Article's Authored by Mr. Rianda

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There is No Magic Bullet

Clients call me fairly regularly saying a cash advance has gone into default just weeks after the advance was made to the merchant. The client wants to take immediate action to collect from the merchant given the fraud the merchant has perpetrated on the cash advance company. As will be explained below, regrettably it is not that easy to move forward against the merchant even if a merchant commits fraud.

The Set Up:

The call I get from the cash advance company usually starts with the same fact pattern: the cash advance was made and only days or weeks after the advance, the merchant is no longer paying. The merchants typically switch to a new point of sale terminal and processing company if the cash advance is being repaid in a split funding type of arrangement. Or, the merchant blocks the cash advance company’s access to the merchant’s bank account if the funds are being collected by automated clearing house.

In either case, the merchant has repaid little if any of the advance. That the merchant had no intention to repay when it induced the cash advance company to provide the advance is fraud. The merchant misrepresented that it was going to repay the advance and also intentionally kept the cash advance company from collecting, a clear cut case of fraud. So it should be easy to seize the merchant’s assets, cash and the like right? Not so fast.

UCC Filings:

Some clients inform me that they have filed a UCC-1 statement and ask if that can be used to seize the defaulting merchant’s assets. Many cash advance companies file UCC-1 statements as part of providing a cash advance. The UCC-1 form is filed in the state where the merchant is located to let other people know that the cash advance company has a lien on certain assets of the merchant. In the event that the merchant defaults on the cash advance by committing fraud, the cash advance company theoretically can now go in and seize those assets under the authority granted under the UCC-1 filing. Sounds like a great way to collect from the merchant. But, the problem is that in reality it does very little to help the cash advance company.

The Uniform Commercial Code allows for the self help remedy of seizing the property that is subject to the UCC-1 lien in the event the merchant defaults. But the law also states that the cash advance company cannot commit a “breach of the peace” in doing so. For the most part, any act of violence, such as breaking a lock to get into a business, is seen as a breach of the peace. Some cases have held that even verbal confrontations constitute a breach of the peace. So from a practical perspective, it is almost impossible to use a self help remedy against a defiant merchant.

That is also true in the event the UCC-1 is only securing an interest in future credit card receivables as many do. Seizing those receivables would involve potentially going to the merchant’s bank and asking it to divert the funds. No bank is going to do so unless you have some sort of court order.

Another recent approach cash advance companies have been using to try to obtain assets is to send a letter to the merchant’s new processor demanding that the processor divert the funds to pay off the defaulting cash advance company’s debt. Although creative, there is really no right for the cash advance company to receive any funds from the merchant’s new processor. If the new processor acquiesced, this would actually be a breach of the terms of the merchant agreement between the merchant and the new processor.

How About Court Intervention?

So how about the courts can’t they help out in a clear cut case of fraud by allowing you to go in and seize assets right away? I am afraid to say it is not that simple.

There is no easy way to speed up the legal system. You have to file your lawsuit and let the case wind its way through the courts. In California for instance, it takes about 12-18 months to get to trial in most jurisdictions. Defendants can usually delay the outcome longer than that if they really want to. In some states given court backlogs, it can take many more years before you get anywhere close to trial, resulting in defendants holding onto and potentially hiding their assets for a considerable amount of time.

There are some states that have ways to expedite the process but the term “quick” is relative. For instance, in California there is something called a “prejudgment writ of attachment.” You file a motion to get one and if you do, then you are able to go and seize the assets of the defendant just like if you have a judgment from a trial. So you can go in and seize bank accounts, take assets and even have a “keeper” go into the merchant’s business and collect all merchant’s customers’ payments for your benefit.

The issue is that can take some time. You still have to file a lawsuit, and then bring your motion. You have to show that you have a “probability of prevailing” in the lawsuit which can be very fact intensive, which of course makes bringing the motion expensive. And then often the court will allow the defendant additional time for discovery to try to show why it will be able to win. In the end if you were able to win the motion in 6-9 months you would be doing pretty well.

Some states also allow for what is known as a “confession of judgment.” The merchant you are making the cash advance to signs a document that states if the merchant defaults on the cash advance, you can take the confession of judgment down to the courthouse and file it to get a judgment. Again, sounds easy in theory but maybe not so much in practice.

The number of states that allow this practice is fairly limited. And, the courts tend to look at these filings fairly closely. The court clerks generally review the confessions of judgments and they are very good at their jobs. They are very adept at finding the smallest failure to comply with the applicable procedural and substantive rules to reject a filing. And the courts for the most part are underfunded. So if you are lucky enough to get through on the first try it will still take months.

And the fact is the judgment may be of little help right away. If the merchant resides in a state that is not the same one where you obtained the judgment, you are going to have to take the judgment to the state where the merchant resides to get what is called a “sister state” judgment. This again takes more time and money. And there is also the possibility that the judgment will be rejected as many states do not allow for confessions of judgments to be confirmed in their state.

So as you can see, even with a slam dunk case against a merchant that has committed fraud, your options are limited and it is highly unlikely that you can immediately collect anything from the merchant. The underlying conclusion then is that there is no magic bullet that is going to allow you to collect from a merchant quickly if there is a default, even a fraudulent one. So, you better do your due diligence on the front end to minimize the number of defaults.

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