Confessions of Judgment: New Year, New Rules in New York

By:Alana Porrazzo, an attorney with Jennings Haug Cunningham

Significant changes to confession of judgment procedures in New York took effect on New Year’s Day. Creditors must now establish that defaulting debtors have New York residency before attempting to enter confessed judgments against them.

A confession of judgment (“COJ”) works as a kind of private admission executed by a debtor or other party assuming a contractual obligation. The COJ authorizes entry of a court judgment for the amount of a debt upon default under the contract-without the need for a traditional lawsuit and the attendant costs of trial. Sometimes, the COF results from what is known as a “cognovit clause” within the parties contract (often a loan agreement). The debtor agrees to jurisdiction in certain court(s), waives notice requirements, and authorizes the entry of an adverse judgment in the case of default. The debtor signs an affidavit confessing to judgment (whether at the time of contracting or thereafter) which is then kept on hand by the lender to be entered if needed.

COJs have appeal for creditors hoping to short-circuit prolonged disputes with defaulting borrowers and to skip straight to entry of judgment. However, jurisdictional variations abound when it comes to COJs and the procedures and formal requirements to secure their enforceability.

For instance, some states allow contracting parties to agree to confess to judgment at the time of contracting. But in Arizona, a COJ is only valid if signed after the debt is incurred. See A.R.S. § 44-143 (2018) (“Judgment by confession shall not be entered. . . under the authority of a power of attorney to confess judgment thereon, unless such authority is executed and acknowledged on a day subsequent to the date on which the indebtedness to be confessed became due and payable.”).

In California, any COJ document agreed to before an actual default under a contract is unenforceable, and a party may only confess to a judgment for money. Further, in California, a COJ can only be entered with an accompanying attorney declaration. The precise contents of the required attorney affidavit are laid out in the California Code of Civil Procedure, but generally speaking, the attorney must certify that the COJ was entered into advisedly and that the client understood it was waiving rights and defenses.

The big news for 2020 comes in the form of New York’s amendment to Civil Practice Law and Rules § 3218. The new law effectively limits the use of COJs to New York residents only. COJs may only be filed with the New York county clerk: (1) where the defendant resided when the confession was executed, or (2) where the defendant resides at the time of filing. “Residence” encompasses any county in which a corporate entity has a place of business.

The blanket applicability of this amendment means that county clerks in New York will no longer be authorized to enter COJs executed by non-New Yorkers-no matter how long ago the creditor may have obtained the COJ. New York’s law draws no distinction between business and consumer confessors, nor does the law vary according to whether the COJ was given after default rather than at loan origination or time of first contracting. No apparent exception exists to allow for the filing of COJs executed as part of settlements of active litigation in New York courts. In all cases, the confessor must have New York residency at the time of execution or filing in order to enter an effective COJ in that state.

As New York COJ practice shifts to accommodate these new residency requirements, or for more about COJs and your business, questions may be directed to JHC’s banking & finance, creditors’ rights, and leasing attorneys.