Everything You Need to Know About Confessions of Judgment
When you sign a Confession of Judgment, you sign away your rights to legal process. A Confession of Judgment (Cognovit Note/Warrant of Attorney) is an extraordinary weapon that creditors can use to remedy loan defaults.
In short, It allows Merchant Cash Advance companies and other creditors to enter a judgment against debtors without having to give notice when a complaint is filed in court and without a hearing where a borrower would have the ability to defend themselves.
What does it look like in practice, though?
The Aftermath of a Confession of Judgment Filing
You wake up and go to work as you do any other day. You go to log into your bank account, make a merchant account charge, or make a general purchase and find out that your bank account is frozen and there is not a penny left in the account.
You immediately call your bank to find out what is happening. You learn that your merchant cash advance lender seized all of the money in your account after they demonstrated a court-executed judgment against you and your business. (You had no knowledge of the legal action and no opportunity to defend).
How Is This Possible if You Received No Notice of Any Court Hearing?
What has likely occurred is that one of your MCA lenders has filed what is called a Confession of Judgment (COJ) with a Court in the State of New York, State of Pennsylvania, State of Texas, or the State of Connecticut.
This Confession of Judgment instrument was likely signed by you as part of your advance funding package, and an attorney acting on behalf of that lender has now filed your signed Confession of Judgment with a Court of Law.
A judge has signed off on your Confession of Judgment, converting it to an actual Court Ordered Judgment allowing the MCA lender to seize your assets without any notice to you, no hearing, and in the absence of the normal due process of law.
What Does a Confession of Judgment Mean for Your Business?
A Confession of Judgment, or COJ, is a written statement signed and verified by the defendant under oath. The papers are submitted to the clerk of the court for entry. It may be entered in any court having jurisdiction for the total amount involved. The judge then signs a judgment which specifies the principal due, interest accrued, and costs incurred.
Once executed, a Confession of judgment may be kept by the plaintiff and not utilized or filed with the court if certain specified payments are made, and if so, the COJ may then be returned to the defendant, unfiled, once all payments are completed.
If payments are not made as agreed, or there is some other form of default that the MCA lender feels may have occurred, the attorney for that MCA lender can obtain an immediate judgment once filed in the courts. This will allow a plaintiff to use all the tools for collection of judgment available as if a full trial had occurred, including writs of execution, attachment of wages and assets, garnishments, and levies.
In standard court proceedings, when a loan default allegedly occurs, you would have the ability to defend yourself in court.
A Confession of Judgment effectively waives the legal right to defend yourself.
In other words, your lender will not have to litigate against you or your attorney in order to obtain a valid and enforceable money judgment against your business and you as the personal guarantor for the advance.
How Are Confessions of Judgment Used?
The lender can use the Confession of Judgment to levy your bank accounts and possibly seize your assets. The Confession of Judgment can also act as a lien on property and receivables.
Most of the time, the aggressive bank account levy is accomplished successfully without warning, and your bank will not alert you before your bank account is frozen or, worse, emptied.
In fact, if your business or you personally do your banking at a national banking institution with branches, offices, or headquarters in the State of New York, in all likelihood, after the plaintiff converts your signed Confession of Judgment into a Court Order Judgment, your accounts may be swept for entire judgment amount within a day or two of the judge executing that order.
New York was the primary state utilizing Confession of Judgments, which is why most lenders have a location there. Section 3218 of New York’s Civil Practice Law and Rules (CPLR) allows confessions of judgments to be filed within the state.
After an investigation of the New York Marshall’s Office for abusive collection activities, many inconsistencies and irregularities were discovered as to how the Marshall’s Office was benefiting monetarily from its hyper-aggressive collection tactics.
Of course, those tactics were also greatly benefiting MCA companies. The entire process made headlines across the county. In order to remedy the abuse, CPLR 3218 was amended in 2019 to restrict the use of confessions of judgments to only residents or businesses domiciled in the State of New York.
In other words, if your small business exists in Florida, as an example, a New York Confession of Judgment is no longer effective against you or your business.
Should I Sign a Confession of Judgment?
A Confession of Judgment is a powerful tool used by lenders to expedite the process of obtaining a civil judgment. In the event that the debtor triggers a condition of the Confession of Judgment, such as missing a required payment, the lender may file the affidavit with the court and obtain a judgment to collect the money – all without needing to bring an actual lawsuit to prove their case.
Confessions of Judgment are often included in the forms Merchant Cash Advance lenders provide to borrowers at the outset of their agreement to receive the advance. If you are considering a merchant cash advance, you need to be aware of unfair terms like Confessions of Judgment. If your advance agreement contains a Confession of Judgment, you should not sign it or agree to the advance’s terms without speaking to legal counsel first.
If you’ve already signed a Confession of Judgment, don’t despair. There are options for relief that can still help you.
How to Vacate a Confession of Judgment
There are some circumstances that could merit vacating a confession of judgment. For example, a confession of judgment may be vacated if the triggering event (i.e., default of the payment plan) did not occur or the Confession of Judgment is facially insufficient.
If you have had a Confession of Judgment executed against you, talk to a Merchant Cash Advance attorney about your possible options for getting it vacated.
Not Usury – the 3 Magic Words
There are no federal regulations for MCA companies. This type of lending was created to sidestep any state licensing requirements and usury laws. Lawyers changed the word loan to Merchant Cash Advance, defining it as advanced money against future receivables.
Those three magic words — Merchant Cash Advance — have created massive profits for aggressive lenders. Consumer protection laws are of no help at all to borrowers because the borrowers are defined as businesses and not consumers.
Attempting to make a legal argument that your defaulted MCA account was, in fact, an illegal usurious loan will, more often than not, be unsuccessful. New York Courts have held repeatedly that because, in essence, the advance is tied to your receivables and, theoretically, your daily or weekly payments could fluctuate up or down based upon your small business volume, that possible payment fluctuation factor makes it an advance and not a loan.
Just because your payment or daily/weekly withdrawals may have always been the same regardless of the change in the amount of your receivables does not mean that courts will see the money you borrowed as a loan.
The fact of the matter is that the courts have held that because the payment “can or may” fluctuate according to the terms of the Advance Agreement (Contract), it is, therefore, not a loan and not subject to Usury laws. This is why your MCA repayment terms may calculate to greater than 100% or even 200% per annum.
A Cautionary Tale About Confessions of Judgment
By now, you have become wary of confessions of judgment, but one Florida small business saw just how destructive a confession of judgment could be.
In 2018, Bloomberg published an expose on Yellowstone Capital, a lender that sold businesses high-interest loans, then bankrupted them when they defaulted on their loans via a confession of judgment.
According to the article, a husband-and-wife-owned Florida real estate agency received a $36,762 loan from Yellowstone Capital. They had been paying their loan back on schedule, but Yellowstone was still able to convince a court in New York to act on the confession of judgment contained in their loan agreement. The couple had their bank accounts frozen, and Yellowstone ended up taking $52,886.93. A month later, their business collapsed.
“Somebody just comes in and rips everything out,” said Doug Duncan, the co-owner of the real estate firm. “It’s cannibalized our whole life.”
The Future of Confessions of Judgment for Business and Credit Companies
Fortunately, the federal government is taking some actions to possibly make confessions of judgment illegal.
According to a recent report by the Washington Post, the U.S. House Financial Services Committee voted in favor of prohibiting the use of confessions of judgment in small business lending contracts.
Following legislation passed by the state of New York rendering Confessions of Judgment no longer permissible for MCA borrowers located outside of the state, Breach of Contract lawsuits are now being filed by the MCA lenders in much greater numbers within the Courts of the State of New York as an alternative.
Have You Signed a Confession of Judgment and Need Help?
If you need help because you have signed a Confession of Judgment as a part of your Merchant Cash Advance agreement, if you have had one executed against you, or if you are having other problems and need help with an aggressive MCA lender, it is in your best interest to contact an attorney at the Business Debt Law Group today to discover what can be done to protect your assets and get your business back on track.