By Ronald G. Acho // Cummings, McClorey, Davis & Acho, PLC
Janelle and Doug Duncan owned a real estate agency in the Florida. The married couple borrowed $36,762 from ABC Merchant Solutions. In addition to other paperwork required for the loan, they were required to sign a ‘confession of judgment.’ The Duncans set up automatic withdrawals of $800 per diem from their bank account to repay the loan. One day, with no warning, the Duncans’ bank accounts were frozen, and a total of $52,886.93 was withdrawn by ABC Merchant Solutions, which claimed that one payment had been made late. The Duncans were stunned at their plight, which found them featured in a Bloomberg Businessweek’s November 20, 2018 article. How could this be remotely legal?
As it turns out, many Americans have starred in similar factual anecdotes, due to the advent of a legal document called a ‘confession of judgment.’ It is an antiquated tool which was unearthed in yesteryears by unscrupulous and aggressive creditors. A typical confession of judgment is a contract in which a borrower agrees to permit the creditor to enter judgment against the borrower in the event of a default on a loan. In practice, the device has the potential for serious abuse, as the borrower is not notified that a judgment is being entered, and so has no opportunity to contest it until too late.
The basic scheme is as follows: A broker offers a business owner a loan. The loan is usually subject to exorbitant interest rates and fees. At the slightest hint of a default – and in some instances even without one – the broker rushes off and presents the pre-signed confession of judgment to a court clerk, along with an affidavit alleging an outstanding amount. The clerk then issues a stamped judgment. The broker then presents the judgment for cash, with fees and penalties tacked on, to the borrower’s banks. In the Duncans’ case, ABC Merchant Solutions seized approximately $16,124.93 more than the original loan amount, exclusive of interest and fees already paid.
Such firms as ABC Merchant Solutions have found creative ways to side-step laws which would ordinarily insulate citizens from the legal quagmire created by the use of a confession of judgment. To begin with, brokers evade the usury laws enacted by virtually every state to protect citizens from loans with exorbitant interest rates by such technicalities as labeling them ‘cash advances.’ Beyond that, confessions of judgment – which are a creature of common law – are not favored by the states which foresaw the rich potential for the abuse of the device and busily began enacting prophylactic measures to protect their citizens. Most states banned confessions of judgment or imposed such stringent restrictions upon them that they eliminated any advantage to be gained by its abbreviated process.
Brokers now use the New York legal system almost exclusively for enforcing confessions of judgment, and in the process have subverted and converted it into a national debt collection organism. New York State ranks third in terms of GDP in the U.S., a fact that means that most major banks have a subsidiary within its territorial confines. Confessions of judgment have not been curtailed and are implemented with conspicuous ease in New York courts. Brokers all over the U.S. are able to annex New York’s legal system in seizing borrower’s funds, so long as the borrower’s bank has a subsidiary within the state.
These confessions of judgment are all the more troubling because due process is the cornerstone of the American jurisprudence, tracing its origins back to the English Magna Carta in 1215. It is sufficient to state that due process is quite simply the notion that before any type of legal action can be taken against an American citizen, he or she is entitled to a day in court to be heard, and to confront the adversary. Confessions of judgment are aberrant and abhorrent to this concept of due process. Caveat lector! Or reader beware.