Confessions of Judgment & The End of An Era

A Confession of Judgment (“COJ”), a popular tool used by many New York based lenders, is a document signed by a borrower before they receive the loaned funds that waives the right to due process if a debt is not timely repaid. By signing a COJ, the borrower admits the obligations and agrees to accept the judgment of the court if a debt is unpaid.

The problem? If a problem arises and the lender believes a payment is past due, the borrower has waived any right to a trial on the merits to determine actual liability. These admissions enable a lender to obtain a judgment without filing a formal lawsuit. By signing a COJ, you are essentially admitting you broke the agreement. You are also agreeing that the contractual penalty can be imposed on you without any opportunity to tell your side or reach a compromise. It’s like confessing you committed a crime without getting a chance to prove your innocence at trial.

Frequently, small business owners who run into difficulty repaying high interest rate loans find themselves on the wrong end of a COJ when they default on the obligations owed. You may be asking “as a Texas based business, how does this affect me?” Once the judgment is entered by a New York court, it can be domesticated, or made enforceable in a Texas court.

Recently, the New York State Legislature passed Bill S06395, which effectively limits the use of a COJ for small business lending situations. It was signed not law by Governor Cuomo at the end of August, 2019. Although it is a New York based law, its effect will be felt as far away as Texas. The law prevents a creditor from filing a COJ against a party that is not a New York state resident. The practical implications mean that a New York based lender cannot file a COJ against a Texas based business. It is estimated that, industry wide, more than 90% of the COJs were being filed in New York because of the easy ability to turn them into valid judgments in a debtor’s home state.

The new law arose after examination of a series of articles published by Bloomberg Businessweek highlighting the abuses by unregulated companies offering small business loans in the form of a merchant cash advance. Since 2014, these lenders have successfully used COJs to win more than an estimated 32,000 judgments, totaling more than $1 billion collectively, in state court across the nation. The overwhelming majority of the businesses affected were small business outside the State of New York. The new law aims to restore the balance between lenders using New York courts as a venue to generate profit and small business borrowers who have no substantial connection to New York.

While the enforcement of liability under a COJ signed before the new law went into effect remains to be seen, if you or your small business are having difficulty meeting your financial obligations, the attorneys at Waldron & Schneider stand ready to assist.

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