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NEW YORK PASSES LEGISLATION PROHIBITING CONFESSIONS OF Bruce E. Loren and Allen J. Heffner | Nov 11 2019

With the rise of Merchant Cash Advance companies (MCAs), our factoring clients have run into situations in which MCAs would obtain a judgment in New York against the mutual Client between the Factor and MCA without providing notice to the Client. Worse, the MCA would immediately contact the Client’s Account Debtors, notifying them of the judgment and instructing them to pay the MCA for all amounts owing to the Client. All of this took place prior to the Factor even realizing that the Client even had an MCA. This article focuses on the background of these confessions of judgment and how recent legislation passed in New York affects MCAs’ abilities to obtain confessions of judgments and how the law affects Factors.

What is a confession of judgment?

Commonly, these MCAs were located in New York, exploiting a law that allows parties to agree to a "confession of judgment" if there was a default of the contract. The confession of judgment, provided for under the agreement with the MCA, allows the MCA to obtain a money judgment against the Client automatically, without notice, if the Client missed any payment. Reports have estimated that confessions of judgments in New York resulted in more than $1 billion in judgments, mostly against non-New York based businesses.

Why was this a problem?

Confessions of judgment directly affect Factors. After receiving notification from the MCAs, confused Account Debtors often refuse to pay the Factor or the MCA until they receive an instruction from a judge as to whether the Account Debtors should pay the MCA or the Factor. This leads to delays in payments and increased legal fees for Factors. In other situations, Account Debtors pay the MCAs in reliance upon these notifications, which in many circumstances, thwart the Factors ability to be paid. The MCAs’ actions place Factor’s collateral at risk, violate the Factors’ lien rights, and in many circumstances, force Clients into bankruptcy.

Why does New York allow this to happen?

Factors no longer have to ask this question. In June, New York passed legislation – recently approved by New York’s governor – prohibiting creditors from obtaining confessions of judgment against debtors that are located outside the State of New York. To be clear, confessions of judgment are still legal for debtors (i.e., Clients) that reside in New York, however, nearly all situations we have encountered regarding an MCA obtaining a confession of judgment against a Factor’s Client have occurred where the Client’s principal place of business is outside of New York. Factors whose Clients are located in New York still need to be aware of this practice by MCAs.

What happens now?

The new law immediately went into effect. Therefore, Factors with non-New York based Clients no longer need be concerned with confessions of judgments from MCAs in New York. However, this does not mean that Clients cannot enter into contracts with MCAs or that MCAs will stop interfering with the Factors’ collateral. Right now, merchant cash advance financing is largely unregulated and filled with ultra-aggressive lenders who have no problems playing fast and loose with existing rules. States are only now catching on to some of these business practices. Factors must continue to protect their security interests from MCAs by: (i) educating their Clients regarding MCAs, their practices and how entering into a merchant cash advance agreement violates their factoring agreement; and (ii) continuously monitoring the Client’s bank statements to review daily withdrawals. But for now, Factors have one less thing to worry about.

Bruce Loren and Allen Heffner of the Loren & Kean Law Firm are based in Palm Beach Gardens and Fort Lauderdale. For over 30 years, Mr. Loren has focused his practice on construction law and factoring law. Mr. Loren has achieved the title of "Certified in Construction Law" by the Florida Bar. The Firm represents factoring companies in a wide range of industries, including construction, regarding all aspects of litigation and dispute resolution. Mr. Loren and Mr. Heffner can be reached at bloren@lorenkeanlaw.comaheffner@lorenkeanlaw.com