Iowa Businesses Sued by an Assignee on an MCA Agreement

The name on the summons is not the name on the wire transfer

An Iowa business takes an advance from one company. Eighteen months later it is sued by another, with a name nobody in the office recognises, over an agreement it does recognise.

The usual reaction is to assume a mistake, or to assume it does not matter because the underlying deal is familiar. Neither is quite right. What has almost certainly happened is that the position changed hands, and that is both ordinary and worth examining.

How a claim ends up with a stranger

Merchant cash advance positions are financial assets. They get:

• sold, individually or in portfolios, often after they stop performing;
• assigned, sometimes more than once, with the paperwork following afterwards;
• placed with servicers who collect in their own name without owning anything;
• pursued by collection agencies instructed by whoever currently holds the file.

Each of those produces a different relationship to the agreement you signed, and only some of them produce a party entitled to sue on it.

Which makes "who are you" a real first question

The question is not rhetorical and it is not an insult. A plaintiff suing on a contract it did not sign is suing on rights it says it acquired, and the acquisition is a matter of documents: an assignment, a bill of sale, a schedule identifying the account, sometimes a chain of three or four of them.

What a court requires to be satisfied of that, under the New York law these agreements choose, is a question for argument in the case — and this page is not going to pretend to a general answer, because the sufficiency of an assignment record is exactly the kind of thing that turns on what was actually produced.

The point is narrower and more practical: it is a question that gets answered if it is asked, and it is frequently not asked, because defendants assume the plaintiff is the funder.

Be careful who you talk to

While a case is pending, several parties may be in contact: a servicer, a broker who arranged the original deal, a collection agency, the plaintiff's lawyers. They are not the same, and none of them is necessarily the party with authority to resolve the claim.

Two consequences follow. First, a payment or settlement agreed with a party that does not hold the claim may leave the obligation sitting where it was. Second, statements made to a collector can find their way into the case, which is a reason to establish who you are speaking to before discussing the facts with them.

New York law governs, which is why New York counsel

GOL § 5-1401 lets parties choose New York law for a transaction covering at least $250,000 whether or not the deal is otherwise connected to the state, and these agreements choose it as a matter of form. The agreement will also submit to New York courts, which is why an Iowa business defends in New York.

The assignment question, like every other question in the case, gets decided under that law by that court.

And the deadline is unaffected by the uncertainty

CPLR § 320 requires an appearance within twenty days of service of the summons, by answer, by notice of appearance, or by a motion extending the time to answer, with longer periods in defined circumstances including particular methods of service.

Not recognising the plaintiff is not a reason to wait. Under CPLR § 3215 a plaintiff whose defendant fails to appear may seek a default judgment, with the clerk able to enter one for a sum certain on submitted proof — and a default judgment in favour of a party whose entitlement was never examined is the worst of both outcomes.

What to do first, from Iowa

1. Write down every name you have ever dealt with on this advance: funder, broker, servicer, collector, plaintiff.
2. Keep the original agreement and any assignment notices you were sent, including emails that mention a transfer.
3. Do not pay or promise anything to a party whose entitlement has not been established.
4. Appear on time and ask the question inside the case. It is a defense, not a reason to delay.

How an MCA lawsuit is defended covers what follows an appearance, and a restrained account covers the position if a judgment already exists.