NY Confession of Judgment Update 2024: The End of Out-of-State Debtor Exploitation

Understanding New York's Confession of Judgment Law and Recent Amendments

New York's Confession of Judgment (COJ) law, codified in N.Y. C.P.L.R. § 3218, is a powerful legal tool that allows creditors to obtain judgments without going through standard court proceedings. This legal tool allows for the swift entry of judgments based on the debtor's affidavit, which can encompass both current debts and potential future liabilities. However, recent amendments have introduced critical changes aimed at protecting out-of-state debtors and refining the law's application. These modifications reflect a growing concern over potential abuses by creditors and aim to ensure that New York courts primarily handle cases with genuine connections to the state. 

Key Components of N.Y. C.P.L.R. § 3218 (Judgment by Confession):

1. Defendant's Affidavit:
   • Must be executed by the defendant
   • Can cover current or future debts, or contingent liabilities
   • Must specify judgment amount, authorize entry, state defendant's county of residence
   • For debts, must explain origin and justify amount
   • For contingent liabilities, must detail liability and ensure amount doesn't exceed potential liability
2. Judgment Entry:
   • Must be filed within 3 years of affidavit execution
   • Filing restricted to defendant's county of residence
   • Clerk enters judgment in Supreme Court
   • Standard $15 fee plus disbursements apply
   • Enforceable like any Supreme Court judgment
   • Cannot be entered post-mortem
   • Businesses' residence is where they operate
   • Government agencies have broader filing options
3. Partial Judgment Execution:
   • Execution limited to amounts currently due
   • Judgment remains valid for future amounts
   • Multiple executions allowed as more becomes due
4. Joint Debtor Provisions:
   • Individual joint debtors can confess
   • Judgment only applies to confessing parties
   • Doesn't prevent action against non-confessing debtors

2019 Amendments: Protecting Out-of-State Debtors

The 2019 changes to CPLR 3218 aimed to address several issues:

1. Curbing abuse by out-of-state creditors using New York courts against non-resident debtors
2. Reducing burden on New York courts from cases lacking state connection
3. Protecting small businesses from distant, difficult-to-contest judgments
4. Ensuring fair legal process for debtors
5. Limiting COJ use to New York residents or businesses
6. Discouraging "forum shopping" by creditors

These amendments seek to balance legitimate COJ use with protecting non-resident debtors from unfair practices, ensuring New York courts primarily handle matters with genuine state connections.

2019 Amendments: Specific Changes to CPLR 3218

The 2019 amendments to CPLR 3218 made several key changes to the statute, primarily affecting sections 3218(a)(1) and 3218(b). Here are the specific amendments, cited verbatim from the document:

1. Deletion of non-resident provisions: The amendment deleted language from CPLR 3218(a)(1) and (b) that previously allowed "the filing of confession affidavits in the county authorized by a non-resident confessor."
2. Restriction to New York residents: The amended statute now "permits the filing of confession affidavits only in the county within New York where the debtor resided at the time the affidavit was executed" (CPLR 3218[a][1]).
3. Definition of residence for non-natural persons: The amendment added language stating that "a non-natural person resides in any county where it has a place of business" (2019 Sess. Laws of NY, ch. 214, sec. 1[b]).
4. Government agency exception: A new provision was added: "Notwithstanding any other provision of law to the contrary, a government agency engaged in the enforcement of civil or criminal law against a person or a non-natural person may file an affidavit in any county within the state" (2019 Sess. Laws of NY, ch. 214, sec. 1[b]).
5. Effective date and application: The amendments "became effective on August 30, 2019" and "operate prospectively from the effective date, meaning that it only applies to confessions executed by affidavit on its effective date and forward" (2019 Sess. Laws of NY, ch. 214, sec. 2).

These amendments significantly narrowed the scope of CPLR 3218, limiting its use primarily to debtors with a New York residence or place of business, while providing an exception for government agencies. The changes aimed to address the issues outlined in the previous section, particularly protecting out-of-state debtors and reducing the burden on New York courts.

Case 1: New York Appellate Court Rules Plenary Action Required to Challenge Confession of Judgment in MCA Case

Lower Court:

New York Court Voids Merchant Cash Advance Agreement, Ruling it a Usurious Loan Due to Lack of Contingency During Hurricane Disruption

The Supreme Court of New York, Westchester County, vacated a confession of judgment and voided a Merchant Cash Advance (MCA) agreement, deeming it a criminally usurious loan. The court based its decision on the MCA company's alleged servicing practices rather than the contract language, particularly its failure to adjust payments when the merchant's business was disrupted by Hurricane Matthew.

Key Legal Principles:

1. MCA agreements may be classified as loans if the funder's practices demonstrate a lack of contingency or risk in repayment.
2. Courts may look beyond contract language to evaluate the true nature of financial agreements, considering the actual servicing and implementation of the agreement.
3. Confessions of judgment may be vulnerable to challenge, even years after filing, if the underlying agreement is found to be invalid or if material facts were not disclosed at the time of filing.

Conclusion: This case represents a significant development in MCA legal decisions, as it focuses on the practical implementation of the agreement rather than just its written terms. It also signals a potential shift in how courts may view confessions of judgment, especially in light of increasing scrutiny from New York lawmakers. The main takeaway is that MCA companies may need to be more flexible in their servicing practices and more transparent in their legal filings to avoid having their agreements classified as loans.

Case Citation: Funding Metrics, LLC v. D&V Hospitality, Inc., 2019 N.Y. Misc. LEXIS [specific citation number] (Sup. Ct. Westchester County 2019).

Appellate Court:

The Appellate Division, Second Department reversed the lower court's decision for procedural reasons, not based on the merits of the case. Here's an explanation of why the reversal occurred:

1. Procedural Error: The main reason for the reversal was that the defendant attempted to vacate the judgment by confession through a motion rather than by commencing a separate plenary action.
2. General Rule: The appellate court cited the general rule that "a person seeking to vacate a judgment entered upon the filing of an affidavit of confession of judgment must commence a separate plenary action for that relief."
3. No Exception Applied: The court found that the grounds for vacatur relied upon by the defendant did not fall within any exception to this general rule.
4. Proper Procedure: The appellate court stated that the Supreme Court should have denied the defendant's motion without prejudice, allowing him the right to commence a plenary action to vacate the judgment by confession.
5. Merits Not Addressed: Due to this procedural issue, the appellate court did not address the substantive arguments about whether the MCA agreement was a usurious loan or whether the company's practices during the hurricane constituted a lack of contingency.

In essence, the reversal was based on a technicality of legal procedure, not on the merits of the arguments about the nature of the MCA agreement or the company's practices. The appellate court's decision leaves open the possibility for the defendant to properly challenge the judgment by filing a separate action, at which point the substantive issues could be addressed.

Citation: Funding Metrics, LLC v D & V Hosp., Inc., 197 AD3d 1150 (2d Dept 2021).

Case 2: Judgment Debtors Lack Standing to Challenge Their Own Confessed Judgments

A judgment debtor and its managing member sought to void two confessed judgments, claiming the supporting affidavits were insufficient. The lower court granted their motion, but the Appellate Division reversed, holding that the plaintiffs lacked standing to challenge the sufficiency of their own affidavits.

Key Legal Principles:

1. CPLR 3218(a)(2) requires only an affidavit from the debtor for a confession of judgment; no attorney affirmation from the creditor is necessary.
2. A judgment debtor cannot challenge the sufficiency of affidavits it executed to support a confessed judgment.
3. A receiver (or someone who purchases a receiver's assets) stands only in the shoes of the judgment debtor and cannot assert rights the debtor did not have.

Conclusion: The main takeaway is that parties who voluntarily confess judgment cannot later challenge the validity of their own affidavits supporting those judgments. This ruling upholds the integrity of confessed judgments and prevents debtors from undermining their own voluntary acts.

Citation: Continuum Energy Tech., LLC v Iron Oak, Inc. (USA), 223 AD3d 406 (1st Dept 2024).

Quiz: New York Confession of Judgment Law

1. Under the 2019 amendments to CPLR 3218, where can confession affidavits be filed? a) Any county in New York State b) Only in the county where the debtor resided when executing the affidavit c) Any county where the creditor does business d) Only in New York City counties
2. For non-natural persons (e.g., businesses), residence is defined as: a) Where the CEO lives b) The state of incorporation c) Any county where it has a place of business d) The location of its headquarters only
3. What is the time limit for filing a confession of judgment after the affidavit's execution? a) 1 year b) 2 years c) 3 years d) 5 years
4. According to case law, how must a judgment debtor challenge a confession of judgment? a) Through a motion to vacate b) By filing a separate plenary action c) Through an informal request to the court d) By appealing directly to the appellate division
5. Can judgment debtors challenge the sufficiency of their own confession affidavits? a) Yes, at any time b) Yes, within one year c) No, they lack standing d) Only with court permission
6. Which execution practice is correct for confessed judgments? a) Must be executed in full immediately b) Can only be executed once c) Limited to amounts currently due d) Must wait until all amounts are due
7. Government agencies filing confession affidavits can: a) Only file in their home county b) File in any county within the state c) Only file in Albany County d) Must file in defendant's county
8. For joint debtors under CPLR 3218: a) All must confess together b) None can confess individually c) Individual confession is allowed d) Only the primary debtor can confess
9. When did the 2019 amendments become effective? a) January 1, 2019 b) August 30, 2019 c) December 31, 2019 d) March 1, 2020
10. The standard filing fee for a confession of judgment is: a) $10 b) $15 c) $25 d) $50

Answer Key:

1. b
2. c
3. c
4. b
5. c
6. c
7. b
8. c
9. b
10. b