You Can’t Restrain the Money and Then Declare a Default When It Doesn’t Arrive

A lot of merchant cash advance disputes ultimately end in settlement. Not necessarily because either party is right or wrong, but because settlement is often the most practical and economically sensible solution.

But what happens after the settlement is signed can sometimes be just as interesting as the dispute itself.

Consider this scenario.

The plaintiff previously served a UCC notice on the merchant’s bank, credit card processor, or some other third party, effectively freezing or restricting access to the merchant’s funds.

The parties eventually reach a settlement. The merchant agrees to make a payment by a certain date. Everyone signs the agreement, and presumably everyone is ready to move forward.

Except there’s one problem.

The merchant’s money is still being restrained.

So who’s responsible?

Is it the third party holding the funds? Is it the plaintiff who issued the notice in the first place? Or is it the defendant who now has a contractual obligation to make a payment by a certain date?

Well, I can tell you who I don’t believe should bear the responsibility: the defendant.

The merchant entered into a settlement agreement in good faith. They’re ready, willing, and able to make the required payment. They’ve done what they’re supposed to do. But the funds necessary to make that payment remain inaccessible because of a restraint initiated by the very party expecting to receive the money.

Now, I don’t necessarily blame the plaintiff for a delay caused by a third-party bank or processor. Once a release is issued, the plaintiff may have little control over how quickly that institution acts.

But that doesn’t end the discussion.

Settlement agreements, like other contracts, carry an implied covenant of good faith and fair dealing.

Presumably, when a plaintiff enters into a settlement agreement, it’s because the plaintiff actually wants to receive the settlement payments. And presumably, the plaintiff will promptly issue whatever releases are necessary to allow that to happen.

But what if the third party doesn’t act promptly?

In my opinion, where the merchant is genuinely prepared to perform and the delay is entirely outside the merchant’s control, the plaintiff should provide a reasonable extension of time. This is particularly true when the settlement agreement contemplates payment from a particular account or source of funds that remains subject to the plaintiff’s own restraint.

After all, how can you insist on payment from funds that your own collection efforts have effectively made unavailable?

That’s not cooperation. And depending on the circumstances, it may not be good faith either.

I recently had this very debate with a good friend of mine, Isaac.

My position was simple: If you want the settlement payments, then work with the merchant to make sure those payments can actually be made.

Don’t use an administrative delay caused by a bank or credit card processor as an opportunity to manufacture a quick default.

And certainly don’t insist on rigid enforcement of a payment deadline when your own prior collection activity is the very thing preventing payment.

The reasonable thing to do is to communicate, cooperate, and extend the deadline where appropriate. That’s not giving the defendant a free pass. That’s recognizing the practical realities of the situation and honoring the purpose of the settlement agreement.

Of course, not every plaintiff will see it that way.

And when a plaintiff refuses to cooperate and instead threatens to declare a default under circumstances like these, my advice to the client is straightforward: seek relief from the court, including, where warranted, an order restraining enforcement of the settlement agreement or preventing the plaintiff from taking advantage of a default caused by circumstances beyond the merchant’s control.

Whether that relief is available will depend on the agreement and the particular facts.

A settlement should be a resolution to a dispute, not a carefully constructed opportunity to create another one.

At the end of the day, good faith isn’t just about signing an agreement. It’s about acting reasonably so that the agreement can actually be performed.

And sometimes, that means giving the other side a few extra days to access money that you restrained in the first place.