MCA UCC 9-406 Notices: Payment Holds & Your Options
What is a UCC § 9-406 lien demand notice? It is a letter sent by an MCA funder, its attorneys, or its collection representatives to a business’s customers, payment processors, insurers, or other payors. The letter claims the funder has rights to the business’s receivables and instructs the recipient to pay the funder directly instead of the business.
Some funders send these notices to one or two customers. Others send them to multiple customers, processors, or payors they can identify based on information available concerning the business and its payment relationships.
Can an MCA Funder Freeze My Credit Card Processing?
If a business owner relies on credit card or electronic payment processing to generate revenue, as many retail and hospitality businesses do, a UCC demand notice directed to the payment processor can create significant disruption.
The substance of a UCC § 9-406 demand notice generally asserts that the MCA provider acquired rights involving the business’s future receivables and that the recipient holds or processes money otherwise payable to the business.
The notice can further assert that, under UCC § 9-406 and the provider’s claimed assignment or security rights, payment should instead be directed to the MCA provider.
When a processor receives a MCA UCC lien demand notice, it can hold funds, restrict the account, or ask for documentation while it evaluates the competing claims.
A hold is not necessarily the end of the road. Depending on the circumstances, the notice can be challenged, documentation supporting the business’s position can be provided to the processor, or the matter can be addressed through negotiation or court proceedings. When a settlement is reached, the MCA provider can agree to send a retraction or withdrawal notice to the affected processor.
Can an MCA Company Redirect My Insurance Payments?
UCC demand notices can create particularly serious problems for businesses that rely on insurance reimbursements, including businesses in the medical, dental, and therapy industries.
Medicare payments are subject to federal restrictions on assignment, which can affect attempts to redirect those payments. Other government-program and private-insurance payments require separate analysis based on the applicable program, contract, and law.
When an insurer receives a notice asserting rights to receivables, it can hold disputed funds, request supporting documentation, or evaluate whether payment should continue to the business or be directed elsewhere.
An interruption involving insurance payments can create significant operational problems for a business that depends on those payments for its normal cash flow.
Can an MCA Funder Contact My Customers?
Ordinary customers, as opposed to insurers or payment processors, can respond differently to a UCC lien demand notice. A customer can question the validity of the notice or simply become uncertain about whom it should pay, resulting in payment being held until the dispute is clarified.
If a business relies upon one or two large customers or clients that account for a substantial portion of its revenue, a UCC demand notice sent to those customers can create significant risk.
An example would be a general contractor that performs most of its work for one large real estate developer.
After receiving the lien demand letter, the developer might not immediately redirect payment to the MCA provider. Instead, the developer could hold disputed funds while seeking clarification concerning who is legally entitled to receive payment.
That interruption alone can significantly affect the general contractor’s cash flow and business operations.
How held funds are ultimately released depends on the agreements involved, negotiations between the parties, applicable law, and any court proceedings. There is no fixed rule requiring a particular percentage of the restrained funds to be paid to the MCA provider.
What Does a UCC § 9-406 Demand Notice Actually Establish?
The way attorneys can contend with these situations begins with determining whether the MCA provider actually possesses the rights it claims to be enforcing.
A demand notice referencing UCC § 9-406 should not automatically be treated as proof that every assertion made by the MCA provider is legally enforceable.
That analysis starts with the MCA agreement, the UCC filing, and the notice itself, reviewed against the applicable state law.
UCC § 9-406 generally addresses circumstances in which an account debtor can discharge an obligation by paying an assignor or, after receiving an effective notification of assignment, an assignee. Whether a particular notification is effective requires analysis of the notice and the underlying rights rather than simply assuming that filing a UCC-1 establishes everything asserted by the sender.
A recipient of a § 9-406 notification can generally request reasonable proof that the assignment was made. Under versions of Article 9 containing this provision, failure to seasonably furnish reasonable proof can affect whether the recipient must redirect payment and can permit the recipient to discharge the obligation by continuing to pay the assignor.
Can an Earlier Bank or SBA Lien Take Priority Over an MCA UCC Filing?
Another important issue is whether other creditors have previously filed security interests against the business.
For example, if a business granted a bank or SBA lender a security interest covering accounts receivable before the MCA provider filed its UCC-1, that earlier security interest can create a significant priority issue concerning the same receivables.
Filing date is not the only factor. Perfection, the collateral covered by each security interest, the nature of the competing interests, and applicable Article 9 priority rules all matter. That is why the complete UCC filing history and underlying documents should be reviewed rather than looking only at the MCA provider’s filing.
Key Takeaway on UCC Lien Demand Notices
UCC lien demand notices can be powerful collection tools for Merchant Cash Advance providers. However, a business owner should not assume that every assertion contained in a demand notice is legally established merely because the notice references UCC § 9-406 or a recorded UCC-1.
There can be significant issues involving the underlying agreement, assignment rights, competing security interests, lien priority, the sufficiency of the notification, applicable state law, and potential negotiation or settlement options.
MCA Creditor Lawsuits
Whether or not UCC notices succeed, an MCA provider can also file a breach-of-contract lawsuit against the business and, depending on the agreement and claims asserted, a personal guarantor.
A lawsuit must be addressed within the applicable court deadline. Ignoring the lawsuit can allow the MCA provider to seek a default judgment.
Confessions of Judgment and Other Court Remedies
A confession of judgment is a procedure through which a creditor can obtain a judgment based on the debtor’s prior written authorization or confession without proceeding through an ordinary contested lawsuit. The availability and enforceability of these arrangements vary considerably by jurisdiction, and many states prohibit or substantially restrict their use.
Some jurisdictions still provide procedures for judgments by confession when specific statutory requirements are satisfied. Iowa, for example, has a statutory judgment-by-confession procedure requiring, among other things, a written statement signed and verified by the defendant.
Other states provide different procedures involving prejudgment attachment, garnishment, or similar remedies. Connecticut, for example, provides procedures for prejudgment remedies in commercial transactions, including circumstances involving legally effective waivers of notice and hearing rights.
A collection representative’s description of what an MCA provider “will do” should never be treated as proof that a particular remedy is legally available. The agreement, jurisdiction, applicable statutes, court procedures, and facts of the case must be reviewed.
Defending an MCA Breach-of-Contract Lawsuit
In our firm’s experience, a substantial portion of MCA legal actions involve breach-of-contract claims. We most often see these lawsuits filed in New York, Utah, Florida, Texas, and California. Through its network of attorneys, Business Debt Law Group represents business owners facing MCA litigation across the United States, including matters as far away as Alaska.
The appropriate defense strategy depends on where the lawsuit was filed, the allegations in the complaint, governing-law and forum provisions, the MCA agreement, payment history, reconciliation provisions, personal guarantees, and the procedural posture of the case.
Once defense pleadings are filed on behalf of a business owner, litigation can continue for a substantial period depending on the court, claims, discovery, motions, settlement discussions, and other circumstances.
Settlement discussions can also occur during litigation. Litigation does not guarantee that a business owner will obtain a lower settlement or more favorable payment terms. Any decision to defend, negotiate, settle, or pursue another strategy should be based on the circumstances of the particular case and advice of counsel.
Past results do not guarantee a similar outcome.
Partial Payments Without a Written MCA Settlement Agreement
Business owners sometimes make partial payments in an effort to avoid a lawsuit or reduce collection pressure.
We generally advise clients against making partial payments without a fully executed written settlement or modification agreement.
Without a written agreement establishing how the payments will be treated, questions can arise regarding how partial payments are credited, whether additional contractual charges continue to accrue, whether the business remains in default, and what balance the MCA provider claims remains outstanding.
A business owner can therefore make partial payments while discovering that the claimed balance is not decreasing as expected.
The Worst Thing Is to Ignore the Situation
One of the most serious mistakes a business owner can make is ignoring an MCA problem.
If a business owner sees that the business is falling behind, or is about to fall behind; on daily or weekly Merchant Cash Advance payments, obtaining professional legal advice early can provide a clearer understanding of the agreement and available options.
Some MCA providers use collection representatives who take a friendly, reassuring approach, staying in regular contact and accepting smaller or partial payments. Meanwhile, the provider’s attorney can be pursuing legal action separately.
A friendly collector is not a reliable indication that litigation is not coming, and a representative’s reassurance does not extend or eliminate a court deadline.
Do Not Ignore an MCA Lawsuit or Court Documents
An MCA provider can file a breach-of-contract lawsuit even while settlement or payment discussions are taking place.
If a lawsuit is properly served and the business fails to respond within the required deadline, the MCA provider can seek a default judgment.
A judgment can create additional enforcement risks, including efforts involving business bank accounts or other assets, subject to applicable law and procedural requirements.
Service rules vary by jurisdiction, and legally effective service does not always require someone to personally hand court papers to the business owner. Treat every summons, complaint, mailed court document, electronic court notice, or other communication concerning a lawsuit as urgent.
What Should a Business Owner Do When Facing UCC Demands or MCA Litigation?
A business owner facing UCC demand notices, payment holds, customer communications, threatened litigation, or an actual lawsuit should preserve all relevant documentation.
This includes the MCA agreements, amendments, personal guarantees, UCC financing statements, UCC amendments, payment records, bank statements, reconciliation requests, communications with the MCA provider, copies of demand notices sent to customers or processors, and any court documents.
These records allow legal counsel to evaluate what rights the MCA provider is asserting, whether competing liens or security interests exist, what defenses or procedural issues require attention, and whether negotiation, settlement, restructuring, litigation defense, or another strategy is appropriate.
Speak With Business Debt Law Group About MCA Collection Pressure
Attorneys Anthony Rumore and Steven R. Serra bring more than 50 years of combined experience in creditor-debtor law and commercial business representation. For approximately the last decade, the firm has been heavily involved in representing business owners facing merchant cash advance collection matters.
Our attorneys represent business owners dealing with MCA disputes, UCC lien demand notices, payment and reconciliation problems, personal guarantees, collection pressure, and MCA lawsuits. We review MCA agreements, UCC records, payment histories, funder actions, court filings, and financial circumstances to evaluate potential legal, negotiation, settlement, restructuring, and litigation strategies.
Our attorneys are available for free consultations to discuss the circumstances affecting your business and potential strategies for addressing MCA collection pressure.
If your business is struggling with Merchant Cash Advance payments, has received a UCC lien demand notice, is making partial payments, or is facing an MCA lawsuit, speaking with an MCA attorney early can help you understand the situation and determine an appropriate strategy for protecting your business.
Received a demand notice, a payment hold, or MCA court papers? Free MCA review or case evaluation. No lawsuit is required.
General information, not legal advice. Contacting the firm does not create an attorney-client relationship. Results depend on the facts and applicable law.
Frequently Asked Questions
What is a UCC § 9-406 demand notice in a merchant cash advance dispute?
A UCC § 9-406 demand notice is a communication sent by an MCA provider, its attorneys, or collection representatives to a business’s customers, payment processors, insurers, or other payors. It generally asserts that the MCA provider has rights to certain receivables and instructs the recipient to redirect payment to the provider. Whether the notice is legally effective depends on the underlying agreement, assignment rights, notice, applicable state law, and other circumstances.
Can an MCA provider freeze my credit card processing account?
An MCA provider does not itself control a third-party payment processor, but a UCC demand notice can cause a processor to hold funds, restrict account activity, or request additional documentation while evaluating competing claims. The appropriate response depends on the MCA agreement, UCC records, notice, processor requirements, and applicable law.
Can an MCA funder contact my customers and demand payment?
An MCA funder can send notices asserting rights to receivables owed by customers, but sending a notice does not automatically establish that every claim in the notice is enforceable. The MCA agreement, assignment rights, UCC filing, competing security interests, and applicable law should be reviewed to determine what rights the funder actually possesses.
Does filing a UCC-1 give an MCA provider ownership of my receivables?
Not automatically. A UCC-1 financing statement generally provides public notice of a claimed security interest; it does not, by itself, establish every contractual or enforcement right asserted by the filer. The underlying agreement, collateral description, perfection, competing interests, priority rules, and applicable law can all be relevant.
What if my bank or SBA lender filed a UCC lien before the MCA provider?
An earlier security interest can create an important priority issue, particularly when both interests cover the same accounts or receivables. The filing date is important, but it is not the only consideration. Perfection, collateral coverage, the nature of each interest, and applicable Article 9 priority rules should also be reviewed.
What happens if an MCA provider files a lawsuit against my business?
The lawsuit should be reviewed immediately and answered within the applicable court deadline. Failing to respond can allow the MCA provider to seek a default judgment. The available defenses and strategies depend on the MCA agreement, allegations, jurisdiction, payment history, reconciliation provisions, personal guarantees, service of process, and other circumstances.
Should I make partial MCA payments to avoid a lawsuit?
Business owners should be cautious about making informal partial payments without a written settlement or modification agreement. Without clear written terms, questions can arise about how payments are credited, whether the business remains in default, whether contractual charges continue, and what balance the MCA provider claims remains due.
Can a merchant cash advance lawsuit or UCC dispute be settled?
Settlement can be an option in MCA disputes, including matters involving payment defaults, UCC demand notices, customer or processor disruption, and pending litigation. The appropriate strategy depends on the MCA agreements, payment history, funder actions, UCC records, litigation status, financial circumstances, and the business owner’s objectives.