MCA Lawsuit: What to Do When an MCA Company Sues You
Getting sued by an MCA company is scary. You open your mail or get served at your business, and suddenly you are facing a legal action that could freeze your bank accounts, put liens on your assets, and threaten everything you have built. But here is what most MCA companies do not want you to know: you have more legal rights and defenses than you think, and many of these cases never go to trial because the MCA company would rather settle than fight.
This guide explains why MCA companies sue, what to expect, your legal rights, the most effective defenses, and exactly what to do step by step.
Why MCA Companies Sue Business Owners
MCA companies file lawsuits for several reasons, and understanding the motive helps you mount a better defense.
Breach of Contract
The most common reason is that you stopped making payments or violated some other term of the MCA agreement. Even though an MCA is technically a purchase of future receivables (not a loan), the contract still contains obligations. If you fail to meet those obligations, the MCA company can sue for breach of contract.
Personal Guarantee Enforcement
Almost every MCA agreement includes a personal guarantee. This means the MCA company can sue you personally, not just your business. If your business closes or cannot pay, the MCA company comes after your personal assets, including bank accounts, real estate, and vehicles.
UCC Lien Enforcement
MCA companies file UCC liens against your business assets when you take the advance. If you default, they can use these liens to claim business equipment, inventory, and accounts receivable. A lawsuit may accompany this process to formalize their claim.
As a Pressure Tactic
Some MCA companies sue not because they expect to go to trial, but because the threat of a judgment and the legal costs pressure you into paying. They know most small business owners cannot afford a prolonged legal fight, so filing a lawsuit is a way to force a quick settlement.
Confession of Judgment vs Regular Lawsuit
These are two very different legal actions, and it is critical to understand the difference.
Confession of Judgment (COJ)
A confession of judgment is a clause you signed in the MCA contract that allows the MCA company to obtain a court judgment against you without a trial, without notice, and without giving you a chance to defend yourself. The MCA company simply files the COJ paperwork with a court clerk, and a judgment is entered immediately.
In 2019, New York passed legislation restricting the use of COJs against out-of-state borrowers. However, COJs signed before the law changed may still be enforceable, and some MCA companies file them in states that have not banned the practice.
Regular Lawsuit
A regular lawsuit requires the MCA company to file a complaint, serve you with the lawsuit, and give you an opportunity to respond and defend yourself. This process takes longer and costs the MCA company more money, which is actually good for you because it gives you leverage to negotiate.
| Feature | Confession of Judgment | Regular Lawsuit |
|---|---|---|
| Notice required | No. You may not know until your account is frozen | Yes. You must be formally served |
| Your chance to defend | None initially. You must file a motion to vacate | Yes. You can file an answer and raise defenses |
| Speed | Very fast. Judgment can be entered in days | Slower. Takes months to resolve |
| Cost to MCA company | Low. Just filing fees | Higher. Attorney fees and court costs |
| Your leverage | Limited until judgment is vacated | More. The longer it takes, the more leverage you have |
Your Legal Rights When Sued by an MCA Company
Even though MCAs are not classified as loans, you still have significant legal rights.
Right to Respond
In a regular lawsuit, you have the right to file an answer to the complaint, raise defenses, and present evidence. You typically have 20 to 30 days to respond after being served, depending on your jurisdiction. Do not let this deadline pass.
Right to Challenge a Confession of Judgment
If a COJ has been entered against you, you have the right to file a motion to vacate (cancel) the judgment. Common grounds include fraud, the COJ clause being unenforceable in your state, the MCA company miscalculating the amount owed, or the COJ being entered after the New York ban went into effect.
Right to Discovery
In a lawsuit, you have the right to demand information from the MCA company through the discovery process. This can reveal important details about how they calculated the amount owed, whether they complied with the terms of the agreement, and whether the MCA should be reclassified as a loan.
Right to File Counterclaims
If the MCA company engaged in fraud, misrepresentation, or deceptive business practices, you can file counterclaims against them. Some business owners have turned MCA lawsuits around completely by proving that the MCA company violated laws or engaged in unconscionable conduct.
Do Not Ignore a Lawsuit
If you are served with a lawsuit and do not respond within the required timeframe, the court will issue a default judgment against you. A default judgment gives the MCA company the right to freeze your bank accounts, garnish your wages, and place liens on your property. Always respond, even if you think the case is hopeless.
Common Legal Defenses Against MCA Lawsuits
Several legal defenses have been used successfully in MCA cases. An experienced MCA attorney can evaluate which ones apply to your situation.
The MCA Is Actually a Loan
This is the most powerful defense. If the court determines that your MCA functions as a loan rather than a true purchase of receivables, the MCA becomes subject to state lending regulations, including usury laws. Courts look at factors like whether payments are fixed (not tied to actual revenue), whether the reconciliation clause is functional, and whether the MCA company bears any real risk of loss.
The New York Department of Financial Services has been actively investigating MCA companies that structure their products as disguised loans.
Unconscionable Terms
If the terms of your MCA are so one-sided that no reasonable person would agree to them with full knowledge, a court may find the contract unconscionable and refuse to enforce it. Extremely high effective interest rates, hidden fees, and misleading contract language can all support this defense.
Fraud or Misrepresentation
If the MCA company or broker lied about the terms, misrepresented the cost, or failed to disclose material information before you signed, you may have a fraud defense. This includes situations where the broker promised one set of terms but the contract contained different ones.
Breach of Contract by the MCA Company
If the MCA company breached the agreement first (for example, by refusing to honor the reconciliation clause, double-dipping on payments, or debiting more than the agreed holdback percentage), you may be excused from your obligations under the contract.
Improper Service or Jurisdiction
If you were not properly served with the lawsuit or the MCA company filed in a court that does not have jurisdiction over you, these procedural defenses can delay or dismiss the case entirely.
Step by Step: What to Do When You Get Sued
- Do not panic and do not ignore it. Read the lawsuit carefully and note all deadlines. Most importantly, note when your response is due.
- Contact an MCA attorney immediately. Many offer free consultations and can advise you within 24 to 48 hours. The American Bar Association can help you find one.
- Gather all your documents. Pull together your MCA agreement, all payment records, bank statements showing ACH withdrawals, and any communications with the MCA company.
- Do not communicate with the MCA company directly once you have an attorney. Let your lawyer handle all communication. Anything you say can be used against you.
- File your response before the deadline. Your attorney will prepare and file an answer to the complaint, raising all available defenses.
- Explore settlement during the legal process. Many MCA lawsuits settle for significantly less than the full amount once the MCA company realizes you are going to fight.
- Follow your attorney's guidance on next steps. Whether that means negotiating a settlement, proceeding to discovery, or preparing for trial.
Timeline and Costs of MCA Legal Defense
Typical Timeline
- Filing a response: 2 to 4 weeks after being served
- Discovery phase: 2 to 6 months
- Settlement negotiations: Can happen at any point during the process
- Trial (if it gets that far): 6 to 18 months after the lawsuit is filed
Most MCA lawsuits settle before trial. The MCA company does not want to spend $20,000 to $50,000 in legal fees to recover a $50,000 advance, especially when the outcome is uncertain.
Cost of Legal Defense
- Vacating a confession of judgment: $3,000 to $7,000
- Defending a lawsuit through settlement: $5,000 to $15,000
- Full trial defense: $15,000 to $50,000 or more
Some attorneys handle MCA cases on contingency or offer hybrid fee structures to make legal defense more accessible.
Frequently Asked Questions
Can an MCA company sue me personally?
What happens if I ignore an MCA lawsuit?
Can I win an MCA lawsuit?
How long does an MCA lawsuit take?
Sources
- New York State Senate. S6395: Confession of Judgment Reform. Law restricting confessions of judgment for out-of-state borrowers.
- New York Department of Financial Services. State regulatory body overseeing MCA companies operating in New York.
- American Bar Association. Lawyer Referral. Find an attorney who specializes in MCA defense.
- United States Courts. Federal court system information on civil lawsuits and procedures.
- Federal Trade Commission. Fair Debt Collection Practices Act. Federal rules governing collection practices.