Merchant Cash Advance Lawsuits: OnDeck, QuarterSpot, Titan and Your Options

The daily withdrawals stopped when the business account ran dry. Now there is a lawsuit, or a judgment you never saw coming, and your name is on it right next to the company’s.

These cases look alike from the outside, but the contract underneath decides a lot. A merchant cash advance and a business loan are different deals, and the difference shapes your defenses, your personal exposure and your way out.

What is a merchant cash advance?

A merchant cash advance, or MCA, is money paid to a business up front in exchange for a share of its future sales. It is usually written as a purchase of future receivables, meaning the funder buys a slice of the money your customers will pay you, rather than as a loan.

The funder collects by pulling money from your business bank account, often every business day. You agree to deliver a fixed total, larger than the advance, as the sales come in.

How is that different from a business loan?

A term loan is a loan. You borrow a lump sum and owe it back on a schedule, with interest, whether your sales go up or down.

An MCA is supposed to rise and fall with your sales. New York courts, where many MCA contracts send disputes, ask whether repayment is really absolute or depends on the business’s revenue. They look at three things: whether the contract has a reconciliation clause, meaning a way to lower the payments when sales drop; whether it has a fixed end date; and what the funder can do if the business files bankruptcy.

That question matters. Usury laws, the legal limits on interest, apply to loans, and a transaction where repayment is not absolute is generally not a loan. Whether a particular MCA crosses that line depends on the contract’s terms and on how the funder actually ran it.

Are OnDeck and QuarterSpot merchant cash advances?

Not necessarily. OnDeck says it offers business term loans and lines of credit, and its own FAQ says its term loans are secured by a general lien on business assets and backed by a personal guarantee.

QuarterSpot’s website says it continues to service and collect the loans it owns. If the plaintiff on your papers is Titan Asset Purchasing or QuarterSpot, read this post on the Arlington cases first, because I won’t repeat it here.

So read the first page of your contract before anything else. Whether it says “loan agreement” or “purchase and sale of future receivables” tells you which of the issues below apply to you.

Why am I being sued personally?

Probably because you signed a personal guarantee, a promise to pay the business’s obligation yourself if the business doesn’t. An LLC or corporation normally keeps the owner from being liable for business debts, and a guarantee is the exception.

Closing the business doesn’t end the guarantee. If the company is gone, you may be the only defendant left to collect from.

With an MCA, read exactly what you guaranteed. The scope of the guarantee depends on its wording, and that wording is one of the first things I check.

What is a confession of judgment?

A confession of judgment is a signed statement, often tucked into the funding paperwork, in which you agree in advance that the creditor can get a judgment against you without a lawsuit if it says you defaulted. No trial, no hearing, no chance to tell your side first.

New York used to let these be filed against businesses anywhere in the country. It changed its law so that a confession of judgment can be filed only in the county where the defendant lives or, for a business, where it has a place of business, which generally shuts New York’s courts to confessed judgments against out-of-state businesses with no New York location.

If you signed one, don’t assume it is harmless. Whether it can be used depends on where it would be filed and what it says, and if a judgment has already been entered on one, how fast you act can matter.

Why is the lawsuit so far from home?

The contract picks the court. A forum selection clause, a term choosing where disputes will be heard, can send the case to New York, to Arlington, Virginia, or wherever the funder or lender wrote in.

Distance is part of the strategy. A defendant several states away is less likely to answer, and a default judgment, the judgment entered when you don’t respond, can then be taken to your home state and enforced against your bank accounts and wages.

If the case is in Virginia, the paper is likely a warrant in debt with a return date, and here is how that works.

What does a UCC lien mean for my business?

A UCC financing statement, often called a UCC-1 or a UCC lien, is a public filing with the state saying a creditor claims an interest in your business assets. It can describe specific collateral, or it can simply say “all assets.”

For a funder that bought your receivables, it can do real damage while the business is still open. Under the Uniform Commercial Code, once your customer is told to pay the funder directly, paying you instead may not clear the customer’s bill, so a customer who gets that notice has every reason to stop paying you.

A UCC filing also shows up when you apply for other financing. When a debt is paid or settled, ask in writing for a termination statement so the public record is cleared.

What are my options?

Negotiate. Many of these cases settle, and a settlement can end the withdrawals, release the guarantee and clear the UCC filing. You negotiate from a much better position after you have answered the case than after a default.

Defend. I look at whether the plaintiff owns the claim, whether the amount matches the contract, whether the MCA is really a loan, whether the guarantee covers what is being claimed, and whether the case belongs in that court at all. Answer by the deadline on your papers, because a default throws all of that away.

Subchapter V. If the business is still viable, Subchapter V, a streamlined Chapter 11 for small businesses under a debt limit, stops the lawsuits and the withdrawals and lets you restructure while you keep operating.

Personal bankruptcy. If the business is closed and the guarantee is what’s left, a personal Chapter 7 or Chapter 13 stops the lawsuit through the automatic stay, the court order that halts collection the moment you file, and can wipe out your personal liability on the guarantee. The Chapter 7 means test applies to people whose debts are mainly consumer debts, so an owner whose debts are mostly business debts may not have to pass it.

What should I do right now?

If you have been sued, or found a judgment or UCC filing you didn’t expect, call me at (202) 448-5136. Have the funding agreement, the guarantee, any confession of judgment you signed and the court papers in front of you.

The consultation is free. I will tell you whether your contract reads like a loan or a sale, when your deadline is, and whether negotiating, defending or bankruptcy fits best.

I defend collection lawsuits in DC Superior Court and the Virginia general district courts in Arlington, Alexandria and Fairfax, and I handle bankruptcy in DC, Maryland and the Eastern District of Virginia. If your case is in New York, you will need a lawyer admitted there for the lawsuit, and if you already have a lawyer in a filed case, call that lawyer first.

Don’t wait. Default judgments in these cases come fast.