Why Closing Your Business to Escape an MCA Lawsuit is Not A Good Idea.

Closing a business may seem like an easy way to escape an MCA obligation or lawsuit, but shutting down does not automatically eliminate the debt or stop legal action. This article explains the potential consequences of closing a business after an MCA lawsuit has been filed, including personal guarantees, UCC liens, creditor claims, asset transfers, and the risk of default judgments. It also outlines legitimate alternatives, such as defending the lawsuit, negotiating a settlement, exploring bankruptcy, or conducting a properly structured business wind-down. The key takeaway is that business owners should address the MCA dispute strategically and legally rather than simply abandoning the business.

By Thomas Tramaglini, Chief Operations Officer

thomas@beaconclientsolutions.com

About Thomas Tramaglini

When a small business owner is sued by a merchant cash advance (MCA) company, one of the first thoughts may be: “What if I just close the business?”

It is an understandable reaction. If the business no longer operates, there are no future receivables for the MCA company to collect. Some owners may believe that dissolving the LLC, closing the bank account, or simply walking away from the business will cause the MCA company to lose its ability to collect.

Unfortunately, closing a business generally does not eliminate an MCA obligation, and it does not automatically stop an existing lawsuit.

In fact, depending on the circumstances, closing the business without first addressing the MCA agreement and pending litigation can create additional problems.

The MCA Contract Doesn't Necessarily End When the Business Does

An MCA is generally structured as a purchase of future receivables rather than a conventional business loan. However, the specific contract controls the parties' rights and obligations.

Many MCA agreements contain provisions that can create obligations beyond the business itself, including personal guarantees, security interests, UCC filings and contractual remedies. Federal regulators have also taken enforcement action involving MCA companies that represented that no personal guarantee was required when their contracts actually contained personal-guarantee provisions.

That means an owner should not assume:

Business closes = MCA disappears.

The MCA company may still assert claims against the business, and potentially against individuals who signed guarantees or other agreements.

Closing the Doors Does Not Automatically Dismiss a Lawsuit

If an MCA company has already filed a lawsuit, shutting down the business generally does not make the lawsuit disappear.

The lawsuit must still be addressed through the legal process.

Ignoring the complaint because the company has stopped operating can be particularly dangerous. Depending on the jurisdiction and circumstances, failing to respond can result in a default judgment. Once a creditor obtains a judgment, it may have substantially stronger collection remedies than it had before the lawsuit.

Those remedies can potentially include enforcement against business assets and, where legally available, enforcement of obligations against an individual who is personally liable.

Closing the business and defending the lawsuit are two separate issues.

An owner can close a business while still having to defend litigation arising from the business's obligations.

What Happens to the Business's Assets?

Another major issue is what happens to the company's assets when the owner decides to shut down.

Closing a company does not necessarily mean that the owner can simply transfer the company's cash, vehicles, equipment, accounts receivable or other assets to himself, herself, family members or a new company.

The Small Business Administration recommends that owners closing a business properly address financial obligations, file the appropriate dissolution documents, resolve tax obligations and maintain business records.

State law can also impose requirements on how a dissolved entity winds up its affairs.

For example, New Jersey law provides that an LLC winding up its affairs must address its debts and obligations and apply its assets to discharge obligations to creditors.

That is an important distinction:

Closing a business is not the same thing as giving away or hiding its assets.

Transferring Assets to Avoid an MCA Creditor Can Create Serious Problems

Perhaps the greatest danger arises when an owner closes the business and simultaneously moves assets in an attempt to put them beyond the MCA company's reach.

For example, an owner might consider:

• Moving money from the business account to a personal account

• Transferring equipment to another company

• Selling assets for substantially less than their value

• Giving business assets to relatives

• Moving receivables to a different entity

• Creating a new company and transferring the old company's customers or assets to it

• Distributing remaining business assets to owners before legitimate creditors are addressed

The legality of any particular transaction depends heavily on the facts and applicable state law. But transactions designed to put assets beyond a creditor's reach can potentially be challenged under fraudulent- or voidable-transfer laws.

In New Jersey, for example, statutes governing dissolved LLCs specifically preserve creditor rights in certain circumstances and address claims involving assets distributed after dissolution.

Consequently, a business owner should not treat dissolution as an asset-protection strategy without obtaining qualified legal advice.

What About the UCC Lien?

Many MCA transactions involve a UCC filing against business assets or receivables.

Closing the operating business does not necessarily make the underlying security interest disappear.

If assets remain in the company, the MCA company may attempt to enforce whatever rights it has under the contract and applicable law.

This is one reason an owner considering closure should understand exactly what the MCA agreement says about:

• UCC-1 financing statements

• Collateral

• Receivables

• Default

• Personal guarantees

• Cross-default provisions

• Confession-of-judgment provisions, where permitted

• Events of default

• Acceleration

• Attorney's fees and collection costs

The actual contract matters.

A Personal Guarantee Can Change Everything

One of the most important documents in an MCA transaction may be the personal guarantee.

If the business owner personally guaranteed the MCA obligation, shutting down the company may leave the owner personally exposed even though the business itself is no longer operating.

The Small Business Administration notes that sole proprietors generally do not have a separate legal entity protecting personal assets from business liabilities, while LLCs generally provide liability protection subject to important exceptions.

An LLC therefore should not be viewed as an automatic shield against every obligation associated with an MCA.

The precise language of the personal guarantee, the business structure, the conduct of the parties and applicable state law all matter.

Closing May Actually Make the MCA Company More Aggressive

There is another practical consideration.

An operating business may still have revenue from which an MCA company expects to receive payments. Once the business closes, that future revenue stream disappears.

That can change the creditor's incentives.

Instead of waiting for future receivables, the MCA company may focus on pursuing its contractual remedies, litigation, guarantees, collateral or other legally available collection mechanisms.

In other words, closing the business may not make the MCA company less interested in the debt. It may make the creditor more focused on collecting what remains.

What If the Business Is Already Losing Money?

There is an important distinction between legitimately closing an unprofitable business and closing a business solely to defeat a creditor's rights.

A business owner has the right to make legitimate business decisions, including deciding that continued operation is economically impossible.

If the business is losing money and cannot realistically continue, shutting down may be entirely appropriate.

The problem is what happens during the wind-down.

A responsible wind-down generally involves understanding the company's obligations, preserving records, dealing appropriately with employees and taxes, accounting for assets and receivables, and addressing pending litigation and creditor claims.

The SBA specifically recommends developing a plan for closing a business and resolving its financial obligations rather than simply abandoning the operation.

Closing After Being Sued Requires Even More Caution

If an MCA company has already sued the business, the owner should be especially careful about making major changes to the company's assets or structure.

The timing can become important.

For example, a transaction occurring shortly before or after litigation begins may receive greater scrutiny if a creditor later alleges that assets were moved to prevent collection.

That does not mean every transaction after a lawsuit is improper. Businesses routinely sell assets, pay ordinary expenses and wind down operations.

The issue is whether the transaction was legitimate and consistent with applicable law—not simply whether it occurred after the lawsuit was filed.

Closing the Business May Be Part of a Solution—but It Shouldn't Be the Entire Strategy

For some businesses, continuing to operate may be economically impossible. In those circumstances, closing may ultimately be the correct decision.

But the better question is not:

“How do I close the business so I don't have to pay the MCA?”

The better question is:

“How do I legally wind down the business while minimizing my exposure and properly dealing with the MCA litigation?”

Those are very different strategies.

Depending on the circumstances, potential options may include:

1. Defending the lawsuit

An attorney can review the complaint, MCA agreement, personal guarantee, UCC filings and other documents to determine what claims are actually being asserted and what defenses may exist.

2. Negotiating a settlement

A pending lawsuit does not necessarily prevent the parties from negotiating.

In some situations, resolving the dispute for an agreed amount may be preferable to allowing litigation to continue indefinitely.

3. Challenging the MCA agreement

Not every MCA agreement is necessarily enforceable exactly as the MCA company claims.

Potential issues can include the actual substance of the transaction, contractual language, representations made during the transaction, payment provisions, personal guarantees, UCC issues and applicable state law.

The facts of each transaction have to be examined individually.

4. Exploring bankruptcy

For some business owners, bankruptcy may be an option worth discussing with bankruptcy counsel.

Whether bankruptcy helps depends on the business structure, the existence of personal guarantees, the type of obligation, the owner's personal assets and liabilities, and the applicable bankruptcy chapter.

A business bankruptcy does not automatically eliminate a personally guaranteed obligation.

5. Conducting a legally structured wind-down

If the business truly needs to close, the owner can work with qualified professionals to properly wind down the company while addressing creditors, taxes, employees, contracts, assets and litigation.

This is fundamentally different from simply abandoning the business.

The Biggest Mistake: Assuming the MCA Company Can't Find You

Some business owners believe that once the company is closed, the MCA company will have nowhere to go.

That assumption can be costly.

An MCA company may have documentation identifying the owners, guarantors, bank accounts, business assets and contractual obligations. Closing a physical location or dissolving an LLC does not necessarily erase that information.

And if a judgment has already been entered, the creditor may have additional legal remedies available.

The Bottom Line

Closing a business can be a legitimate and necessary business decision. Closing the business solely as a way to escape an MCA obligation or lawsuit, however, can create additional legal and financial risks.

The MCA does not necessarily disappear when the business stops operating. Personal guarantees may survive. UCC rights may remain relevant. Lawsuits do not automatically disappear. And transferring or distributing assets improperly can create additional problems.

For a business owner already facing an MCA lawsuit, the safest approach is generally to address the litigation first, understand the MCA contract and personal guarantees, identify the company's assets and obligations, and develop a legally compliant wind-down strategy if the business truly cannot continue.

The goal should not be to hide from the MCA company.

The goal should be to protect the business owner's legal rights, avoid unnecessary exposure, and resolve the MCA dispute through the strongest lawful strategy available.

This article is for general informational and educational purposes and is not legal advice. MCA agreements, personal guarantees, UCC filings, business structures and creditor remedies vary by contract and jurisdiction. Anyone facing an MCA lawsuit should consult qualified counsel such as the attorneys at Beacon Client Solutions regarding the specific facts of their situation.

Contact Beacon Client Solutions to better understand your situation and how we can help you.

Dr. Thomas Tramaglini is the Director of Operations and Negotiation for Beacon Client Solutions, an award-winning company that supports small businesses in multiple areas, especially business debt. Thomas has been a small business owner for many years, as well as held leadership positions in several organizations and companies. Thomas holds a B.A. in History, as well as Masters and Doctorates in Organizational Leadership from Rutgers University, The State University of New Jersey.

Disclaimer: Beacon Client Solutions is not an accountancy, or a law firm. We are business consultants. While Beacon works with outstanding attorneys and accountants, we cannot and do not provide legal or tax advice. All of our work is connected to those who are legally certified to give such advise. Beacon does have a longstanding body of work in MCA resolution and understands what small business owners deal with, specific to MCA. Beacon Client Solutions serves clients in all 50 states, Puerto Rico, Mexico and Canada.