Merchant Cash Advance or MCA creditors almost always pursue lawsuits quickly against businesses that default on their debt. One of the serious problems in this field is that MCA’s sue almost immediately and often move to obtain a default judgment 31 days after the alleged service was made or only 1 day after the general time period allowed to answer! This seems to clearly be an effort to obtain fast default judgments before businesses have the ability to answer or in some cases before, they are even served. In almost all the litigation matters we defend including credit card and student loan debt as well as contract disputes, the plaintiff follows the regular procedure of hiring a process server to deliver the summons and complaint or lawsuit to the defendant. This usually means that they try to serve them personally or in-hand first and then will attempt substitute service such as taping the lawsuit to the door or serving another party at the address if they cannot complete personal service. MCA lenders have almost completely forgone any attempt or interest in personal service. Instead, they usually have a clause in their agreement that allows them to serve defendants by simply mailing the lawsuit to them. We believe that this is an extremely inefficient way to conduct service of process as it leads to a significant amount of default judgments given that much of the alleged service is done via regular mail without any tracking whatsoever. It seems clear to us that the only reason for this type of service of process is in fact to obtain defaults against businesses instead of litigating these cases on the merits. In fact, more and more judges have voiced their concern and frustration with the questionable service against businesses as well as the jump to default judgments without giving the defendant, business a real chance to answer.
Their strategy seems to be quite clear. Use the cheapest possible form of service of process, often regular class mail which sometimes goes to an incorrect address to obtain a default judgment as soon as the 31st day after it was allegedly sent. This prevents the defendant from having a chance to not only receive the lawsuit in time but to find counsel and give counsel time to review and answer the lawsuit. A default judgment gives Merchant Cash companies the ability to levy business and personal bank accounts quickly, crippling the defendant’s ability to conduct business. A bank levy is the most common form of judgment enforcement that we have seen for the reasons discussed above. Big banks such as JPMorgan Chase, Bank of America, Citibank, and others are generally easy targets for MCA creditors. Merchant Cash Advance attorneys send information subpoenas with copies of the obtained judgment to levy the accounts and do so all over the country given that the big banks usually have branches in most states. Wage garnishment, which is a typical judgment enforcement tool does not usually apply in these cases as these are self-employed individuals and businesses. Liens against real property don’t apply either because New York Judgments cannot be used to lien property in the home state of the debtor unless a separate case is filed in the defendant’s home state to enter the foreign judgment. This means that a judgment obtained in New York cannot be used to levy property of a business who resides in Texas or any other state other than New York. For this reason, obtaining a quick bank levy is one of the most important tools for an MCA.
When facing these issues, we quickly move to vacate the default judgment against the business and guarantor who is usually the individual owner or owners. This re-opens the case entirely and puts the business in a position where they can litigate the matter and defend themselves on the merits of the case while allowing them to assert important defenses such as Usury. It also releases the bank levy and removes any other liens obtained from the default judgment allowing the business to continue functioning as usual. Additionally, New York follows the Separate Entity Rule which states that a bank account outside of New York cannot be frozen even if the bank has a New York branch. This is an important rule that can be used as part of the motion to vacate the judgment or alternatively to remove a bank levy even if a judgment cannot be vacated.