When a merchant defaults on their Merchant Cash Advance, there are three (3) possible repercussions.
The three (3) primary legal remedies available to a Merchant Cash Advance Funder in the event of a merchant default are:
(1) The MCA Funder may file a UCC-1 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.
In summary, enforcement of a UCC-1 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.
These documents are designed 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.
The ramifications can be severe. A funder that chooses to file a UCC will do so very quickly, and it is common to wake up to a frozen bank account or a frozen 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 terminate the UCC by filing a UCC-3 – the document that terminates the UCC – 1 lien.
Even in the event a UCC is filed, a full and final mutually agreed upon legal settlement can be reached between the parties. Thus, it’s not too late to save the business and avoid any notion of bankruptcy.
In other instances, an MCA case may be a candidate for litigation rather than settlement, for example if there was fraud or misrepresentation or for other abuses perpetrated by a Merchant Cash Advance Funder upon the business and merchant.
(2) 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
(3) Lastly, a Merchant Cash Advance funder MAY also attempt to freeze or levy your bank accounts, including business and even personal bank accounts. Don’t forget that 99% of MCA’s require a Personal Guarantee, making the merchant personally liable in the event of default.
* Please note: an MCA Funder may try to enforce its Merchant Cash Advance Agreement through the above three legal tools, i.e. a lawsuit, the UCC Lien and/or freezing of bank accounts, but each is independent of the others and one or all may be brought by the funder simultaneously.
Not every Merchant Cash Advance default is a Breach of Contract or Unjust Enrichment
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 merely titled a Merchant Cash Advance.
If the facts provide evidence of the instrument being a loan, a Merchant may not be required to repay anything.
* Please Note: Pursuant to New York Law commercial loans cannot exceed 25% interest. If they do, it is a felony as can be 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
TAKE BACK YOUR RECEIVABLES…
TAKE BACK YOUR BUSINESS!