generally, to be heard in federal court, a case must involve more than $75,000 and involve citizens of different states. The request for removal must come within 30 days of receiving a copy of the complaint.

The Clock Really Matters

To appear and defend a lawsuit, you usually have 20 days after the service of legal papers. But it may be up to 30 days if you are served outside of New York or by certain other methods. And the clock really matters. If no one answers the complaint, the funder can seek a judgment against the business and the guarantors. Under New York law, a motion to vacate a default judgment for excusable default has to be made within one year after being served with the judgment, together with a notice of entry.

Some agreements include a “confession of judgment”. To enforce it under CPLR 3218(b), the funder has to file it only in the county where you or the business resided at the time of signing or at the time of filing. A business resides where it has a place of business. So a Texas company with no place of business in New York generally can’t have a confession of judgment entered in a New York court. Also, an affidavit to enter a judgment by confession of judgment can only be filed within three years after the person signing the confession of judgment signed it.

A New York judgment can follow you home. Under Texas Civil Practice and Remedies Code 35.003, it can be filed with a Texas court clerk and then gets enforced, reopened or vacated just like a Texas judgment. Back in Texas, you cannot bring your own action for damages for violations of HB 700 (Finance Code Chapter 398). Only the Office of Consumer Credit Commissioner can enforce it. And the civil penalty is $10,000 per violation.

The Business’s Defenses

New York courts recognize defenses such as: Is it really a loan? To decide, they look to see if there’s a finite term, whether there’s recourse in the case of merchant bankruptcy, and a reconciliation provision that works. An MCA is supposed to be a purchase of future receivables. It is not supposed to be a loan. If it is, then interest above 25 percent a year is criminal usury. A corporation can raise the defense of criminal usury. The result may be that the loan is void. See Adar Bays (2021).

In one case (Crystal Springs Capital v. Big Thicket Coin), New York’s Second Department vacated a default judgment and dismissed the suit. The court reasoned that there was a fixed daily debit, with no duty to reconcile. Full repayment on business bankruptcy made the repayment absolute. And an interest rate above 25% was an illegal criminal usury.

Other common questions that can decide the case: Did a default actually occur under the terms of the agreement? Did the funder honor all reconciliation requests? Were fees counted twice? Another issue: funders can use legal notices to demand that your customers or payment processors hand over your money to them, instead of to you. Those notices can be challenged. The timing matters.

If you signed a personal guarantee, the funder will usually sue you as well as the business. What you owe comes down to the terms of the personal guarantee. But the business’s defenses could still matter to you too.

What usually happens: a negotiated resolution is very common in merchant cash advance cases. The strength of the defenses usually drives the terms of the resolution. A business that answers on time, and who gets all the defenses on record, generally negotiates from a very different position than a business facing default.

The bottom line: A New York filing is not the end of it. And it’s not a reason to think that New York law is the only thing that matters. Check the date of service and the deadline to respond. Make sure the defenses get on record before default.