New York state law governs most merchant cash advance agreements – even though neither the borrowers nor lenders are typically located in New York. When there is a default on these agreements, the lender must pursue the borrower through debt collection in New York.
Until recently, all agreements secured by merchant cash advance companies required borrowers (both corporate and personal guarantors) execute a confession of judgment that could, in the event of default, be filed immediately. The practice was outlawed, prohibiting out-of-state confessions of judgment from being filed in New York.
What Happens When Borrowers Default on Merchant Cash Agreements
Most of the calls that come into our office are from guarantors, officers of the borrower corporation(s), who learned a default judgment had been obtained against them without receiving notification of a lawsuit. They now need to vacate the judgment, or, those that received notice of pending litigation but are located out of state, need to obtain counsel to defend the lawsuit.
Although New York no longer recognizes out-of-state judgments, the state allows lenders to pursue borrowers even though neither party has a connection to the state. Here is a list of the most common issues borrowers face when judgment on default has been obtained against them by the lender.
A Lawsuit
Personal guarantors are always sued together with corporate borrowers. This occurs even when only a small amount of the loan remains, a process that can negatively affect the guarantor’s credit and ability to borrow again.
Most borrowers face lawsuits in New York regardless of their connection to the state, requiring them to retain counsel in New York to defend the case or risk a default judgment. Although the individual guarantor can represent themselves, the corporation cannot.
Immediate Access to the Bank Accounts
The loan agreements offer the lender authorization and access to lock your bank account, merchant account, and credit card processor.
Waiver of Notice Requirements
Most agreements provide for the borrower and guarantor to waive any notice requirements of default in payment.
Service of Process
In almost all cases, rather than service of process being made in accordance with the requirements of the New York Civil Practice Law and Rules, the agreements provide that service of process can be made by mail (typically certified mail, return receipt requested).
If you need assistance navigating debt collection matters following a merchant cash advance agreement, message us for a consultation.
