Merchant Cash Advance Lawsuit: What To Do If An MCA Company Sues You

Have you received a merchant cash advance lawsuit? Did you sign a confession of judgment for your merchant cash advance loans? What exactly is a merchant cash advance lawsuit and how to defend it? Merchant cash advances (MCAs) have become a popular financing option for small businesses seeking quick access to capital. Unlike traditional loans, MCAs provide upfront cash in exchange for a percentage of future sales, typically repaid through daily or weekly deductions from the business's revenue. While MCAs offer flexibility and rapid funding, they can also lead to legal disputes. This article explores the landscape of MCA lawsuits, highlighting common issues, legal grounds for disputes, and strategies for both plaintiffs and defendants. 

Understand the Merchant Cash Advance

A Merchant Cash Advance (MCA) is a financing option designed to provide businesses with quick access to capital by advancing a lump sum of money in exchange for a percentage of future sales revenue. Unlike traditional loans, MCAs do not have fixed repayment schedules or interest rates. Instead, businesses typically repay by deducting daily or weekly from their credit card or debit card sales. This structure allows repayment to fluctuate with the business’s revenue, offering more flexibility during slower periods. However, MCAs often come with high effective interest rates and fees. These can lead to significant financial strain if not managed carefully.

Get the expert help you need with a free MCA debt consultation from CuraDebt by calling 1-877-504-0981.

Common Issues Leading to MCA Lawsuits

• Usurious Interest Rates: One of the most contentious issues in MCA agreements is the effective interest rate. Though MCA providers argue that their advances are not loans and thus not subject to usury laws, courts have sometimes disagreed, leading to significant legal battles over what constitutes an illegal interest rate.

• Misrepresentation and Fraud: Allegations of deceptive marketing practices and fraudulent terms are common. Businesses may claim they were misled about the true cost of the advance or the terms of repayment.

• Breach of Contract: Disputes often arise when either party believes the other has violated the terms of the agreement. This can include disagreements over the calculation of daily deductions, improper handling of funds, or failure to provide agreed-upon services.

• Confession of Judgment: Many MCA agreements include a clause allowing the lender to obtain a judgment against the borrower without a trial, which can lead to immediate asset seizures. In court, litigants frequently challenge the enforceability and fairness of these clauses.

Navigating Multiple Lenders and Legal Tactics

Priority among competing creditors depends on applicable law, liens, security interests, judgments and filing dates—not simply who sues first. Give your attorney all agreements, notices and court papers so they can evaluate the risks.

The Critical Role of Legal Representation

An attorney experienced in business-debt disputes can review the agreement, deadlines and defenses. Whether an MCA is legally treated as a loan depends on its substance and applicable law, not just the label used in correspondence. A missed payment does not establish a universal lawsuit timetable.

A qualified attorney may identify defenses or settlement possibilities, but cannot guarantee that a funder will abandon litigation or that a judgment will be vacated.

Confession of Judgment and UCC-1 Liens

A confession of judgment may permit entry of judgment without a conventional trial where lawful. ACH authorization, security interests and a COJ are different documents. Before changing payment instructions or account access, obtain advice about contractual obligations, banking rights and potential consequences.

If your business cannot sustain payments, seek advice promptly. A funder’s rights to receivables or other assets depend on the agreement and applicable law; a UCC filing and a court judgment are not the same thing.

Legal Framework of Confession of Judgment

Confessions of judgment are subject to jurisdiction-specific restrictions. New York CPLR 3218 imposes affidavit, residence and filing requirements. Do not assume a clause allows immediate judgment in every jurisdiction; have a lawyer review the papers and any response deadline.

Steps to Expect in an MCA Lawsuit

Facing a merchant cash advance lawsuit can be overwhelming. Here’s what you can expect:

• Initial Notification: You’ll receive a formal notice indicating the filing of a lawsuit against you. This typically includes details about the claims and the amount the lender is seeking.
• Legal Documentation: Expect to deal with a plethora of legal documents, including a Confession of Judgment, UCC-1 liens, and other contractual paperwork. These documents outline the lender’s claims and your obligations.
• Asset Freezing: Freezing or subjecting business bank accounts and assets to liens can hinder accessing funds for daily operations.
• Court Proceedings: You must have to attend court hearings where both sides will present evidence and arguments. It’s crucial to have legal representation to navigate this process.
• Customer Interference: Lenders might contact your customers, informing them about the lawsuit and potentially disrupting your business relationships and operations.
• Potential Settlements: There may be opportunities for negotiation and settlement. Engaging with a skilled attorney can help you explore these options to mitigate damages.

• Judgment Enforcement: If the court rules in favor of the lender, they can enforce the judgment by seizing assets, garnishing wages, or placing liens on your property.

Merchant Cash Advance Collections

Once a judgment has been obtained through a confession of judgment, MCA lenders often move quickly to collect the debt. Collections efforts can be aggressive and may include freezing your business bank accounts. And further garnishing your wages, or placing liens on your business assets. Additionally, MCA lenders might contact your customers directly, informing them of the lawsuit and potentially disrupting your business operations. The primary goal of these collections efforts is to recover the outstanding debt as efficiently as possible. This often leaves the business owner with limited financial resources to continue operations.

Selling a Business with a Pending Lawsuit

Selling a business with a pending lawsuit, especially one related to MCA disputes, can be extremely challenging. Legal and financial uncertainties may deter potential buyers. However, it is not impossible. To successfully sell your business under these conditions, full disclosure of the lawsuit is essential. You may need to negotiate with the buyer to assume responsibility for the legal issues. Or you might agree to settle the lawsuit prior to the sale. Engaging with a skilled attorney can facilitate these negotiations. They can also help structure the sale to minimize risk to the buyer and maximize the seller's return.

Enroll in MCA Debt Relief Program

If MCA payments are unaffordable, CuraDebt can connect eligible businesses with independent business-debt providers for a free evaluation. This does not stop collection or a lawsuit. A separate attorney should handle legal defenses and court deadlines.

Small Business Debt Relief Programs by CuraDebt

CuraDebt can help businesses explore independent provider options for eligible unsecured business or MCA debt. Services, fees and creditor participation depend on the provider and written agreement; no debt reduction or improved cash flow is guaranteed.

Business Debt Settlement Program by CuraDebt

Business-debt settlement seeks voluntary creditor agreement to resolve an obligation. CuraDebt is not your negotiator or law firm through this inquiry process; any provider services are governed by a separate agreement. Compare costs and risks before enrolling.

Conclusion

Merchant cash advances can lead to contractual and legal disputes. Review the agreement and court papers with a qualified attorney and preserve deadlines. CuraDebt’s free business-debt evaluation can help explore separate provider options, but does not provide legal representation or guarantee relief from collection.