Change to Prejudgment Remedy (PJR) Law for Merchant Cash Advance (MCA) Collection Actions in Connecticut per Public Act 23-201
June 6, 2024Prejudgment Remedy
Connecticut has a unique and effective debt collection legal process, called the Prejudgment Remedy (PJR). In collection actions, a PJR allows creditors (plaintiffs) to attach property of debtors (defendants), to secure debt prior to the creditor obtaining final judgment. The benefits of PJR attachments can be significant, increasing overall recovery, and reducing litigation costs and delay, through among other things (i) preventing debtors from transferring and dissipating assets, and (ii) obtaining early settlements that often occur due to PJR attachments. The PJR laws in Connecticut are long standing and well established.
PJR attachments can be obtained (i) with a court order, through filing a PJR application, with or without advance notice to debtors (without notice is an Ex Parte PJR), (ii) without a court order, through a PJR waiver (PJR waiver), where debtors, in a commercial transaction, contractually waive the right to notice and a court hearing prior to the creditor making PJR attachments.
Pursuant to Public Act 23-201 (Act), the law in Connecticut for making PJR attachments through a PJR waiver, in Merchant Cash Advance (MCA) collection actions, is scheduled to change. The Act only amends the law for attachments by PJR waiver, and does not change the law for PJR attachments by court order. This article will outline the changes to the PJR law for MCA collection actions per the Act, as we presently understand them.
PJR Procedure for MCA Agreements Entered Into Prior to July 1, 2024
For MCA agreements entered into prior to July 1, 2024, the PJR waiver attachment procedure allows MCA funders (plaintiffs) to attach financial accounts of merchant parties (defendants), following default on the MCA agreement, if the MCA agreement contains a PJR waiver (where the merchant parties waive the right to notice and a court hearing prior to the MCA funder being able to attach their financial accounts). Most often, PJR waiver attachments are done at the time service of the complaint is made on the merchant parties. However, and significantly, PJR attachments, including through use of a PJR waiver, can occur at any time in a litigation action prior to judgment. For example, a PJR attachment can be done years into a protracted litigation matter.
PJR Procedure for MCA Agreements Entered Into On or After July 1, 2024
For MCA agreements entered into on or after July 1, 2024, the PJR waiver attachment procedure for MCA collection actions is set to change in certain circumstances, per the Act. As an initial note, the Act does not change the PJR waiver laws in cases where the amount of financing provided by the funder (commonly referred to as the purchase price) is more than $250,000. In these cases, the PJR attachment process remains unchanged, and will continue as set forth above.
The Act, however, modifies the PJR waiver laws in cases where the amount of financing provided by the funder is $250,000 or less. In these cases, the Act provides that a PJR waiver is unenforceable “upon commencing any litigation.” Notably, the Act does not provide that a PJR waiver is unenforceable after commencing litigation, and as stated above, PJR attachments, including through use of a PJR waiver, can be done after commencing litigation. “Upon commencing litigation” is a legal phrase, defined in Connecticut as the act of completing service of process on a defendant (i.e., service of the summons and complaint). See e.g., Broderick v. Jackman, 167 Conn. 96, 99 (1974) (“[A]n action is commenced…when it is served upon the defendant.”) Thus, a PJR waiver should be enforceable after commencing litigation (i.e., after service of process is complete), if the MCA agreement contains a properly worded PJR waiver in compliance with the Act.
Conclusion
The prejudgment remedy laws in Connecticut provide creditors with a unique and powerful debt collection tool, that MCA funders should consider as a means to secure future judgments, increase recovery rates, and reduce litigation expenses. The Act in summary as drafted, (i) does not change the PJR waiver attachment procedure in cases where the financing amount is more than $250,000, and (ii) limits the use of a PJR waiver to after commencing litigation, and not upon, in cases where the MCA agreement is entered into on or after July 1, 2024, and the amount of financing is $250,000 or less.
Disclaimer: This article contains our understanding and opinions as of the date of this article and is not to provide specific legal advice. It is not known how the courts will interpret the Act, including if in accordance with this article. No attorney client relationship exists by reading this article, and this article should not be used as a substitute for legal advice from a licensed professional attorney.
Lucas B. Rocklin is a creditor rights attorney. He has extensive experience in representing financial institutions and creditors in workout and litigation matters (commercial and consumer) including collections, foreclosures, bankruptcy and landlord-tenant litigation. Attorney Rocklin also practices labor law including collective bargaining agreement negotiations and arbitrations.
Joseph R. Dunaj is a member of the firm’s commercial litigation, and bankruptcy and creditor rights groups. His extensive experience includes representation of financial institutions and creditors in various collection cases and foreclosure cases, inclusive of settlement negotiations, title matters, and both appellate and bankruptcy work.
John T. Szalan is a member of the firm’s commercial litigation and creditor rights groups. His experience includes representation of financial institutions, creditors, and institutional real estate clients, inclusive of settlement negotiations, title issues, and real estate transactions.