Delaware Entities Sued on Merchant Cash Advance Agreements

A Delaware company is usually a Delaware company and nothing else

Most businesses organised in Delaware do not operate there. They were formed there and they trade somewhere else, often through a second entity, sometimes through several. That ordinary arrangement produces a question in merchant cash advance litigation that rarely comes up elsewhere: which of these companies is the defendant, and did that one sign anything?

It is worth asking early, because by the time a judgment exists the answer has stopped being useful.

Three names, and they are not interchangeable

Open the agreement and find each of the following separately:

• The entity named as the merchant. Sometimes a holding company, sometimes the operating company, occasionally a trading name that is not an entity at all.
• The entity whose receivables were actually purchased. The bank account the daily remittance came out of tells you this, and it is not always the same company.
• The person who signed the guaranty. A human being, usually on a separate page.

Where those three line up, the case is simple in structure. Where they do not, the caption on the summons is a decision the funder made, and decisions can be wrong.

Being named wrongly is not the same as being safe

The instinct on discovering that the wrong company was sued is to assume the problem solves itself. It does not.

A defendant that is named and served has to appear. If it does not, the fact that the claim against it was misconceived does not stop a judgment being entered — it simply means a bad judgment exists, and someone will have to spend money to undo it later. The argument that the wrong entity was sued is a defense, and defenses are raised by defendants who show up.

Who could lawfully be handed the papers

For a limited liability company, CPLR § 311-a is specific. Personal service is made by delivering a copy to a member of the company in New York where management is vested in its members, to a manager where management is vested in one or more managers, to any other agent authorised by appointment to receive process, or to any other person the company designated to receive process.

In a layered structure, the person who was actually handed the envelope may be none of those for the entity named on it. That is a factual question answered by the affidavit of service in the court file, not by recollection.

Formation does not decide location

CPLR § 302 gives New York personal jurisdiction over a non-domiciliary who transacts any business within the state or contracts anywhere to supply goods or services in the state, as to a cause of action arising from that act. The agreement almost certainly adds a submission to New York jurisdiction on top.

Neither of those cares where the certificate of formation was filed. A company organised in Delaware, trading in Oregon, sued in New York is an unremarkable combination, and the Delaware part is the least relevant of the three.

And none of it reaches the guaranty

The entity analysis is worth doing and it has a boundary. Where an individual signed a personal guarantee, the claim against that individual rests on that signature. A corporate structure above the operating business does not stand between a guarantor and a guaranty, and the person's deadline runs on its own.

What to do first, from Delaware

1. Build the entity list. Every company in the group, with its role and its state of formation.
2. Match the agreement to the bank account. Whose receivables were really being taken.
3. Read the affidavit of service. Who was served, on behalf of whom, in what capacity.
4. Deal with the guaranty separately. Its clock is the person's, and the structure does not slow it.

How an MCA lawsuit is defended covers the case once appearances are filed. A confession of judgment and a restrained account describe what happens when nobody appears.