Thank you for visiting Delancey Street. We are a nationwide business debt settlement company that helps business owners all across the country get out of predatory MCA debt. One of the questions we often are asked is, what can you do after an MCA confession of judgment?
For many people, a confession of judgment feels like the end. Consequences range, but usually we hear about bank accounts being frozen without any type of lawsuit and no real input from you on exactly what occurred. That’s exactly how the document is designed to feel. But a filed judgment is not the same as a final one. You still have some moves, but the catch is you have to move fast, and the order you make them in matters more than anything else. We work with businesses dealing with merchant cash advance debt, so here’s the honest version of what happens next and what you can actually do about it.
The affidavit you sign at funding
A confession of judgment is an affidavit you sign at funding. In it, you admit a debt and you’re authorizing a court clerk to enter a judgment against you if the funder says you defaulted. In New York State, the governing rule is CPLR 3218.
The affidavit typically has to state the sum, authorize the entry, state the county where you lived in when you signed, and explain the facts of the debt. It can be filed any time within three years of signing and only in the county where you resided when you signed it or where you reside at the time of filing.
Most people who learn about confessions of judgment often observe the fact that no complaint was filed, there was no service, there was no hearing. The clerk just entered the judgment. The first time you usually learn about it is when a bank freezes your bank account.
The first 72 hours and the restraining notice
Really, the first 72 hours are all about cash. Your instinct is going to be to argue the merits. We want you to resist that. The immediate danger comes from the restraining notice under CPLR 5222, which can freeze assets up to twice the judgment amount. That means a $90,000 judgment can lock up almost $180,000 across your accounts. What happens next is payroll is done, vendors bounce, and the business can fail overnight.
The first calls you make
The first calls you make are very practical.
- You have to find out which accounts are restrained and which are not.
- You have to move your operating activity to an unrestrained institution if you can.
- You should ask the funder’s counsel what it will take to release the freeze, because a negotiated release is often faster than any motion you can file.
One thing people miss is that New York’s exempt income protections under CPLR 5222-a mostly protect individuals, not actual business entities. But if you signed a personal guarantee, your personal accounts are in play too, and that’s something that you have to think about in addition to the confession of judgment.
The 2019 amendment and the filing date
The first thing that people often ask is whether the COJ could be legally filed at all. This is typically the strongest and cleanest way to attack it, and it’s the one most owners don’t know about. On August 2019, New York amended CPLR 3218 to prevent filing a confession of judgment against a person who does not reside in New York State. The change applies to judgments entered on affidavits filed on or after that date. It came out of regulations and new reporting that was done on the MCA industry, where a large number of out-of-state merchants were being pushed into New York County Clerk offices through the COJ.
The test is simple. If your business and you personally are not in New York and the affidavit was filed after that date, the filing was not authorized. That is a defect in the court’s authority to enter the judgment. And therefore, it can be challenged. Older judgments filed before the amendment are not covered by it, which is why the filing date is the most important thing to look at.
Common problems in the affidavit
Then the next thing to do is read the affidavit against the statute. Even if a confession is permitted, many times we’ve seen lenders fail because of the paperwork. There are some common problems we’ve noticed.
- For example, the affidavit does not state the facts the debt arose from anything specifically.
- It recites a county that doesn’t match where you actually lived, or it was filed in the wrong county, or the notarization is defective.
- Some funders will also inflate the entered amount with default fees, percent-based attorney fees, and other punitive fees, which the affidavit never authorized as a fixed sum.
These aren’t small technicalities to a court reviewing the document that was entered without any say from you or any adversarial stance from you. The whole reason the statute is so limited is because nothing else in the process protects you.
Recharacterization of the underlying advance
The deeper attack can be on the underlying advance itself. In the past, an argument has been made successfully that the transaction was never a purchase of receivables at all. If it really was a loan, New York usury limits come into play, and a criminally usurious loan is typically void.
New York Second Department, in the past, set out a three-factor framework in the LG Funding case where they evaluated whether MCA was really a loan in disguise. They look at things like whether the agreement has a real reconciliation provision, whether it has a finite term, and whether the funder has any recourse if the merchant goes bankrupt. The First Department applied similar reasoning in the Davis v. Richmond Capital Group in 2021. And treated agreements styled as advances as loans that were then subject to usury laws.
The reconciliation pressure point
Typically, reconciliation is going to be the pressure point. If the contract says the funder may adjust your daily debit rather than must adjust the daily debit, or if you requested reconciliation but the funder ignored you, that looks a lot like no risk at all on the funder and more looks like a fixed repayment obligation.
It’s important if you’re going to be challenging the COJ in the loan itself, or rather the MCA itself, you have to keep your reconciliation request documented and the funder’s response documented as well. That correspondence is strong evidence.
Motion or plenary action
Now, often we see a lot of clients try to challenge COJs and they get stuck in a procedural trap. They contemplate whether to file a motion or a separate lawsuit, and here’s where good arguments typically die. In New York, the general rule is you cannot simply move to vacate a judgment entered on a confession. You actually have to commence a separate plenary action. The Second Department has said this more than once.
There are exceptions, though, and they matter. A claim that the court lacked the authority to enter the judgment can be raised by motion. Courts have also entertained a motion under CPLR 5015, which covers items such as fraud, misrepresentation, or other misconduct, where criminal usury is clear from the actual documents themselves.
The strategic play is this: a non-resident filing defect points towards a motion, which is typically faster and cheaper. If you go the opposite way, where you try to do a fact-heavy usury or recharacterization argument, this will typically belong in a plenary action, which is slower and costs more, and by that time your business is probably destroyed. Filing the wrong motion can burn you weeks, if not months. CPLR 5240 lets a court modify or deny the use of an enforcement procedure, and is a separate lever worth considering for immediate relief for your business.
Domestication across state lines
One of the things with COJs that most people don’t realize is the judgment has to cross state lines if you’re in a different state. A New York judgment still has to be domesticated to reach assets elsewhere, and confessions get treated differently. Under New York’s own Article 54, a creditor domesticating an out-of-state judgment has to file an affidavit that the judgment was not obtained by default or by confession, which pushes the confession judgments out of the different streamlined routes available. States vary on this point, so you have to check your state’s enforcement statute specifically rather than assuming it copies New York State statute. Domestication also creates a second courthouse chain of events where you can raise limited defenses, including whether the original court had jurisdiction over you. This is a real opportunity, though.
The decision tree
Let’s put it all together. It’s pretty clear if you’ve read this article that the decision tree is very short.
- Your first job is to stabilize your cash and deal with the restraint.
- Second, you have to pull the county clerk file and check the filing date and your residency, because the 2019 amendment is a very strong line and the cheapest way to win.
- Third, read the affidavit against CPLR 3218 for defects.
- Fourth, evaluate reconciliation and recourse to decide whether recharacterization is worth the cost of a new action.
- Fifth, decide honestly whether you are fighting to win or fighting to settle.
How Delancey Street can help
In the past, Delancey Street has successfully helped companies that are facing COJs create a new pathway forward by negotiating directly with the lenders. Often, lenders will get a very big judgment against you, but the amount of money in the bank account will not be sufficient to cover it. But they’ll still try going after other assets. If they fail at getting access to other assets, they’re still going to proceed with actions to try to secure them. In situations like this, Delancey Street can intervene and help create a new restructured approach that protects your other assets from the COJ. We encourage you to get a risk-free consultation today to learn about what options are available to you.
