Defending Against Merchant Cash Advance Lawsuits in San Jose
The Merchant Cash Advance Trap
You took out a merchant cash advance (MCA) to help your San Jose business through a rough patch, but now: the debt is spiraling, your cash flow is dwindling, and you’re facing aggressive collection tactics – or even a lawsuit from the MCA company. What do you do? This scenario is, unfortunately, all too common for small business owners who fell into the MCA trap.MCAs are not loans – at least, not technically. They involve companies purchasing a share of your future receivables at a discount. Sounds simple enough, right? But the truth is: these deals are carefully structured to avoid usury laws, while extracting exorbitant fees that can cripple businesses. And when you can’t “pay” that purchased percentage of your sales? Well, the MCA company pursues you relentlessly – through frozen accounts, lawsuits, even personal asset seizures.So, what‘s a San Jose business owner to do when drowning in MCA debt? You fight back – with a strategic legal defense.
Your Rights as a Merchant
Let’s get one thing straight: you did not take out a standard loan. The MCA agreement is a purchase of future income, which means the “lender” assumes more risk. This key distinction provides you, the merchant, with leverage and rights that loan borrowers simply don’t have.For example, if your sales decline due to factors outside your control, you may be able to renegotiate the repayment terms based on your actual receivables. After all, the MCA company only purchased a portion of your projected sales – not a fixed debt obligation.Additionally, many MCA contracts contain provisions that could invalidate the entire agreement, such as:
- Usurious fees and interest rates violating state laws
- Lack of clear disclosure about the true costs involved
- Overreaching personal guarantees and confessions of judgment
An experienced MCA defense attorney will scrutinize every word of your agreement to identify any such violations – giving you grounds to challenge the contract‘s enforceability.
Mounting a Vigorous Defense
So, you’ve been sued by an MCA company over that debt you couldn’t repay. Don’t panic – but do act swiftly and decisively. Ignoring the lawsuit is the worst thing you can do, as it will likely lead to a default judgment against you and your business.The first step? Respond to the lawsuit by filing an Answer within the required timeframe (typically 20-30 days). This preserves your right to defend yourself and raises any applicable grounds for dismissal or renegotiation.From there, your defense strategy could include:
Challenging the Contract’s Validity
As mentioned, any provisions violating usury laws, disclosure requirements, or overreaching into personal assets could render the MCA agreement void or voidable.
Asserting Violations by the MCA Company
If the plaintiff engaged in deceptive practices, harassment, or otherwise breached their own contract terms, you may have counterclaims against them.
Negotiating a Settlement
Oftentimes, the wisest path is pursuing an agreed settlement – a lump sum or restructured repayment plan that provides you financial relief.
Pursuing Bankruptcy Protection
In severe cases where the MCA debt is simply insurmountable, bankruptcy may be the best option to discharge your obligations through Chapter 7 or reorganize them in Chapter 11.No matter which defense route you take, having an experienced MCA litigator in your corner is crucial. These cases are highly technical and the MCA companies will undoubtedly be represented by aggressive counsel of their own.
The Anatomy of a Winning Defense
But what does a successful MCA lawsuit defense really look like in practice? Let’s walk through a hypothetical example:Jamal owns a popular food truck business in San Jose. When the pandemic hit, his sales plummeted and he struggled to cover expenses. A broker convinced him to take out a $75,000 MCA, saying it was “not a loan” and the payments would simply be a percentage of his receivables going forward.However, the contract contained a usurious fee structure equating to over 40% interest. It also had a personal guarantee clause and a confession of judgment provision – meaning if Jamal defaulted, the MCA company could immediately seize his personal assets without allowing him to defend himself in court.Sure enough, when Jamal’s food truck business failed to fully recover post-pandemic, he quickly fell behind on the “purchased payments percentage.” The MCA company sued him, seeking to enforce the full remaining balance plus fees – a sum exceeding $100,000.Jamal wisely hired an MCA defense firm, which sprung into action:
- They filed a timely Answer contesting the lawsuit on multiple grounds.
- They asserted violations of California’s usury laws based on the excessive interest rates and fees.
- They claimed the personal guarantee and confession of judgment clauses were unconscionable and unenforceable overreaches.
- They raised affirmative defenses that the MCA contract failed to properly disclose all costs as required.
- Finally, they filed counterclaims against the MCA company for deceptive lending practices and bad faith.
With such a strong legal position, Jamal’s attorneys were able to negotiate a highly favorable settlement – a $35,000 lump sum payment to fully resolve the over $100,000 debt.While every case is unique, this example illustrates the multi-pronged defense approach that can protect San Jose business owners from the MCA debt trap.
Escaping the Trap: A Moral Imperative
At the end of the day, these merchant cash advance companies exploit regulatory loopholes to extend predatory, quasi-loan products to unwitting small businesses. Their mission? Extracting maximum revenues, with little regard for the financial devastation they leave in their wake.As a San Jose business owner, you have a moral – and legal – obligation to fight back against such bad faith actors. Not just for yourself, but for the entire ecosystem of entrepreneurs trying to make an honest living.So if you find yourself ensnared in the MCA debt trap, don’t succumb to the pressure tactics. Remain defiant, and secure professional legal representation to defend your rights as a merchant under the law. It’s not just about your business surviving – it’s about upholding ethical standards and ensuring fair dealings for all.Because when you took out that MCA, you thought you were making a simple purchase of future income. What you didn’t realize? You were being sold a bill of goods designed to entrap you from the start. But now, you’re armed with knowledge – and you have the power to fight back.
Key Takeaways
- Merchant cash advances are not standard loans, providing merchants with certain legal protections
- Carefully review your MCA agreement for any provisions that could invalidate the contract
- Never ignore a lawsuit – respond promptly by filing an Answer to preserve all defenses
- Potential defense strategies include challenging the contract, asserting violations, negotiating a settlement, or bankruptcy
- Consult an experienced MCA defense attorney to protect your rights as a San Jose business owner
At Delancey Street, we’re committed to helping businesses escape the MCA debt trap through strategic legal representation. Our attorneys have extensive experience defending against these predatory lending practices. If you’re facing an MCA lawsuit or struggling with unsustainable MCA debt, schedule a consultation today.