A confession of judgment lets an MCA funder get a court judgment against your business without a lawsuit. Since August 30, 2019, New York courts cannot enter one against a defendant who does not live in New York, but New York businesses can still face them.
What a merchant cash advance is
A merchant cash advance (MCA) gives a business a lump sum in exchange for a share of its future sales. The funder is usually paid back through fixed daily or weekly withdrawals from the business bank account.
Funders write these agreements as a purchase of future receivables, not a loan. That label matters, because loans are subject to usury laws and a true purchase generally is not.
Courts do not always accept the label. They have looked at factors such as whether the payments can actually be adjusted to match real sales (often called reconciliation), whether there is a fixed end date, and whether the funder can still collect if the business fails. Whether a given agreement is a loan in disguise depends on its exact terms.
What a confession of judgment is
A confession of judgment (often called a COJ) is a sworn statement, signed in advance, in which the business and often the owner personally agree that a judgment can be entered against them for a stated amount.
Many MCA agreements include one. If the funder says you have defaulted, it can file the confession with the court clerk and get a judgment without filing a lawsuit or holding a hearing. Many business owners first learn about the judgment when their bank account is frozen.
Once a judgment exists, the funder can use collection tools. In New York, that includes serving a restraining notice on your bank, which can freeze the account.
What New York changed in 2019
For years, funders across the country filed confessions of judgment in New York courts, including against businesses that had no connection to New York.
New York amended the law that governs these filings, CPLR 3218, effective August 30, 2019. Under the amended law, a confession of judgment can be entered only in the county where the defendant lived when they signed it. A defendant who does not live in New York cannot have a confession of judgment entered against them in a New York court.
What that does and does not mean for a New York business
If your business and you as the owner are New York residents, the 2019 change does not stop a funder from using a confession of judgment against you. It means the filing has to be made in the county where you lived when you signed.
The change also does not cancel the debt or the agreement. The funder can still sue you in the ordinary way, in New York or wherever the agreement allows.
There may still be ways to challenge a confession of judgment or the judgment entered on it, depending on the facts and how it was filed. Those challenges have rules and timing of their own.
Do not sign more, and do not ignore papers
When payments become hard to make, funders sometimes offer a new advance to pay off the old one, or a modification. These often come with new confessions, personal guarantees, or waivers of defenses you had under the first agreement. Read anything new carefully before signing it.
If you receive a summons, a notice of judgment, a restraining notice, or anything else from a court, do not set it aside. Deadlines to respond can be short, and missing one can leave you with a default judgment and fewer options.
First steps to take
Having the paperwork in one place makes it possible to see what the agreement actually says and what has been paid against it.
- Find every agreement you signed with each funder, including any confession of judgment and personal guarantee
- Pull your bank statements showing every withdrawal the funder took
- Write down what the funder told you about reconciliation and whether you ever asked for it
- Keep every email, text, and voicemail from the funder or its collectors
- Talk to a lawyer before you negotiate a settlement or sign anything new
When to talk to a lawyer
If a funder is threatening to file a confession of judgment, has already filed one, or your account has been frozen, the time to get advice is now, before the next payment or the next signature.
Call our Brooklyn office or request a consultation, and bring the agreement and your payment records.
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This post is general information, not legal advice, and reading it does not create an attorney-client relationship. Every situation is different, and the law changes. Prior results do not guarantee a similar outcome.