It’s the early-morning check of the business account when you’ve just realized the weekend MCA debit didn’t happen. Panic follows, then questions. What the MCA funder can do to you, and what it can’t, depends on a whole lot more than a late debit: it depends on a document called a confession of judgment, and on a New York law that changed the way that confession can be used.
The Most Dreaded Weapon in the MCA Arsenal
For years, the most dreaded weapon in the MCA arsenal was the confession of judgment (COJ). Some MCA lenders used the COJ to attack small businesses that did not fully understand how this kind of financing worked. A confession of judgment is as old as paperwork: it’s been around for centuries. In merchant cash advances, lenders often required borrowers to sign one before receiving their money. By signing, a business waives the right to defend itself in court in future disputes with the lender. The business is essentially pleading no contest to the lender’s claim before the lawsuit is even filed.
With a signed COJ in hand, lenders could file court judgments in New York declaring a borrower in default, regardless of where the borrower was located, and regardless of whether there was any proof of default. A county clerk in New York would usually rubber-stamp it pretty quickly, with no notice to the borrower, and usually with no hearing.
New York keeps showing up in these stories. The reason is that most states don’t enforce COJs; New York does. In fact, its courts have been among the most receptive to that kind of litigation. That’s why most MCA lenders had borrowers sign a document agreeing that they could file the papers in New York even if the business was located in another state.
Bloomberg Businessweek published a series of articles that showed how badly this could go. In some cases, the lenders forged documents and lied about amounts owed or made up defaults out of thin air, then somehow got away with it because borrowers had signed a COJ to admit fault before the judgment was entered. Often, owners and managers are unaware of the judgments until their accounts are frozen or their assets seized. And when that happens, the bank may not even identify who started the process.
The numbers grew fast. There were just 14 judgments by confession for MCA lenders in the State of New York before 2014; since 2014 there have been more than 32,000. They topped 8,000 in 2017 and 10,000 in 2018. According to Bloomberg Businessweek, the total sum of the judgments was $1.5 billion.
Bloomberg Businessweek also described one borrower whose story should sound familiar to anyone who just missed a debit. A Florida real estate agency borrowed about $36,000, but alleges that the lender–despite being paid on schedule–filed a judgment claiming the agency was late on a payment, and that the county clerk rushed it through. The agency’s bank accounts were frozen almost immediately, and soon more than $52,000 disappeared from one account, seized by the lender. That started a chain reaction that eventually landed the agency in bankruptcy. All it took was a lender’s claim of one missed payment.
New York Passed Legislation
Then the state stepped in. After the Bloomberg Businessweek articles, New York passed legislation designed to end the practice of MCA lenders using COJs to collect from businesses in other states. It prohibits filing COJs against business borrowers outside New York, and it also bans requiring a signed COJ in a financing contract. That matters because 99 percent of all the COJs filed by MCA lenders were filed in New York; lenders can still file COJs against borrowers located in New York, but they’ll have to file the judgment in the borrower’s home county, where it is easier to challenge.
So what does this mean for the payment you missed on Saturday? If your business is located outside New York, a COJ can’t be filed against you, and a financing contract can’t require you to sign one. In New York, a COJ can still be filed but has to be filed in your home county, where it is easier to mount a defense. The old practice, a judgment rubber-stamped in a New York clerk’s office with no notice while the owner learns about it from a frozen account, is what the law was written to stop. On the whole, this is good news for the small businesses that need quick money.
Debt Settlement Company
None of that makes the balance go away, and a missed payment is still something to deal with rather than ignore. We are Delancey Street, a debt settlement company for small businesses in New York City. We negotiate with lenders and with MCA funders for less than the full amount, even when you’ve been “stacked” with a string of advances. We are not a law firm; when we feel litigation is the better path, we refer you to an independent lawyer. Your first call is free and confidential. If a case cannot be won, or if a cheaper route is available, we’ll tell you so on that first call.
