To the average Floridian, the term “confession of judgment” is likely to be unfamiliar. One reason for this may be because the use of confessions of judgment, by lenders, is prohibited by Florida statute. A confession of judgment is basically a contract provision which allows a creditor to enter a judgment against a debtor without the need to file a complaint or to conduct a trial. In states like New York, in which confessions of judgment are recognized, a creditor may proceed directly to the Clerk of the Court and, based upon an affidavit alone, have a judgment entered against a debtor who is alleged to be in default.
At first blush, this procedure would appear to violate every possible notion of due process. Yet it exists as recognized by numerous states across the country including New York. Even though Florida has a statute which, on its face, prohibits the enforcement of confessions of judgment, out-of-state creditors have been cleverly utilizing this device against Florida business owners for years.
A Florida court decision from 1997 recognized that even though confessions of judgment are per se illegal in Florida, the state of Florida is, nonetheless, required to recognize such judgments entered in other states, based upon the full faith and credit clause of the U.S. Constitution. In sum, the Constitution provides that one state is required to recognize a judgment entered in another state. The net result of this decision is that a Florida business owner, who signs a contract containing a confession of judgment clause, and which provides for jurisdiction in New York, can be subject to a judgment entered against them in New York, without notice or an opportunity to be heard first by a judge. Once the judgment is obtained, a creditor can then immediately garnish bank accounts that a debtor may have at banks with New York branches. The creditor can also seek to “domesticate” in Florida the judgment it obtained in New York and can then garnish the debtor’s bank accounts in Florida or seize the debtor’s assets.
In 1985, the use of confessions of judgment against individual consumers was limited by an amendment to the Truth in Lending Act. Nonetheless, since that time, the use of Confessions of Judgment has been widespread in connection with loans obtained by small business owners. The most common use of these loans is by lenders in the merchant cash advance business. Merchant cash advance companies typically provide funding to borrowers who may not be successful in obtaining funding from traditional banks. While there are many reputable merchant cash advance companies, there are a significant number of unsavory lenders in this field which have been taking advantage of small business owners by quickly obtaining judgments by confession and then tacking on exorbitant interest.
A typical scenario in which a merchant cash advance company can take advantage of a small business is by having the business owner sign a loan agreement containing a confession of judgment provision. The loan agreement usually provides for exclusive jurisdiction in a place like New York or Pennsylvania. If the merchant is either late on a payment or defaults altogether, the lender is permitted to file an “affidavit of confession of judgment” with the clerk of the local court. The lender is then permitted to collect upon the judgment by either garnishing bank accounts in branches of the debtor’s Florida bank, which may be out-of-state, or by domesticating the judgment in Florida, which the Florida courts are obligated to recognize.
Two U.S. senators and two congressmen have recently recognized that confessions of judgment adversely affect small businesses in much the same way that these confessions affect individual consumers. Sens. Marco Rubio (R. Fl) and Sherrod Brown (D. Ohio), and two Congressmen Roger Marshall (D. Kan.) and Nydia Velazquez (D. N.Y.), have introduced bipartisan legislation, as a further amendment to the Federal Truth in Lending Act, known as the Small Business Fair Lending Act. If passed, the bill would essentially outlaw the use of confessions of judgment nationwide.
In the meantime, business owners should be wary about companies that promise fast and easy cash. Usually, there is an extensive contract to sign where it is important to read the fine print. Those contracts will often contain confession of judgment provisions, which provide for jurisdiction in states like Pennsylvania or New York. Business owners considering these types of loans should consult counsel to negotiate the provisions of such contracts in order to avoid being later placed in a very difficult and untenable position when a predatory lender comes to collect.
Roger Slade is a partner and shareholder with Haber Law in Miami. He is a commercial litigator and practices in the areas of business disputes and family law. Contact him at email@example.com.