Confession of Judgment in MCA Contracts: 5 Questions Before Assuming the Result

The confession of judgment that you may have signed as part of the merchant cash advance paperwork is scary. It does not mean that you have lost or that there is a judgment against you. It only allows the funder to go for a judgment if it claims that you defaulted. Whether it can be used depends on the law of your state and on what you signed. If you are threatened with a judgment, there are five questions to ask about this document and the advance.

One question is whether a judgment has actually been entered. The confession only becomes a judgment if the funder files it. Plenty of people are worried by threats to take them to court, but a promise to do something is not the same thing as doing it, and nothing happens until the funder actually files your confession of judgment with the court clerk. Even then, filing for the judgment does not prove everything is right. In New York, it can be filed with an affidavit and the clerk will enter it as a judgment. You want to see the affidavit that the funder had to file.

If money was frozen in your bank account, the first step is to see what the notice from the bank said. While the bank notice alone does not say how the creditor froze your money - whether through a confession of judgment or through a judgment entered in a lawsuit - it tells you what to check next. Demand:

• (1) who brought the case;
• (2) who the defendants were;
• (3) where it was filed;
• (4) the date of the judgment and
• (5) the amount.

Keep a copy of that notice. No universal rule applies to what happens next or when it happens. Banks do not have to empty the account within a day or two after an order is issued.

Each State Has Its Own Law

The second question is where this confession can be used and whether it is valid at all. That depends on where the funder will try to file it. A confession of judgment cannot be used everywhere. The Federal Trade Commission regulations ban their use in consumer credit but do not apply to business debts. Each state has its own law on the matter.

New York, for example, does allow confessions of judgment to be used. However, from August 30, 2019 forward the judgment can only be filed where the debtor lives, and a business lives where it has a place of business. The location of the funder is not enough. Check the location of every named defendant, and make sure that all of the dates and signatures are correct. If you have no connection to New York - no residence or business in the state - the confession generally is not covered by the New York proceedings.

Other states have their own rules for getting to a confessed judgment. As of January 1, 2023, California makes it impossible to get a judgment through confession; older ones are not covered by the new law. Florida voids pre-suit powers to confess judgment but has honored some valid out-of-state judgments. Pennsylvania allows confessed judgments in many commercial deals.

The third question to ask is who signed what. Each document is a separate promise. If you signed one thing as a manager and another as an individual, those are different and may lead to different results. Never forget that a business judgment does not always reach its owner.

Question four is what counts as a default. Almost everything depends on that language. Late payments, missed payments and blocking payments can all count as breaches that amount to default. When you are not sure, check the agreements you signed carefully for their terms, and then compare the claimed default to those terms. Even if everything is signed in order and the terms are valid and usable, the matter can be unclear. How, for example, does the confession allow for the money that the borrower has already paid? Make sure all money has been properly credited.

Question five asks if it can be challenged. Signing a confession does not rule out a challenge, but it does not guarantee one will win. The ability to challenge and set aside a judgment has to be investigated in each case. Ask how the confession itself can be challenged, whether there is a period to do so, who can bring it, and whether there is a procedure to pause enforcement of the judgment while the legal issue is decided. Make sure that any challenge to a confessed judgment is filed on time.

It is essential to speak with an attorney about the procedure to set aside a judgment in the state where you will be sued, and to make sure that all defenses are included. In New York, for example, a debtor seeking to undo a judgment for fraud or usury generally has to bring a separate lawsuit, and a motion to vacate will not be enough. Pennsylvania gives the borrower 30 days after notice of a confessed judgment to ask to open it, and all defenses must be in the one petition.

Even if the confession of judgment cannot be used, that does not end the matter. The funder can still sue in an ordinary lawsuit. As for usury, the New York criminal usury statute bars loans of more than 25% a year, but a borrower has to prove that the transaction is really a loan in order to be covered.

It is always important to keep a complete copy of every agreement, every confession of judgment and every judgment obtained. If there is a proposed settlement, it is essential to see whether the existing confession will be withdrawn, and what effect the settlement will have on it.

If a new confession of judgment is offered as part of the deal, have a lawyer review the whole set of documents before you sign. Wording and dates in every document have to be checked, and the heading of a document tells you nothing about whether it can be used. Never assume the outcome.