A new amendment in New York that restricts the use of judgments by confession will protect debtors and limit the ability of creditors to exploit a loophole.

The change prohibits a creditor from filing a confession of judgment in court unless the debtor is a New York resident at the time the confession is executed or filed.

In simple terms, a judgment by confession is a way a creditor can swiftly obtain a judgment without civil litigation for money due or to become due. The New York State Legislature has now significantly amended Civil Practice Law and Rules § 3218, which provides specifics for use of judgments by confession, effective August 30, 2019. CPLR § 3218 permits a defendant to sign an affidavit confessing that he or she owes another party a dollar amount certain, and authorizes the plaintiff to file the affidavit with a New York county clerk in order to obtain a judgment against the defendant in that amount, all without commencing an action in state court. Through this device, which descends from English common law, a debtor completes a document effectively waiving the debtor’s due process rights, including raising defenses in court, in exchange for a loan.

In theory, creditors can avoid prolonged litigation to collect money owed of undisputed sums, as money may be held in escrow pending fulfillment of a settlement agreement or pending completion of certain transactions. But prior to the law’s recent amendment, it contained a glaring loophole that savvy creditors were taking advantage of and dishonest creditors were abusing.

Impact of Closing Loophole for Judgments by Confession

In proposing the amended law, the Legislature intended to prevent a practice where out-of-state creditors obtained judgments by confession in New York counties against out-of-state debtors, particularly small business owners, prior to when a debt became due. Then, shortly after the debtor defaulted on a loan, the creditors executed upon the judgments.

A relatively controversial practice historically, judgments by confession were banned by the federal government for consumer credit transactions. Some states, like Florida and Massachusetts, outlaw the practice as well.

However, because the United States Constitution’s Full Faith and Credit Clause requires states to honor judgments that are validly entered by courts in sister states, the out-of-state creditors could then enforce the judgments by confession entered in New York and attack out-of-state debtors’ assets located outside of New York. For example, a creditor who resides in California could obtain a judgment by confession in New York against a debtor who resides in Florida before the debtor defaulted. Then, shortly after the debtor defaulted, the creditor could use that judgment and attack the debtor’s assets located outside of New York.

Now, creditors can no longer take advantage of the prior loophole. Creditors may only file entry of judgments by confession in the county where the debtor resided when the debtor executed the judgment by confession documents or where the debtor resided when the creditor filed the judgment. The Legislature mainly sought to even the playing field and protect small business owners with no connection to New York and limited resources to challenge or prevent abusive practices such as freezing or seizing the debtor’s assets and even fraudulent practices like submitting altered documents to obtain judgments by confession. New York courts are an additional beneficiary to the new law, as they will now have significantly less judgments and paperwork to process for actors with no connection to the state. Parties who litigate in New York state courts or conduct transactions in New York with non-residents must note that the CPLR § 3218 amendment may affect how a judgment by confession is used in litigation, transactions, or settlements.