Default judgments are an unfortunate and common phenomenon that we encounter when dealing with both business and consumer collection defense matters. We are finding that the number of default judgments obtained may be even higher in the Merchant Cash Advance field. Merchant Cash Advances are the business loans that are not really loans as they explain it but instead a so-called purchase of future receivables. Previously, MCA companies used confession judgments which allowed the MCA’s to enter judgment automatically without even suing the business but just by entering it with the clerk. Signing a confession judgment essentially gave up any legal defenses a business might have. These confession judgments were ultimately banned by former Governor Cuomo for all companies outside of New York. Merchant Cash Advance creditors such as Cloudfund, Vox Funding, Pearl Capital, Fox Capital, Green Note and dozens of other Cash Advance companies must have decided that they needed an easier way to try and obtain judgments against businesses now that confession judgments were no longer available to them. MCA’s decided that they would place a clause in their contracts that would allow them to serve businesses with a lawsuit simply by mailing it to their address instead of the usual service of process in which personal service and even substitute service is attempted by an actual process server. Now instead of someone actually going to the address to serve the lawsuit it is simply mailed without any sort of tracking in most scenarios that we have seen. This is the primary reason why so many Merchant Cash Advance default judgments are obtained.
Ironically, the fact that personal service is not even attempted by these companies makes it easier to vacate a default judgment. Under CPLR 5015(a)(4) a reasonable excuse and at least one meritorious defense is necessary to vacate a default. The defense does not need to be proven but a legitimate one need be raised. When dealing with Merchant Cash Advances, there are several defenses that can be asserted including fraud, and usury which are now being considered by both the Federal and State courts in New York. Unlike, personal service or substitute service in which an affidavit is drafted by the process server explaining how and where the defendant was served, or whom was served at the address, the affidavit of service in these cases simply says that the lawsuit was mailed to the address listed by the MCA. An affidavit from the defendant stating that they did not in fact receive the lawsuit should be enough for a reasonable excuse. Alternatively, under CPLR 317 only a meritorious defense need be shown without even having to assert a reasonable excuse. CPLR 317 can only be used if the defendant is not served via personal service which means that they receive the lawsuit into their hands. Of course, we know that personal service is not possible if the creditor is mailing a lawsuit so these defaults should automatically be vacated based on this provision. A business or consumer must move to vacate the judgment within one year of learning about it and not more than 5 years after its entry under CPLR 317 as opposed to 5015. Finally, under CPLR 5015(a)(1) the default can be vacated based on a lack of jurisdiction mainly due to improper service. We have encountered many situations where the lawsuit is sent to either the wrong address or an old address. A lack of jurisdiction makes the judgment void to begin with so that no reasonable excuse or meritorious defense is necessary.
Once the judgment is vacated an answer with affirmative defenses and potential counterclaims can be entered restarting the matter. This then shifts the burden back onto the Merchant Cash Advance company to prove their case. Once, litigation begins we often see the merchant cash advance law firms such as Isaac Greenfield, David Fogel, Jeffrey Zachter, Berkovitch & Bouskila, Lieberman & Klestzick and others contacting us to see if the matter can be resolved through a settlement. The settlement range on MCA matters we have worked on has been anywhere between 30%-70% off of the entire amount depending on the situation. Interest free payment terms can also be negotiated giving the client the ability to pay off the debt while continuing to run their business eliminating daily or weekly payments that the MCA companies usually insist on. Vacating a default judgment is complicated and you generally only receive one chance to do so. It is important to retain an attorney who understands these motions as well as the underlying Merchant Cash Advance cases and laws associated with them.