Defaulting On A Merchant Cash Advance
WHAT HAPPENS IF I DEFAULT ON MY MERCHANT CASH ADVANCE ?
When a merchant defaults on their Merchant Cash Advance or breaches the MCA Agreement, there are three (3) possible repercussions.
The three (3) primary legal remedies available to a Merchant Cash Advance Funder and their collection attorneys are:
THE FILING OF A UCC LIEN
- The MCA Funder may file a UCC Lien together with an Information Subpoena and Restraining Notice. These are special legal documents used by MCA funders and MCA collection attorneys to freeze and place a hold on funds that are still owed to the merchant by its clients.
- These documents are akin to an official Court Order and instruct third party entities like banks as well as clients owing the business money to channel those funds, originally intended, and owed to the business and merchant, rather to the Merchant Cash Advance Funder.
- Enforcement of a UCC Lien means that notice is given to those holding money for the merchant to freeze those funds for the benefit of the Merchant Cash Advance Funder. Sometimes an MCA Funder may employ the services of a Marshal to collect upon its UCC Lien.
- The filing of a UCC Lien is done primarily to notify those creditors owing funds to the business, that they are legally required to send those funds to the Merchant Cash Advance Funder, rather than to the business. It is also employed by a funder to embarrass the business and merchant with their clients.
- The ramifications of a UCC filing can be severe. A funder that chooses to file a UCC will do so quickly and it must be complied with by the recipient. Thus it is common for merchants to wake up to a frozen bank account or payment processor.
- Pursuant to most MCA Agreements, in the event of a default and the filing of a UCC, any funds found can be removed from accounts belonging to the merchant even without prior notification.
- Since its common for a bank account to be frozen due to a UCC lien notification, it is prudent to avoid having a UCC filed if possible, or to seek immediate legal assistance to remove the UCC Lien.
- One can terminate a UCC-1 Lien by filing a UCC-3 – a document that terminates the UCC – 1 lien and puts the world on notice that there is no longer a blanket UCC in existence against the merchant and business.
- Even in the event a UCC is filed, it’s not too late to reach a legally binding resolution. For example, a mutually agreed upon legal settlement can be reached between the parties or a Merchant Cash Advance Debt Defense Attorney can file emergency legal papers seeking an audience with a judge immediately to remove the lien for fear of the business collapsing . Thus, even if your MCA Funder has filed a UCC Lien, it’s not too late to save the business and avoid bankruptcy!
- In other instances, an UCC Lien filing may be a candidate for litigation rather than settlement, for example if there was fraud or misrepresentation in the filing of the UCC with the bank or customers of the merchant and business or for harassment or predatory behavior perpetrated by a Merchant Cash Advance Funder upon a business and merchant.
LAWSUIT
- Additionally, a Merchant Cash Advance Funder may seek legal recourse due to a merchant default by commencing a lawsuit against the business and the Merchant personally, with the most common claims being for Breach of Contract and Unjust Enrichment. A lawsuit can easily be defended and counter claims made against the MCA funder.
BANK ACCOUNT & PAYMENT PROCESSOR – LEVIES AND HOLDS
- Lastly, a Merchant Cash Advance funder may also attempt to freeze or levy your bank accounts and or your payment processors. This is also accomplished by the filing of a UCC Lien and most often attached to the UCC Lien filing is a complete and un-redacted copy of your Merchant Cash Advance Agreement. Due to the Security Claim provided to a Funder in a MCA Agreement, coupled with the personal guarantee means that the funder is legally permitted to go after the bank accounts of the business and the personal assets and bank accounts of the guarantor.
Note: An MCA Funder may try to enforce its Merchant Cash Advance Agreement through the above legal tools and each of these legal “weapons” are independent of each other. Therefore, one or all may be brought by the funder simultaneously.
SOLUTIONS
Not every Merchant Cash Advance default is a Breach of Contract or guilty of the legal claim of Unjust Enrichment, the two most common causes of action used by an MCA Funder in a lawsuit.
DECLINE IN RECEIVABLES / ABUSE BY FUNDERS
- If business receivables have declined, the funder must reconcile the repayments to correspond to actual receivables rather than estimated receivables.
- Moreover, in the event of a decline in account receivables, a merchant may not be required to pay what was originally agreed to in the MCA Agreement because he or she is suffering a genuine decline in receivables.
- This means the daily or weekly ACH repayments must be adjusted or lowered. In some cases, payments must stop entirely.
- Accordingly, even non-payment may not be sufficient to claim a default or breach of the MCA agreement, when revenues have fallen.
- Ironically, most Merchant Cash Advance Agreements state categorically that declines in receivables or the non-generation of future receivables are possibilities and even non-payment by the merchant may NOT be a breach of contract or a default.
- Finally, in the event an MCA Funder abuses its MCA Agreement through instances of fraud, misrepresentation or through acts and behaviors that can prove the financial instrument is in fact and law a loan and only titled a Merchant Cash Advance or Purchase and Sale of Future Receivables Agreement. If the facts prove the MCA is a loan, a merchant has a legal case.
Note: Pursuant to New York Law commercial loans cannot exceed 25% interest. If they do, it is a felony as seen in the New York Penal Code.
For a free and thorough analysis of a Merchant Cash Advance Agreement or to hear more about your legal rights pertaining to any MCA position call the Merchant Cash Advance Attorneys.
Grant Phillips Law, PLLC
516.670.5165
