How to Vacate a Merchant Cash Advance Default Judgment

Merchant cash advances (MCA) often include a powerful (and controversial) tool known as a confession of judgment (COJ). This clause in an MCA agreement allows providers to get judgments against borrowers without going through the traditional legal process. 

Business owners often don’t realize they’ve agreed to this in their contracts until their bank accounts are frozen or their wages garnished.

COJ clauses are banned or heavily restricted in certain states. Even so, MCA providers have found a workaround where they file their judgments in New York, where COJ provisions are still enforceable, regardless of where the business is located.

What Are the Legal Grounds to Vacate a Default Judgment?

If your MCA provider has obtained a default judgment against you, it may still be possible to have it vacated. You’ll have to file a motion with the court and establish valid legal grounds showing why it should be vacated. There are several legal grounds you can cite to have your default judgment set aside:

• Lack of proper services of process: You were never properly served with the lawsuit or notified of the judgment.
• Excusable neglect or surprise: You can demonstrate that you didn’t know about the lawsuit through no fault of your own.
• Fraud or misrepresentation by the MCA company: The MCA funder engaged in fraudulent activity, such as misrepresenting the facts of the case or submitting false documents.
• Lack of personal jurisdiction: You have no meaningful connection to the state where the lawsuit was filed.
• Problems with the underlying agreement: The MCA contract was void, unconscionable, or otherwise unenforceable.

The grounds for vacating a judgment and the deadlines for filing motions with the court vary from state to state, so it’s important to research the specific laws where you’re located. In many cases, you’ll only have 30 days to file your motion, so it’s important to act quickly.

Challenging the MCA Agreement Itself

Vacating the default judgment is only the first step in defending yourself against an MCA lawsuit. You’ll still have to defend yourself against the MCA’s claims. To do this, you’ll need a “meritorious defense” to the underlying claim. In other words, you need to show the court that you have a valid legal argument against the MCA provider’s claim if the case goes to trial.

Here are some of the common legal defenses you may be able to raise in court:

• The MCA is a business loan subject to usury laws: MCA companies market their products as cash advances or sale of future receivables. However, many of them are simply loans in disguise with astronomical interest rates. If you can show that the cash advance is actually a loan subject to usury laws that cap interest rates, you could have the case thrown out.
• The amount claimed is inflated or incorrect: MCA companies may inflate the amounts they claim are owed by adding additional fees, penalties, and charges. By carefully reviewing your payment history and account, you may be able to show that the amount they’ve claimed is inflated or incorrect.
• The contract terms are unconscionable: MCA borrowers don’t have many protections, but you may still be able to have your judgment thrown out if the court finds that the contract is one-sided, oppressive, or abusive.
• The MCA company engaged in unfair or deceptive practices: Some MCA companies engage in aggressive and deceptive practices during the sales process. If this were the case for you, there may be a case to have your default judgment set aside.

Keep in mind that many MCA agreements include personal guarantees, which hold business owners personally liable for any debt the business can’t pay off. Personal guarantees can also be challenged in court, but that’s not always the case. It’s best to have a merchant cash advance attorney review your specific situation.

What Happens After You File a Motion to Vacate?

There are two possible options when you file a motion to vacate a default judgment. Either your motion will be granted, and the judgment will be set aside, or you’ll be denied.

If the judgment is set aside, you’ll have the opportunity to defend the case on the merits. From there, you could win the case and not have any judgments against you. Alternatively, you may still end up losing the case and having a judgment against you, but at least you’ll have the chance to defend yourself in court first. On the other hand, if your motion is denied, you may be able to appeal or seek reconsideration.

While your motion is still pending, enforcement actions, including bank account levies and wage garnishment, may continue unless you can get the court to issue a stay.

Finally, know that settlement negotiations often happen in parallel to court cases. Ideally, you’ll be able to settle your case outside of court. That way, you can avoid a judgment and possibly end up paying less than you actually owe.

Why You Need an Attorney for This Process

Challenging an MCA default judgment is a complex legal process with strict deadlines, procedural requirements, and jurisdiction-specific rules. It requires an in-depth knowledge of the law and legal processes. While some business owners attempt to represent themselves during the process, that can be a risky choice, often resulting in missed deadlines and procedural errors. Not to mention, you may not know how to advocate for your rights in the same way an attorney would.

An experienced MCA lawyer can evaluate your grounds, draft and file your motion properly, and handle your MCA defense. Not to mention, they may be able to help you negotiate a settlement of your MCA outside of court.

Tayne Law Group has extensive experience handling MCA disputes and default judgment defense. We understand how MCA companies operate and the strategies that work in these cases. If you’re facing a default judgment and need help, contact us today by calling (866) 890-7337 or filling out our short contact form to set up a free phone consultation. We never share or sell your information, and all conversations are confidential.

FAQ

What is a confession of judgment, and why does it matter for MCA cases?

A confession of judgment (COJ) is a clause in many merchant cash advances that allows a creditor to get a judgment against you without going through the normal legal process. When you sign an MCA agreement that includes a COJ clause, you agree to allow the provider to do this if you fall behind on your payments.

How long do I have to file a motion to vacate a default judgment?

The deadline for filing a motion to vacate a default judgment varies from state to state, but you’ll often have around 30 days. Make sure to read up on your state’s laws in case they have shorter or longer deadlines along with the process to do so.

Can I vacate a default judgment if I signed a personal guarantee?

You may be able to vacate a default judgment even if your MCA includes a personal guarantee. However, you must show a valid defense against the judgment. Even if the default judgment is set aside, you may ultimately still end up owing the money or having your personal assets at risk where the creditor can refile the case.

What happens to bank levies and garnishments if the judgment is vacated?

If the default judgment is vacated, enforcement of any bank levies or wage garnishments will end immediately. You may be entitled to a refund of the money that’s already been taken, but you’ll have to file a separate legal motion for that.

Can I negotiate a settlement instead of trying to vacate the judgment?

Yes, it’s possible to negotiate a settlement instead of trying to vacate a judgment. In fact, a settlement is often the preferred outcome for small business owners. MCA companies may be willing to negotiate a reduced settlement if they want to avoid costly legal fees or if they don’t think they’ll be able to get the full amount from you through the court process. It is advisable to use an experienced MCA attorney to assist with this since there are complicated legal aspects that will need to be addressed.