If you own a small business, you may have used a merchant cash advance to get capital. An MCA can be a great way to get funding quickly, but it can also be expensive, and it’s possible that some terms can be predatory. Typically, you have to sign a personal guaranty for the advance. When you sign that personal guarantee, you are (spoiler alert) promising to pay off the advance yourself if your business can’t. If you default on the advance, the MCA funder sues the business and you, personally, and looks to get its money fast by asking for summary judgment. However, a look at recent New York cases shows that they can’t always get summary judgment. Courts are setting up roadblocks to quick enforcement, when that’s necessary to enforce the law.
A ‘summary judgment‘ is just a fancy name for winning a lawsuit without a trial. The court will grant it if there’s nothing to argue about and one side obviously has the law on their side. In New York, a summary judgment motion can be filed any time after the defendant answers the complaint. They are usually filed after the discovery process and before trial. But what a lot of lawyers for merchant cash advance funders do is very strange. Instead of waiting to file a summary judgment motion until later in the case, they sometimes file it right away, before there’s even any discovery.
The funder has to prove it would win as a matter of law before the trial even starts. That means proving the “prima facie case” and also showing there are no disputes over material facts. So it needs admissible, bulletproof evidence. The courts have been applying the black-letter law lately and saying “nope, you didn’t prove this stuff” to MCA providers. When a principal guarantees a loan and the owner gets sued with the company, this is the thing to focus on.
The Court Denied Summary Judgment
Take Global Merchant Cash Inc v LPZ Carriers LLC (2024), where the court denied summary judgment. Among other things, the judge said the funder hadn’t proved that the MCA agreement was a business record. To qualify, the funder’s affidavit has to say not just that the record was made in the regular course of business, but also that it was the regular course of that business to make the record, and that it was made at or near the time of the transaction, and that anyone in the chain was under a business duty to report accurately. The affidavit submitted by the funder’s CEO didn’t demonstrate that the record-maker had personal knowledge and didn’t state that it was the funder’s regular practice to make the records.
In Silverline Servs., Inc. v PDC Constr., LLC (2024), the other side just didn’t show up. They didn’t file a single word of an opposition. And yet, the judge still said no to the summary judgment motion. Just because nobody fought it doesn’t mean you win. The court had to decide if the funder actually proved its case. The affidavit from the funder’s lawyer didn’t have any knowledge of the facts, so it was useless as evidence. The statements for the merchant balance were just thrown in there without any explanation of where they came from or what they meant.
In Robin Funding Group LLC v Southern Elite Roofing, Inc. (2024), the funder’s affidavit said that the business had ordered a stop payment, which prevented the funder from accessing the funds. But the supporting account history just said the money wasn’t received; it didn’t say anything about a stop payment. The default happened on a Thursday, and the funder sued five calendar days later, before the time the contract gave the business to request a reconciliation had even expired. The contract said funder took on the risk of adverse business conditions, and funder couldn’t even show that business had generated sufficient receivables, or that any shortfall wasn’t due to an adverse business condition. They failed to show breach.
In Fundfi Merchant Funding, LLC v JDM Elec. LLC (2024), once again nobody opposed the application, again, probably because they couldn’t afford it, and yet again the judge declined to grant summary judgment. The report of the account was a single page of small text, it didn’t explain itself, and there was no business-record foundation for it; the funder didn’t even attach a copy of the bank record showing the returned-payment code. Because the funder couldn’t establish that the business breached the agreement, it couldn’t establish that the guarantor’s obligation had ever been triggered, so it couldn’t establish that the guarantor breached either. If you signed a personal guarantee, read that last sentence twice.
Rejected Their Motions for Extras
Even a funder that wins does not automatically get everything it asks for. In Newco Capital Group VI LLC v K Transco Inc. (2024), the court agreed with the funder that there was a default, but rejected their motions for extras. They called the contract’s default fee a penalty because the real loss is obvious: just the balance. They also said the 30% for legal fees doesn’t mean the creditor gets a fixed 30%; it’s a cap, and the court picks a reasonable amount based on the work done, and since the funder hadn’t even produced their timesheets, the court gave them 30 days to send the bill or lose the fees entirely.
If you’re an MCA funder, pay attention. You have to stick to the rules and put in a lot of paperwork to get your way on summary judgment, or you can lose. If you’re a small business owner and you gave a personal guaranty, this is also good news for you. You might be able to drag out the case long enough to stop a summary judgment from happening, and that buys you more leverage to get a better settlement.
