How the Recession Has Complicated Judgments By Confession

Following the Rules

The New York Civil Practice Law and Rules (“CPLR”) provides straightforward, albeit limited, guidance on securing a judgment by confession. It provides that a judgment by confession must be supported by an affidavit of defendant. A number of other states are less stringent than New York, allowing confessions to be based on an attorney's affidavit, also known as a cognovits, or even a clause in a contract. New York's procedure is designed to protect a defendant against an improper waiver of his due process right to notice and an opportunity to be heard. Indeed, New York courts have denied full faith and credit to judgments entered in other states that are supported by an attorney's statement, rather than a defendant's affidavit. Fiore v. Oakwood Plaza Shopping Ctr., 78 N.Y.2d 572, 578 (1991).

A defendant's affidavit must state the sum for which judgment may be entered and the county in which the defendant resides (or for non-residents, the county in which judgment is authorized). CPLR 3218(a)(1). If the judgment is for money due (or to become due), the affidavit must state “concisely the facts out of which the debt arose ' ” and must show the sum confessed is justly due (or to become due). CPLR 3218(a)(2). If the confessed judgment is to secure the plaintiff against a contingent liability, the defendant's affidavit must concisely state the facts constituting the liability and must show that the sum confessed does not exceed the amount of the liability. CPLR 3218(a)(3).

Providing Sufficient Detail

Although the requirements of CPLR 3218 are not onerous, the most common error in applications for a judgment by confession is failing to state “concisely the facts out of which the debt arose,” which is fatal to an application. An attorney who relies solely on the terms of the CPLR risks failing to comply with a well-developed body of case law, dating back to the 1800s, that adds meat to the bones of CPLR 3218.

New York's courts have consistently held that the defendant's affidavit must contain sufficient genuine detail to enable other creditors to investigate the claim and discern a complete picture of the transaction underlying the confessed judgment. Princeton Bank and Trust Co. v. Berley, 394 N.Y.S.2d 714, 718 (2d Dep't 1977). The policy driving this requirement is that interested third parties should be able to ascertain whether the confession was accurate, honest, and bona fide. County Nat'l Bank v. Vogt, 280 N.Y.S.2d 1016, 1018 aff'd 21 N.Y.2d 800 (3d Dep't 1967). Even when the transaction underlying a confessed judgment is bona fide, an interested third party may prevail on a motion to vacate a judgment based upon an affidavit that lacks sufficient detail. Baehre v. Rochester Dental Prosthetics, 446 N.Y.S.2d 901, (N.Y. Sup. Erie 1982); Bradley v. Glass, 46 N.Y.S. 790, 791 (4th Dep't 1897). On the other hand, minor errors of detail that are not clearly prejudicial, or errors in detail that are balanced against other details that correct them, should not have the devastating effect of invalidating a judgment. Princeton Bank and Trust Co., supra.

To provide context for these concepts, a defendant's affidavit that merely stated it was “for goods sold and delivered,” without describing the goods or providing pricing information or relevant dates, was rejected for failing to describe the precise nature of the indebtedness. Bradley, supra. Similarly, an affidavit was rejected because it stated an amount due without separately setting forth principal and interest, or providing data from which the two amounts could be ascertained. Vogt, supra.

The Recession's Impact on Judgments By Confession

Precedent among New York courts addressing judgments by confession has been consistent for well over 100 years. Published decisions, however, do not always reflect practical realities and recent trends that are felt in clerks' offices in New York and other states. Further, because the very purpose of seeking a judgment by confession is to avoid litigation, there are few circumstances under which a clerk's denial of a 3218 application would lead to a published decision. The recent economic downturn, characterized by unavailability of credit, has contributed to innumerable defaults on a variety of commercial transactions. The judgment clerk for New York County confirms that over the past year, its office has been inundated with applications for judgments by confession. More than ever, applications are based upon sophisticated commercial transactions documented by voluminous agreements and forbearances. It is not uncommon for one application to be supported by several complex agreements. Moreover, in many cases, the supporting agreements may reference various interest rates triggered by different events. While these agreements may make sense to sophisticated business people who live with and understand their intricacies and the corporate attorneys who draft them, they are not necessarily clear for a clerk who has never seen the contracts before and is not steeped in corporate finance.

To complicate matters, the plaintiff may file a confession at any time within three years after the affidavit confessing to judgment is executed. CPLR 3218(b). In the interim, things can change that complicate an application. For example, the defendant may make payments toward principal and/or interest; interest may accrue; and the rate of interest may change based on contractual contingencies. Assuming a default takes place, warranting entry of a confessed judgment, the defendant is entitled to apply for judgment by confession for the sum confessed (less payments to principal and plus interest). To address events that transpired after the defendant executed a confession, a knowledgeable representative for the plaintiff should submit an affidavit explaining any changed circumstances and calculating the proper judgment amount in the most basic terms possible. An affidavit on plaintiff's behalf, however, does not, and cannot, replace the all-important defendant's affidavit. To address concerns that the judgment clerk may have, the defendant's affidavit should expressly state that the defendant knowingly and intentionally waives any right to notice or an opportunity to be heard before entry of judgment. Moreover, the defendant's affidavit should reflect that the defendant agrees to pay the specific contractual rate of interest. This is particularly important in commercial cases, where interest exceeds 16% that is permissible for commercial loans, Leader v. Dinkler Mgt. Corp., 20 N.Y.2d 393 (1967), but otherwise may be usurious for non-commercial loans. NY General Obligations Law ' 5-501. The beauty of securing a judgment by confession is that it avoids the cost and delay associated with litigation. Rather than seeking a determination from a judge, a party simply walks into the Judgments Office to file a judgment. After the clerk confirms that the defendant's affidavit is sufficiently specific and the other requirements of CPLR 3218 are met, the clerk may enter judgment for a specific sum. However, as the judgment clerk explains, the clerk is not a referee, and CPLR 3218 was not intended to transform a clerk into a referee. That is a judge's role. In complex applications for judgment by confession, however, the analysis required to confirm the amount of a judgment may force a clerk to assume the decision-making role of a referee. When that happens, applications are denied, even if they are otherwise meritorious.

While CPLR 3218 (judgment by confession) and 3215 (default judgment) address separate circumstances, the later is notable because it provides some guidance concerning the clerk's authority to determine the amount of a judgment: “If the plaintiff's claim is for a sum certain or for a sum which can by computation be made certain, application may be made to the clerk ' . Where the case is not one in which the clerk can enter judgment, the plaintiff shall apply to the court for judgment.” CPLR 3215(a). Courts have explained that if “anything more than arithmetic” is required to ascertain the amount of a default judgment, the court, rather than the clerk, must address it. General Elec. v. Perez, 549 N.Y.S.2d 203, 206 (3rd Dep't 1989). In Perez, the court found that a clerk had exceeded his authority by effectively making a determination concerning plaintiff's calculation of damages. Id. Accordingly, the court vacated the clerk-entered judgment and found that an inquest on damages was required. Id. Thus, the fine line that delineates whether a clerk will enter a judgment by confession may depend on whether “anything more than arithmetic” is required to ascertain the precise amount of the judgment.

Conclusion

The judgment clerk is positioned where two trends, occurring simultaneously, have a significant impact. First, on a general level, the economic downturn has led to a sharp increase in court activity. Second, the tightening of credit markets has caused an unusually high quantity of sophisticated commercial transactions to go into default. This has caused, and will likely continue to cause, innumerable parties to confess to judgments. Not every confession of judgment is filed. Nonetheless, the judgment clerk is faced with a sharp increase of applications for judgments by confession, which is exacerbated by their complexity. Attorneys who opt to use CPLR 3218 should make every effort to procure detailed defendants' affidavits. At the same time, they must recognize the audience. Attorneys should anticipate that a clerk will thoroughly check the facts to confirm that the amount of the judgment is evident. The judgment clerk, however, is cautious to avoid assuming the role of a referee and will likely deny an application instead of engaging in deep analysis of complex agreements. Therefore, when anything more than arithmetic is required for a clerk to ascertain the amount of the judgment ' as confessed, less payments and plus interest ' a judgment by confession may not be the best procedural tool. The denial of an application does not mean that the plaintiff is not entitled to relief, but the authority of a judge ' rather than a clerk ' may be required. The available procedural mechanisms for complex transactions include, depending on the circumstances of each case, seeking an inquest or filing a motion for summary judgment in lieu of complaint under CPLR 3213.

Kevin R.J. Schroth is Special Counsel in the New York office of Cole, Schotz, Meisel, Forman & Leonard, P.A. He can be reached at 646-563-8927 or [email protected].

As New York Times reporter William Glaberson recently reported in his Dec. 29, 2009 article, “The Recession Begins Flooding Into the Courts,” New York State courts closed the year with 4.7 million cases, the highest tally ever. This is one of many signs that our country's recession has made itself a home in the judicial system. The increase in court activity has affected various branches of the New York State court system. The Clerk of New York County's Judgments Office has witnessed a dramatic increase in volume and complexity of cases, as attorneys in greater numbers have pursued judgments by confession in an effort to avoid litigation. In many instances, however, attorneys have been frustrated to find that a judgment by confession is not the proper procedural tool under the circumstances. In ordinary economic times, the most common deficiency in applications for judgment by confession is the failure to include sufficient detail concerning the basis for a judgment. Recently, however, the pendulum has swung in the opposite direction, the judgment clerk says. Instead of providing insufficient detail, attorneys have been filing exceedingly complex applications based on sophisticated and voluminous commercial transactions, many of which have been denied because, in short, they are too complicated.

The Benefits of a Judgment By Confession

A judgment by confession is a tool that can be used to secure a judgment promptly without the formality, time, or expense involved in an adversarial legal proceeding, enabling a creditor to file a judgment voluntarily confessed by the debtor. A confession of judgment serves as a security device to creditors and persons who assume a contingent liability on behalf of another, such as a surety. For example, a creditor who is concerned that a debtor cannot repay a debt can insist that the debtor confess to a judgment. In the event of a default, the creditor may file the confession of judgment and establish its right to repayment. Unlike a lawsuit, a judgment by confession does not require service of process, filing a complaint, or an appearance by the defendant. Instead, a creditor may proceed to the appropriate county clerk's office to enter a judgment by confession, which has the legal effect of a court-ordered judgment.

Following the Rules

The New York Civil Practice Law and Rules (“CPLR”) provides straightforward, albeit limited, guidance on securing a judgment by confession. It provides that a judgment by confession must be supported by an affidavit of defendant. A number of other states are less stringent than New York, allowing confessions to be based on an attorney's affidavit, also known as a cognovits, or even a clause in a contract. New York's procedure is designed to protect a defendant against an improper waiver of his due process right to notice and an opportunity to be heard. Indeed, New York courts have denied full faith and credit to judgments entered in other states that are supported by an attorney's statement, rather than a defendant's affidavit. Fiore v. Oakwood Plaza Shopping Ctr. , 78 N.Y.2d 572, 578 (1991).

A defendant's affidavit must state the sum for which judgment may be entered and the county in which the defendant resides (or for non-residents, the county in which judgment is authorized). CPLR 3218(a)(1). If the judgment is for money due (or to become due), the affidavit must state “concisely the facts out of which the debt arose ' ” and must show the sum confessed is justly due (or to become due). CPLR 3218(a)(2). If the confessed judgment is to secure the plaintiff against a contingent liability, the defendant's affidavit must concisely state the facts constituting the liability and must show that the sum confessed does not exceed the amount of the liability. CPLR 3218(a)(3).

Providing Sufficient Detail

Although the requirements of CPLR 3218 are not onerous, the most common error in applications for a judgment by confession is failing to state “concisely the facts out of which the debt arose,” which is fatal to an application. An attorney who relies solely on the terms of the CPLR risks failing to comply with a well-developed body of case law, dating back to the 1800s, that adds meat to the bones of CPLR 3218.

New York's courts have consistently held that the defendant's affidavit must contain sufficient genuine detail to enable other creditors to investigate the claim and discern a complete picture of the transaction underlying the confessed judgment. Princeton Bank and Trust Co. v. Berley , 394 N.Y.S.2d 714, 718 (2d Dep't 1977). The policy driving this requirement is that interested third parties should be able to ascertain whether the confession was accurate, honest, and bona fide. County Nat'l Bank v. Vogt , 280 N.Y.S.2d 1016, 1018 aff'd 21 N.Y.2d 800 (3d Dep't 1967). Even when the transaction underlying a confessed judgment is bona fide, an interested third party may prevail on a motion to vacate a judgment based upon an affidavit that lacks sufficient detail. Baehre v. Rochester Dental Prosthetics , 446 N.Y.S.2d 901, (N.Y. Sup. Erie 1982); Bradley v. Glass , 46 N.Y.S. 790, 791 (4th Dep't 1897). On the other hand, minor errors of detail that are not clearly prejudicial, or errors in detail that are balanced against other details that correct them, should not have the devastating effect of invalidating a judgment. Princeton Bank and Trust Co., supra.

To provide context for these concepts, a defendant's affidavit that merely stated it was “for goods sold and delivered,” without describing the goods or providing pricing information or relevant dates, was rejected for failing to describe the precise nature of the indebtedness. Bradley, supra. Similarly, an affidavit was rejected because it stated an amount due without separately setting forth principal and interest, or providing data from which the two amounts could be ascertained. Vogt, supra.

The Recession's Impact on Judgments By Confession

Precedent among New York courts addressing judgments by confession has been consistent for well over 100 years. Published decisions, however, do not always reflect practical realities and recent trends that are felt in clerks' offices in New York and other states. Further, because the very purpose of seeking a judgment by confession is to avoid litigation, there are few circumstances under which a clerk's denial of a 3218 application would lead to a published decision. The recent economic downturn, characterized by unavailability of credit, has contributed to innumerable defaults on a variety of commercial transactions. The judgment clerk for New York County confirms that over the past year, its office has been inundated with applications for judgments by confession. More than ever, applications are based upon sophisticated commercial transactions documented by voluminous agreements and forbearances. It is not uncommon for one application to be supported by several complex agreements. Moreover, in many cases, the supporting agreements may reference various interest rates triggered by different events. While these agreements may make sense to sophisticated business people who live with and understand their intricacies and the corporate attorneys who draft them, they are not necessarily clear for a clerk who has never seen the contracts before and is not steeped in corporate finance.

To complicate matters, the plaintiff may file a confession at any time within three years after the affidavit confessing to judgment is executed. CPLR 3218(b). In the interim, things can change that complicate an application. For example, the defendant may make payments toward principal and/or interest; interest may accrue; and the rate of interest may change based on contractual contingencies. Assuming a default takes place, warranting entry of a confessed judgment, the defendant is entitled to apply for judgment by confession for the sum confessed (less payments to principal and plus interest). To address events that transpired after the defendant executed a confession, a knowledgeable representative for the plaintiff should submit an affidavit explaining any changed circumstances and calculating the proper judgment amount in the most basic terms possible. An affidavit on plaintiff's behalf, however, does not, and cannot, replace the all-important defendant's affidavit. To address concerns that the judgment clerk may have, the defendant's affidavit should expressly state that the defendant knowingly and intentionally waives any right to notice or an opportunity to be heard before entry of judgment. Moreover, the defendant's affidavit should reflect that the defendant agrees to pay the specific contractual rate of interest. This is particularly important in commercial cases, where interest exceeds 16% that is permissible for commercial loans, Leader v. Dinkler Mgt. Corp. , 20 N.Y.2d 393 (1967), but otherwise may be usurious for non-commercial loans. NY General Obligations Law ' 5-501. The beauty of securing a judgment by confession is that it avoids the cost and delay associated with litigation. Rather than seeking a determination from a judge, a party simply walks into the Judgments Office to file a judgment. After the clerk confirms that the defendant's affidavit is sufficiently specific and the other requirements of CPLR 3218 are met, the clerk may enter judgment for a specific sum. However, as the judgment clerk explains, the clerk is not a referee, and CPLR 3218 was not intended to transform a clerk into a referee. That is a judge's role. In complex applications for judgment by confession, however, the analysis required to confirm the amount of a judgment may force a clerk to assume the decision-making role of a referee. When that happens, applications are denied, even if they are otherwise meritorious.

While CPLR 3218 (judgment by confession) and 3215 (default judgment) address separate circumstances, the later is notable because it provides some guidance concerning the clerk's authority to determine the amount of a judgment: “If the plaintiff's claim is for a sum certain or for a sum which can by computation be made certain, application may be made to the clerk ' . Where the case is not one in which the clerk can enter judgment, the plaintiff shall apply to the court for judgment.” CPLR 3215(a). Courts have explained that if “anything more than arithmetic” is required to ascertain the amount of a default judgment, the court, rather than the clerk, must address it. General Elec. v. Perez , 549 N.Y.S.2d 203, 206 (3rd Dep't 1989). In Perez, the court found that a clerk had exceeded his authority by effectively making a determination concerning plaintiff's calculation of damages. Id. Accordingly, the court vacated the clerk-entered judgment and found that an inquest on damages was required. Id. Thus, the fine line that delineates whether a clerk will enter a judgment by confession may depend on whether “anything more than arithmetic” is required to ascertain the precise amount of the judgment.

Conclusion

The judgment clerk is positioned where two trends, occurring simultaneously, have a significant impact. First, on a general level, the economic downturn has led to a sharp increase in court activity. Second, the tightening of credit markets has caused an unusually high quantity of sophisticated commercial transactions to go into default. This has caused, and will likely continue to cause, innumerable parties to confess to judgments. Not every confession of judgment is filed. Nonetheless, the judgment clerk is faced with a sharp increase of applications for judgments by confession, which is exacerbated by their complexity. Attorneys who opt to use CPLR 3218 should make every effort to procure detailed defendants' affidavits. At the same time, they must recognize the audience. Attorneys should anticipate that a clerk will thoroughly check the facts to confirm that the amount of the judgment is evident. The judgment clerk, however, is cautious to avoid assuming the role of a referee and will likely deny an application instead of engaging in deep analysis of complex agreements. Therefore, when anything more than arithmetic is required for a clerk to ascertain the amount of the judgment ' as confessed, less payments and plus interest ' a judgment by confession may not be the best procedural tool. The denial of an application does not mean that the plaintiff is not entitled to relief, but the authority of a judge ' rather than a clerk ' may be required. The available procedural mechanisms for complex transactions include, depending on the circumstances of each case, seeking an inquest or filing a motion for summary judgment in lieu of complaint under CPLR 3213.

Kevin R.J. Schroth is Special Counsel in the New York office of Cole, Schotz, Meisel, Forman & Leonard, P.A. He can be reached at 646-563-8927 or [email protected].