Confessions of Judgment

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Key Issues of the Confession of Judgment:

  • Confessions of judgment (COJs) are arguably the most important element of a merchant cash agreement. They give creditors a sum certain judgment upon default without having to pursue expensive litigation.
  • COJs are considered a violation of due process in some states. Some states allow them in a commercial context but not a consumer context (see state-by-state discussion here).
  • To perfect a judgment in the borrowers state, the court in your state will follow the Uniform Enforcement of Foreign Judgments Act (UEFJA) and be bound by the Full Faith and Credit Clause of the US Constitution.
    • The UEFJA requires the creditor’s home state to recognize the judgment unless there are procedural or jurisdictional issues.
    • The Full Faith and Credit Clause requires states to enforce judgments from other states and is often used to extend the UEFJA.

What is a Confession of Judgment?

COJ (aka Cognovit Note) is an affidavit in which a party admits liability to another party in advance. In a COJ, the borrower accepts the sum of damages and agrees that the COJ affidavit may be filed as a judgment upon a default.  They are generally enforced if they are obtained in a jurisdiction that allows their use and if the original court had proper jurisdiction over the person and matter.

How does a COJ work?

  1. Borrowers sign (via a notary or attorney) a COJ prior to funding, as part of the cash advance agreement
  2. Upon a default by the borrower, the MCA company will file the original COJ affidavit with a court designated in the agreement
  3. The MCA company will then proceed to file this judgment in the home state of the borrower and proceed to attach their bank accounts and assets

Where is a COJ filed?

In the COJ, the MCA lenders will designate a court where they reside and where the law is favorable, not where you reside. This is accomplished via a “choice-of-laws” clause, a clause stating that you agree to be sued in their preferred state. Many MCA lenders designate New York in the choice of laws section, because 1) New York allows confessions of judgment and 2) there is ample case law that finds MCA contracts to be purchases (not loans) and therefore non usurious.

Example – New York Confessions of Judgment under CPLR 3218

Most MCA lenders designate New York in their choice-of-laws provision in their purchase agreement. New York CPLR 3218 addresses judgments by confession and sets forth the requirements for filing.

In many states, a judgment by confession may be filed upon an attorney’s affirmation (sometimes called a “cognovit judgment”).  In New York, the defendant must execute an affidavit that states the sum for which judgment may be entered, authorizes entry of judgment, and states the county where the defendant resides or, if the defendant is a non-resident, the county in which entry is authorized.

For a great summary of New York COJs and CPLR 3218, see here.

What specifically is required to be filed in New York?

Specifically, CPLR 3218 provides for the entry of a confession of judgment, at any time within three years of its execution, provided it is accompanied by an affidavit of confession by the debtor, specifically setting forth the following:

  • The sum for which judgment may be entered;
  • Authorization for the entry of judgment;
  • The county where the defendant resides or the county in which entry is authorized if the defendant is a non-resident;
  • If the matter involves money due or to become due, the facts out of which the debt arose must be stated concisely and that the sum confessed is justly due or to become due; and
  • if the matter involves securing the plaintiff against contingent liability, the facts constituting the liability but be stated concisely and that the sum confessed does not exceed the amount of the liability.

The affidavit must also state the facts surrounding the debt and show the sum confessed is due or to become due. This requirement allows other creditors to research the claim and check its validity. If the COJ is to secure a contingent liability, the affidavit must clearly describe the liability and show that the sum due does not exceed the amount of liability.

After the court accepts the judgment, and the debtor is out-of-state, it is domesticated

Once a money judgment has been perfected by the issuing court, the creditor then tries to get the debtor to voluntarily pay the judgment. If there is no cooperation, the creditor then determines what property is owned by the debtor and where that property is located.  In the case of an MCA lender, they will know in advance where your bank accounts are domiciled.

If the property of the judgment debtor is located in the state that issued the judgment, the judgment creditor can then proceed with enforcement. However, when the property of the judgment debtor is located in another state, the judgment creditor may need a sister-state judgment issued by a court in the state in which the property of the judgment debtor is located.

Notice Requirements

After filing the application, the judgment creditor must give the judgment debtor notice of the filing. This enables the judgment debtor to raise certain bars to the issuance of the sister-state judgment, such as defects in the issuance of the judgment or the original judgment is not final and unconditional. If unanswered, the sister-state judgment is issued and the judgment creditor pursues all available remedies for enforcement of the judgment in the sister-state.

Typical grounds for non-recognition of a foreign state judgments

  • Lack of systemic due process
  • Court did not have in personam, in rem or subject matter jurisdiction
  • Denial of notice and opportunity to be heard
  • Fraud
  • Judgment is against public policy of the host state
  • Risk of inconsistent judgments
  • Choice of laws clauses
  • Inconvenient or incorrect forum
  • Integrity of the rendering court
  • Due process problems in specific proceedings

Confessions of Judgment

Key Issues of the Confession of Judgment:

  • Confessions of judgment (COJs) are arguably the most important element of a merchant cash agreement. They give creditors a sum certain judgment upon default without having to pursue expensive litigation.
  • COJs are considered a violation of due process in some states. Some states allow them in a commercial context but not a consumer context (see state-by-state discussion here).
  • To perfect a judgment in the borrowers state, the court in your state will follow the Uniform Enforcement of Foreign Judgments Act (UEFJA) and be bound by the Full Faith and Credit Clause of the US Constitution.
    • The UEFJA requires the creditor’s home state to recognize the judgment unless there are procedural or jurisdictional issues.
    • The Full Faith and Credit Clause requires states to enforce judgments from other states and is often used to extend the UEFJA.

What is a Confession of Judgment?

COJ (aka Cognovit Note) is an affidavit in which a party admits liability to another party in advance. In a COJ, the borrower accepts the sum of damages and agrees that the COJ affidavit may be filed as a judgment upon a default.  They are generally enforced if they are obtained in a jurisdiction that allows their use and if the original court had proper jurisdiction over the person and matter.

How does a COJ work?

  1. Borrowers sign (via a notary or attorney) a COJ prior to funding, as part of the cash advance agreement
  2. Upon a default by the borrower, the MCA company will file the original COJ affidavit with a court designated in the agreement
  3. The MCA company will then proceed to file this judgment in the home state of the borrower and proceed to attach their bank accounts and assets

Where is a COJ filed?

In the COJ, the MCA lenders will designate a court where they reside and where the law is favorable, not where you reside. This is accomplished via a “choice-of-laws” clause, a clause stating that you agree to be sued in their preferred state. Many MCA lenders designate New York in the choice of laws section, because 1) New York allows confessions of judgment and 2) there is ample case law that finds MCA contracts to be purchases (not loans) and therefore non usurious.

Example – New York Confessions of Judgment under CPLR 3218

Most MCA lenders designate New York in their choice-of-laws provision in their purchase agreement. New York CPLR 3218 addresses judgments by confession and sets forth the requirements for filing.

In many states, a judgment by confession may be filed upon an attorney’s affirmation (sometimes called a “cognovit judgment”).  In New York, the defendant must execute an affidavit that states the sum for which judgment may be entered, authorizes entry of judgment, and states the county where the defendant resides or, if the defendant is a non-resident, the county in which entry is authorized.

For a great summary of New York COJs and CPLR 3218, see here.

What specifically is required to be filed in New York?

Specifically, CPLR 3218 provides for the entry of a confession of judgment, at any time within three years of its execution, provided it is accompanied by an affidavit of confession by the debtor, specifically setting forth the following:

  • The sum for which judgment may be entered;
  • Authorization for the entry of judgment;
  • The county where the defendant resides or the county in which entry is authorized if the defendant is a non-resident;
  • If the matter involves money due or to become due, the facts out of which the debt arose must be stated concisely and that the sum confessed is justly due or to become due; and
  • if the matter involves securing the plaintiff against contingent liability, the facts constituting the liability but be stated concisely and that the sum confessed does not exceed the amount of the liability.

The affidavit must also state the facts surrounding the debt and show the sum confessed is due or to become due. This requirement allows other creditors to research the claim and check its validity. If the COJ is to secure a contingent liability, the affidavit must clearly describe the liability and show that the sum due does not exceed the amount of liability.

After the court accepts the judgment, and the debtor is out-of-state, it is domesticated

Once a money judgment has been perfected by the issuing court, the creditor then tries to get the debtor to voluntarily pay the judgment. If there is no cooperation, the creditor then determines what property is owned by the debtor and where that property is located.  In the case of an MCA lender, they will know in advance where your bank accounts are domiciled.

If the property of the judgment debtor is located in the state that issued the judgment, the judgment creditor can then proceed with enforcement. However, when the property of the judgment debtor is located in another state, the judgment creditor may need a sister-state judgment issued by a court in the state in which the property of the judgment debtor is located.

Notice Requirements

After filing the application, the judgment creditor must give the judgment debtor notice of the filing. This enables the judgment debtor to raise certain bars to the issuance of the sister-state judgment, such as defects in the issuance of the judgment or the original judgment is not final and unconditional. If unanswered, the sister-state judgment is issued and the judgment creditor pursues all available remedies for enforcement of the judgment in the sister-state.

Typical grounds for non-recognition of a foreign state judgments

  • Lack of systemic due process
  • Court did not have in personam, in rem or subject matter jurisdiction
  • Denial of notice and opportunity to be heard
  • Fraud
  • Judgment is against public policy of the host state
  • Risk of inconsistent judgments
  • Choice of laws clauses
  • Inconvenient or incorrect forum
  • Integrity of the rendering court
  • Due process problems in specific proceedings
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