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WHAT TO DO IF A MERCHANT CASH ADVANCE COMPANY GETS A JUDGMENT AGAINST YOUR CLIENTBruce E. Loren, Esq. and Allen Heffner, Esq. | Jan 26 2018

We have previously discussed how Factors can protect themselves and their security interests from Merchant Cash Advance companies (MCAs). However, sometimes a Factor’s defensive strategies will not be enough to stop its Client from entering into a transaction with an MCA. Recently, one of our clients encountered this issue. The Client defaulted on its agreement with the MCA and the MCA immediately got a judgment against the Client. Worse, the state in which the judgment was entered allows the MCA to notify all known creditors of the Client of the judgment and allows them to instruct the creditors, without court intervention, to pay the MCA for monies owed to the Client. This notification was sent to one of the Client’s Account Debtors who stated that it would no longer make any payments to the Factor until the issue with the MCA judgment was resolved. This article outlines what steps we took in response to the Account Debtor’s position to ensure that payments from the Account Debtor would continue to be made to the Factor.

Remind the Account Debtor of the importance of the Notice of Assignment

After receiving notice of the judgment and the Account Debtor’s claim that it would no longer make payments to the Factor, we reached out to the Account Debtor’s attorney to discuss the issue. We reminded the Account Debtor of two important facts: (i) the Factor’s Notice of Assignment was still in place and payments made to any other entity would not discharge the debt; and (ii) the Factor’s security interest in the Client’s assets had priority over the MCA’s judgment. Additionally, we offered to indemnify the Account Debtor and hold the Account Debtor harmless for any damages suffered by the Account Debtor with respect to any claims made by the MCA regarding payments made to the Factor after the judgment was entered.

Warn the MCA of potential legal action

At the same time that we contacted the Account Debtor, we sent a cease and desist letter to the MCA to inform the MCA of the Factor’s priority in the Client’s assets. Additionally, the letter put the MCA on notice that any attempt on the MCA’s behalf to collect on its judgment from the Client’s Account Debtors would constitute tortious interference with the Factor’s agreement with the Client. Finally, we demanded that any funds received by the MCA be immediately transferred to the Factor.

What happens next?

In our case, the Account Debtor and MCA acted reasonably and the Account Debtor agreed to continue to make payments to the Factor. However, parties will not always act reasonably. If the Account Debtor refuses to make payments or the MCA refuses to back down, the Factor is left with little choice but to file a lawsuit against the Account Debtor and the MCA. The Factor would seek a declaratory judgment from the Court asking the Court to confirm the priority of the Factor’s security interest in the Client’s assets and the MCA’s judgment. Additionally, the Factor would assert a claim for tortious interference against the MCA and could seek damages from the MCA for unpaid payments owed by the Account Debtor to the Factor. Litigation is the last resort but sometimes simply filing the lawsuit will force the Account Debtor and MCA to take the Factor seriously.

Our client was able to take a potential volatile situation and turn it into a non-issue by having straightforward conversations with the parties involved. However, parties will not always act rationally and Factors need to be aware of their rights in the event an MCA gets a judgment against its Client.

Bruce Loren and Allen Heffner of the Loren & Kean Law Firm are based in Palm Beach Gardens and Fort Lauderdale. For over 25 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.