Simon PLC Attorneys & Counselors – October 2019 Memorandum
Creditor Considerations as New York Legislature Passes New Limits on Confessions of Judgment
Bloomfield Hills, Michigan – This summer the New York State Legislature passed legislation that put new limits on the use of the long used procedural tool by creditors, banks and financial institutions – the confession of judgment.
This tool allows a party to execute an affidavit confessing that he or she owes another party a particular sum of money or “sum certain.” This tool is often used to secure forbearance and settlement agreements and allows a creditor to file an affidavit of confession of judgment from a debtor that admits liability of a confessed sum with any county clerk in State of New York together a money judgment. This typically happens after a default in payment and ex parte, or without any notice to the debtor. This tool is useful because there also doesn’t need to be a pending litigation in order to obtain a confession of judgment.
The new law, effective August 30, 2019, makes confessions of judgment executed by parties that reside outside of New York State unenforceable. The amendment to New York Civil Practice Law and Rules (the CPLR) § 3218 provides that the confession must state the New York county in which, “the defendant resided when it was executed.” The confession must be filed in that county or the county in New York State where the defendant resided at the time of filing.
Now by this amendment, a nexus or connection by the debtor with the State of New York is critical. This law was passed to address the abuses by some lenders and financial institutions in which non-resident debtors would confess judgment in New York State. Upon a default, judgment by confession would entered in New York State without any notice to debtors, who then become subject to judgment enforcement, including restraining and freezing of bank accounts.
Note that there is a carve-out for government agencies: “[n]otwithstanding 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.”
Creditors must keep in mind that affidavits of confession of judgment must be filed within three years after execution or they expire. This limitation can be addressed with explicit waiver language and or provisions in agreements that provide for re-execution before the three-expiry. Caution must been exercised when using confessions of judgment. When used effectively, confessions of judgment can be a very power tool for creditors involved with New York State debtors.
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