Recently, our clients have encountered issues in which, unbeknownst to the Factor, their Clients had not only entered into merchant cash advance agreements with Merchant Cash Advance companies (MCA), but defaulted on those agreements as well. As a result, the MCAs immediately obtained judgments against the Clients and began notifying the Clients’ Account Debtors of the judgments and directing the Account Debtors to remit all payments owing to the Clients to the MCAs. Naturally, these letters alarmed the Account Debtors, who typically refuse to make payments to anyone. This article outlines what steps we took in response to the MCAs’ notifications to ensure that the Account Debtors continued to make all payments to the Factors.

Cease and desist letter to the MCAs

Our first action was to send cease and desist letters to the MCAs. In these letters, we notified the MCAs that:

  • Our security interest in the Clients’ Collateral was superior to the MCAs’ security interest;
  • That the MCAs’ actions constituted tortious interference with the Factors’ agreements with the Clients; and
  • That any further action taken by the MCAs with respect to the Collateral would result in a lawsuit.

Some of these MCAs responded to our letters and a couple did not, but it was important for the Factors to send a message to the MCAs informing them that the Factors were aware of these actions and that the Factors would take action if the MCAs continued their unlawful conduct.

Communication with the Account Debtors

Generally, most Account Debtors are unfamiliar with the concept of factoring, Notices of Assignments, and the possibility of double-payment because of non-compliance with the Notice of Assignment. In these situations, not only were these Account Debtors already instructed to pay the Factors, who they did not contract with and had never heard of, but these Account Debtors were receiving additional notices from the MCAs, including copies of valid judgments, instructing the Account Debtors to pay the MCAs. Naturally, the Account Debtors did not know what to do.

Either the Factors, or our firm on the Factors’ behalf, reached out to each of the Account Debtors to discuss these issues and communicate that all payments need to continue to be made, and needed to be made to the Factors.

First, we tried to educate the Account Debtors about the laws relating to factoring, Notices of Assignment, and priority of security interests. Though many of the Account Debtors did not fully grasp these concepts, all the Account Debtors had called their own lawyers, which led to reasonable conversations about the issues.

Second, and most importantly, the Factors offered to indemnify and hold the Account Debtors harmless with respect to any payments the Account Debtors made to the Factors. This offer provided the Account Debtors with security that they could continue to make the payments to the Factors without fear or claw backs or double-payment.

In each of these scenarios, the Account Debtors ended up continuing to make payments to the Factors and there has been no further communication from the MCAs. To be clear, these strategies will not always be successful. You may run into an ultra-conservative Account Debtor who would rather put the funds in question into a court’s registry and wait for a judge to tell them who to pay. Or you may encounter a hyper-aggressive MCA that destroys the relationships between the Client, the Account Debtor, and the Factor. However, in the event this happens to you, having honest and straightforward conversations with Account Debtors gives the Factor the best chance of continuing to receive funds, despite an MCA’s collection efforts.

Bruce Loren and Allen Heffner of the Loren & Kean Law Firm are based in Palm Beach Gardens and Fort Lauderdale. For over 30 years, Mr. Loren has focused his practice on construction law and factoring law. Mr. Loren has achieved the title of "Certified in Construction Law" by the Florida Bar. The Firm represents factoring companies in a wide range of industries, including construction, regarding all aspects of litigation and dispute resolution. Mr. Loren and Mr. Heffner can be reached at bloren@lorenkeanlaw.com or aheffner@lorenkeanlaw.com or 561-615-5701.