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. However, recent amendments have significantly changed its application, particularly for out-of-state debtors.
Key Components of N.Y. C.P.L.R. § 3218:
- 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
- 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
- Partial Judgment Execution:
- Execution limited to amounts currently due
- Judgment remains valid for future amounts
- Multiple executions allowed as more becomes due
- 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:
- Curbing abuse by out-of-state creditors using New York courts against non-resident debtors
- Reducing burden on New York courts from cases lacking state connection
- Protecting small businesses from distant, difficult-to-contest judgments
- Ensuring fair legal process for debtors
- Limiting COJ use to New York residents or businesses
- 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:
- 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."
- 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]).
- 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]).
- 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]).
- 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:
- MCA agreements may be classified as loans if the funder's practices demonstrate a lack of contingency or risk in repayment.
- Courts may look beyond contract language to evaluate the true nature of financial agreements, considering the actual servicing and implementation of the agreement.
- 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:
- 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.
- 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."
- 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.
- 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.
- 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:
- CPLR 3218(a)(2) requires only an affidavit from the debtor for a confession of judgment; no attorney affirmation from the creditor is necessary.
- A judgment debtor cannot challenge the sufficiency of affidavits it executed to support a confessed judgment.
- 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).