Dealing With MCA Legal Issues: What to Do

If you're reading this, something has already gone wrong and you’re now wondering what to do. No one lands on an article about “Dealing with MCA legal issues,” for fun.

Either you've been served with a lawsuit, or you're about to be, or your accounts have been frozen, or a UCC notice landed at your processor, or your customers are getting letters telling them to pay someone else.

The First Thing to Understand

MCA legal issues move faster than any other kind of business debt problem you've dealt with. These are professional loan sharks, they play hard, and aggressive. They lend money at usurious rates exceeding 100% APR. If you've been through a credit card collection, or a vendor dispute, or a tax problem, none of that is preparation for this. Those companies have rules, based on the federal laws, they have to follow. No such rules apply for MCA lenders. The MCA enforcement playbook is built for speed, and the reason it's built for speed is that the funder knows the longer you have to think, the more options you have. So they don't give you time to think. The pace is the weapon.

What that means practically: every decision you make in the first 72 hours after something legal happens is going to matter more than every decision you make in the next 6 months. Which is a brutal thing to tell someone who's already overwhelmed, but it's true, and pretending otherwise would be doing you a disservice.

What Counts as an MCA Legal Issue

Before we get into what to do, let's get clear on what we're actually talking about. "Legal issues" with an MCA can mean any of the following, and each one has a different response:

• You've been served with a lawsuit. Someone handed you papers, or left them with someone at your business, or mailed them. You're a defendant in a civil case, usually filed in New York Supreme Court.
• A judgment has already been entered against you. This usually means you missed a deadline to respond to the lawsuit, and the funder got a default judgment.
• Your accounts have been frozen or restrained. A bank notice arrived saying funds are restrained pursuant to a court order. This is a post-judgment move.
• A UCC notice has gone out to your processor or customers. Letters have landed at your credit card processor, your major customers, or anyone else who pays you. They are telling your processor, and customers, that the MCA lender owns your receivables, and they are legally required to send the funds to the lender instead of you.
• You're being threatened with litigation. You haven't been sued yet, but the calls have escalated, and someone in the funder's collections department or their outside law firm is telling you a lawsuit is coming.

The response is different for each of these, and lumping them together is one of the mistakes that gets people into worse trouble.

Step 1: Be Careful What You Say To The Lender

This is the hardest one for most owners, because you've probably been on the phone with these people for weeks, trying to work something out, trying to explain your situation, trying to be reasonable. The moment something legal happens – a lawsuit, a UCC notice, a frozen account – the conversation is no longer between you and the funder. It's between your lawyer and their lawyer, even if you don't have a lawyer yet. Anything you say can, and will, be used against you. The lawyer for the lender is not your friend, he/she is there to protect their client.

Anything you say to the funder's collections team after a legal action starts can and will be used against you. They're not your friends. They're not negotiating in good faith at this point. They're building a file, collecting information, tidbits of knowledge, which can be used to nail you against the wall. Every admission you make, every promise you can't keep, every detail about your assets or your bank accounts that you let slip, all of it ends up in a litigation file that gets used to crush you later.

If they call, the script is: "I'm not going to discuss this on the phone. You can put anything you need to communicate in writing." That's it.

The exception is if you have a lawyer already and they've told you specifically what to say. Otherwise, silence is the move.

Step 2: Find Out Exactly What's Happening

You can't respond to a legal problem you don't understand.

Here's how you find out:

If you've been served with a lawsuit: Read the papers. Find the case caption, the index number (in New York) or case number, the court, the filing date, and the date your response is due. The response deadline is the most important number on the document. In New York Supreme Court, you typically have 20 to 30 days to respond depending on how you were served. Miss it and the lender gets a default judgement against you, and now they can automatically go through your bank account and take funds from it. Often, lenders will add punitive fees, like default fees, and legal fees.

If you think a judgment exists but you're not sure: Search the court records in New York. The New York court system has a public database (eCourts / WebCivil Supreme) where you can look up cases by your name or your business name.

If your account is frozen: Call your bank and ask for the document that authorized the restraint.

This research is something you can do yourself, in an hour, before you spend a dollar on a lawyer. And it's information you'll need to give the lawyer anyway. Do it first.

Step 3: Get a Real Lawyer, Fast

Not a debt relief company. Not a "consultant." There are maybe 30 lawyers in the country who do this at a high level, and they're mostly based out of New York, New Jersey, and Florida, because that's where most MCA litigation occurs. The lenders live there, and it’s where they file their lawsuits. Some newer lenders are filing/based out of Connecticut, due to more lender friendly remedies available there.

How to find one:

• Search for "MCA defense attorney" and "merchant cash advance defense lawyer," but read carefully – half the results are debt settlement firms with attorneys on staff, which is not the same as a litigation firm.
• Look at the lawyer's actual case history. New York court records are public. You can see which cases they've handled, who they've represented, and what the outcomes were.
• Ask them, on the first call, how many MCA cases they've defended in the last 12 months and which funders they've gone up against.
• Avoid anyone who quotes you a flat fee before they've seen the complaint and the contract. Real defense work is hourly or hybrid, because the work that's needed depends on what the funder does.

Step 4: Decide Whether to Fight, Settle, or File

These are the three doors. There is no fourth door. Anyone telling you there's a fourth door is selling you something.

Fighting

Fighting means defending the lawsuit on the merits. This is appropriate if you have real defenses – if the contract is unconscionable, if the funder breached first, if the receivables purchase was actually a disguised loan that violates usury laws, if there are procedural problems with how you were served, if the funder violated some specific provision of New York or your home state's law.

Real defenses exist. New York courts have started to push back on MCA contracts in recent years, particularly on the question of whether they're true sales of receivables or disguised loans. The argument has won in some cases. It's not a slam dunk in any case, but it's not frivolous either. If your contract has the right characteristics and you can afford the litigation, fighting can produce a much better outcome than settling.

The downside of fighting is cost and time. A real MCA defense in New York Supreme Court is going to take 12 to 24 months and cost $25,000 to $100,000+. Most business owners don't have the cash flow or the runway to do this. Fighting is the right move for a small minority of cases.

Settling

Settling means negotiating a payoff for less than the full balance, usually with the help of a lawyer or a debt settlement firm that has relationships with the funders. Most MCA cases end this way. The reason settlement works is that the funder, despite how aggressive they are, would rather get 40 cents on the dollar today than spend two years and $50,000 trying to collect a judgment that may not be collectible at the end.

Settlement percentages vary wildly. I've seen MCA's settled at 20 cents on the dollar and I've seen them settled at 70. The variables are: how stressed the funder is, how good your lawyer is, how strong the funder's case is, whether you've been sued yet, whether there's a judgment, and how exposed you personally are. The earlier you settle – before suit, before judgment, before enforcement – the better the percentage usually is. The longer you wait, the worse it gets.

Filing

Filing means bankruptcy. I wrote a whole separate piece on this so I won't repeat the mechanics, but the short version is: bankruptcy is the right move if you're stacked too deep to settle (typically four or more MCA's), if your personal exposure is large enough to threaten your home or retirement, or if you've already been hit with a judgment that's collecting against you faster than you can earn. It's the wrong move if you only have one or two MCA's and the underlying business is healthy.

Bankruptcy is the option of last resort, but "last resort" doesn't mean "bad option." For some people it's the right one. The mistake is treating it as a failure rather than as a strategic tool, because that emotional framing keeps people from filing when they should, and they end up worse off.

Step 5: Don't Make These Mistakes

In rough order of how often I see them:

Don't ignore the lawsuit. This is the single biggest mistake. People get served, they're overwhelmed, they don't know what to do, and they do nothing. The clock runs out, a default judgment gets entered, and now you're fighting from a much worse position. A judgment is much harder to vacate than a lawsuit is to defend. If you've been served, the response deadline is the only deadline that matters this week.

Don't move money around to hide it. I covered this in the criminal liability piece, but it's worth saying again. Once a lawsuit is filed, transferring assets out of accounts the funder knows about, into accounts they don't, is a fraudulent transfer. It's recoverable by the funder, it's voidable by a bankruptcy trustee, and in some cases it's criminal. The instinct is understandable. The execution is a disaster.

Don't open new bank accounts to dodge the ACH. Same reason. The funder will find out (they usually find out within a week), and now you've handed them a "intent to defraud" argument they didn't have before. Often, many lender agreements have clauses in them – where you agree to notify the lender before switching ACH bank accounts. IF you do it without informing them, it could be used against you.

Don't sign anything the funder sends you without a lawyer reading it. When you stop paying, the funder will sometimes send you a settlement offer or a forbearance agreement that looks like relief. These documents often include new admissions, new personal guarantees, broader confessions of liability, and language that strips away defenses you would have had in litigation. Some of them are worse than just being sued. Don’t sign anything without hiring a company to review it, and act as your defender.

Don't take another MCA to pay the one in default. This is the death spiral. Every business owner who's deep in MCA trouble took the second deal because the first one was killing them, and the third because the second was killing them. Stacking is what gets you from "fixable problem" to "bankruptcy is the only option." Many lenders have anti-stacking clauses, and when you default, you’ll get hit with punitive penalties, associated with stacking.

Don't talk to the funder's outside law firm without your own lawyer. Once the file goes to outside counsel, the lawyers are professionals at extracting admissions and locking you into positions that hurt you later. They're polite. They sound reasonable. They're not your friends. Treat any call from a law firm representing the funder the same way you'd treat a call from the IRS – say nothing, get a lawyer, communicate only through counsel.

Step 6: Build a Real Plan

Once you've stopped the bleeding, found out what's happening, gotten a lawyer, and decided which door you're walking through, the actual work starts. The plan needs to cover:

• The legal response. What's getting filed in the case, when, and by whom.
• The cash flow plan. What's the business doing while this plays out.
• The settlement budget. If you're settling, how much money do you actually have to put toward a payoff, and where is it coming from. Settlements without funds behind them are just conversations. Even if you hire a business debt settlement company, if you have no funds the company can’t do anything.
• The personal exposure plan. What's your personal liability, what assets are exposed, and what can you do to protect what's protectable (legally – not by hiding things). Many people sign a limited performance guarantee, which turns into a personal guarantee. IF such a clause is in your agreement you need to make sure you’re aware of your personal liabilities.
• The other MCA's. If you have more than one, what's the order of operations. Some have to be dealt with first because they're further along. Others can wait. The sequencing matters. Some lenders are more aggressive on filing UCC liens, and being litigious. Others, which have bigger books, will take longer to move things along.