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In a long article on Bloomberg News, but well worth the read:
How unscrupulous lenders have used an obscure legal document to wreck havoc against small businesses nationwide.
The lenders’ weapon of choice is an arcane legal document called a confession of judgment. Before borrowers get a loan, they have to sign a statement giving up their right to defend themselves if the lender takes them to court. It’s like an arbitration agreement, except the borrower always loses. Armed with a confession, a lender can, without proof, accuse borrowers of not paying and legally seize their assets before they know what’s happened. Not surprisingly, some lenders have abused this power. In dozens of interviews and court pleadings, borrowers describe lenders who’ve forged documents, lied about how much they were owed, or fabricated defaults out of thin air.
By seizing their bank deposits, Yellowstone had managed to collect its money ahead of schedule(60k on a 38k loan) and tack on $9,990 in extra legal fees, payable to a law firm in which it owns a stake. In about three months, the company and its affiliates almost doubled their money. At that rate of return, one dollar could be turned into 10 in less than a year.
Everyone else involved in the collection process got a slice, too. SunTrust got a $100 processing fee. Barbarovich’s office(NYC Marshal) got approximately $2,700, with about $120 of that passed along to the city. The Orange County Clerk’s office got $41 for its rubber stamps. The New York state court system got $184.
Cash-advance companies have secured more than 25,000 judgments in New York since 2012 worth an estimated $1.5 billion.
It sure explains why my small business gets a ton of loan/cash advance offers.
It should be noted that these letters have been prohibited in some states for over 50 years, and banned nationwide for consumers since 1984. (but even when banned by a state, they pursue it in a state where they are legal.)
(Score: 2) by looorg on Wednesday November 21 2018, @02:53PM (16 children)
This seems beyond stupid, so you sign away your rights to defend yourself in court and/or contest any claim they make and then they can just make shit up and you can't do fuck all about it? Who would be desperate or stupid enough to sign something like that, ok so quite a few people apparently. Still it seems odd that this would/should be legal.
(Score: 3, Touché) by JoeMerchant on Wednesday November 21 2018, @03:06PM (7 children)
Who reads contracts? Of that 3% who do read them, what percentage understands what they're reading?
Of course, you: small business owner in need of a loan, you are the perfect candidate to engage legal counsel to protect your interests and inform you that the only loans available to you are from unscrupulous predatory firms working the edges of the legal system to effectively steal your assets from you when they know you have no means to fight back. Oh, wait, what are you going to pay this lawyer with, and why would they give you advice/protection when they know you can't pay them? That's right, survival of the fittest, and you: owner of a small business in need of a loan are on your way to retraining. Repeat after me: "do you want fries with that?"
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(Score: 2) by suburbanitemediocrity on Wednesday November 21 2018, @04:57PM
Lawyers. They're very good and worth it in my experience.
(Score: 3, Insightful) by All Your Lawn Are Belong To Us on Wednesday November 21 2018, @07:00PM (5 children)
In a business? If you sign a contract without having read it you still deserve to be held to its terms. If you read the contract but do not understand what the contract is saying.... you still deserve to be held to its terms.
Maybe I'm above average but the examples here [lawinsider.com] all seem either very clear or would make me Google "Confess Judgement" or similar to land me at Wikipedia's page on the subject. [wikipedia.org] Or Investopedia's page - very similar.
And if you're seeking a business loan then you are seeking enough cash to have an attorney review the terms. The smart attorney might perform such work on invoice since the successful completion of the loan does indeed mean the client will have the loan proceeds to said attorney with (and indeed the lawyer could advise the client of precisely that.) Of course... the smart business owner already has used a lawyer already before you get to the "I need a loan" stage that he or she can call upon for such work. If you are borrowing on the equivalent of a payday loan.... you still deserve to be held to its terms as a penalty for using tomorrow's capital to fix today's problems.
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(Score: 3, Insightful) by JoeMerchant on Wednesday November 21 2018, @07:13PM (4 children)
What you say all makes sense for you, and me.
When I picture the small business owners I know, talking net business valuations less than $300K, more than half of them just aren't that sharp. Do they deserve to lose their business as a result? One could argue that maybe they do, but I find myself coming down in favor of consumer protection type laws, even though these are businesses and not consumers.
When would a "Confess Judgement" ever be a part of a conscionable contract?
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(Score: 3, Insightful) by looorg on Wednesday November 21 2018, @07:32PM (1 child)
Very much this, is there even a single example of when this would be a good idea for both involved parties? It really does seem like an utterly stupid law. I'm wondering if it really ever made any sense, even back in colonial times.
(Score: 0) by Anonymous Coward on Thursday November 22 2018, @05:17AM
IAAL and posted the comment here [soylentnews.org]. We use confessions of judgments in business contracts, but only for high-risk businesses or for low-value liquidated damages. In the former, it allows us to beat a business to bankruptcy, as filing an action before they formally declare makes us a much higher priority, especially if in federal court. For the latter, it allows us to recover damages in cases where it would otherwise be financially unwise to do so. One thing to note in our state, there is court oversight of those, as they have to be filed in court, notice has to be given after execution, a satisfaction has to be filed, a method of defending satisfaction must be stipulated, collection costs are limited to the amount of the debt, and the penalty for abuse is treble damages, including all actual and consequential damages. Plus all the protections normally applied to contracts apply, and can be brought up by the opposing party on appeal.
(Score: 2) by All Your Lawn Are Belong To Us on Monday November 26 2018, @03:50PM (1 child)
Yeah, you make a good point there. My personal history intervenes a little. My father was in business for himself for several decades as a small businessman. He once shared with me that he attended a business seminar as a young and new business owner - this would have been somewhere right around 1960. The number one lesson there was that all failures of a business can be directly traced back to the management of the business. Even if it is strictly that economic conditions won't support the business it is management's responsibility to know that before engaging in it. When the store burned to the ground there was insurance but not enough to rebuild it into what it was. So he shrank operations. Some years later Dad left the day-to-day operations of that business to a relative when we moved several states away because we had to for health reasons, and that relative drank the business into the ground. We (as a family) spent a few years recovering from the impact of that because Dad was still the owner on paper and he acknowledged his responsibility and the business debts the relative incurred. And when he wasn't positive about what something was he paid someone to explain it to him, or he accepted the consequences if he didn't and he was wrong. There was a key juncture where we could have expanded the business in a way such that it might have survived to this day, but he and I didn't take advantage of it. The business then folded when he was disabled and could no longer work, and I had already gone on to other things. So I tend to believe strongly that a personal failure to understand something as a business owner is indeed a business owner's fault.
Sorry about such a long story to have gotten there. Do I expect every small business owner must be that way? No. But does every businessperson get a "do-over" because they didn't understand the terms of the agreement they made? No.
But your other point: I agree that a Confess Judgment should never be part of a conscionable contract without clear legislative authorization to allow them. To me that would mean mandatory phrasing in ways that any reasonable person can follow what it means and not just use a legal term of art that may be overlooked by a non-lawyer. I do think a contract can have stipulations in it which would make a judgment far, far easier to achieve - ones on which a prima facie argument should therefore be allowed. I think those stipulations can lead out with phrasing that, "Should a legal dispute be raised by either parties, both parties are stipulating at the outset of this contract the following facts to be taken as established by any court of law: " and then a recitation that A is lending B money, B realizes that they owe that debt plus all accrued interest to A, a table of exactly how the debt is laid out, and that should there be a default then B recognizes by signing the contract that in court the debt amount at the time of default is established as a matter of fact." That's a little different from a Confess Judgment in that it doesn't just give a blanket agreement that B will acknowledge fault should A raise any matter at law. But it might achieve the same aim - minimal legal expense for a lender to enforce something that should have been very well understood by the borrower before borrowing.
And yep, debt can be tempting to keep something afloat that really should sink. It's a tough call to say what should be expected of a hypothetically reasonable small business owner. But "Understand The Law" is pretty high up there as a priority to me.
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(Score: 2) by JoeMerchant on Monday November 26 2018, @08:58PM
I've had contracts put in front of me with language that amounted to: "you agree that you won't sue us, you agree that we did nothing wrong, you agree that you will never tell anybody about this contract." and had the verbal explanation that it is "for the protection of both parties..." HA, zero language protecting me, tons of language protecting them, and zero incentive for me to sign it... I bring it up now any chance I get. Same company was recently reamed in the courts for what sounds (from the newspaper articles) like a bit of a raw deal (they didn't really do anything "wrong", but the lawyers made it appear as such...), but, then, after seeing what they tried to get every laid off employee to sign AFTER telling them they're fired? My sympathy is quite limited.
What I feel the world needs is more "open legal advice" - not where you lock in a private room with some guy charging you $300 per hour to feed you the same lines he fed everybody else for $300 per hour before you - but truly open, honest evaluations of things like unconscionable contracts - especially in the realm of non-compete pre-employment agreements, but all over really.
As a stretch of an anecdote, I called the Florida Bar for a low cost referral to a lawyer for a matter with our kids and the schools, the guy waited behind closed door until the credit card machine beeped for his $25 payment, then he invited me in, closed the door, and lied to me for 30 minutes including winners like: "Civil rights laws, those are pretty old, I don't think anybody uses those anymore...." I left infuriated, but within 2 hours had obtained a referral to another lawyer who took up our cause pro-bono, we got what we wanted from the school system and he basically confirmed my layman's assessment of the $25 asshole: if Florida weren't a two party consent recording state somebody should wear a wire and have this guy's license for breakfast.
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(Score: 3, Disagree) by loonycyborg on Wednesday November 21 2018, @04:09PM (7 children)
It's a clear violation of right to a fair trial [wikipedia.org]. Any court that enforces things this way is violating it. Right to fair trial is one of unalienable rights, it cannot be overridden by local laws or contracts. Perhaps it works because a company is targeted with the lawsuit and not a person?
(Score: 3, Informative) by Whoever on Wednesday November 21 2018, @05:14PM (2 children)
The US Supreme court has upheld the use of arbitration in contracts. Why would this be different?
(Score: 1, Informative) by Anonymous Coward on Wednesday November 21 2018, @09:10PM (1 child)
Because arbitration clauses don't completely destroy your right to a fair trial. You can still challenge an arbitration in court, it is just much more difficult. Without some sort of obvious defect in the arbitration, your chances are very slim. It is important to note, that bias of the arbitrator or being denied a chance to present evidence or defend yourself are grounds to overturn an arbitration.
A confession of judgment, on the other hand, completely waives your right to defend yourself. There is an example below. The problem with that is you cannot defend yourself at all. Even if they forge documents or perjure themselves, there is no remedy until after you receive notice of execution, which happens AFTER they take your stuff. For that reason, they cannot be used against individuals. Even the states that do allow them against companies and other entities are starting to reign in their use because the abuse is getting too rampant and lenders keep having problems with manufacturing evidence that don't become apparent until years later on appeal.
(Score: 0) by Anonymous Coward on Wednesday November 21 2018, @09:12PM
Darn it, used the wrong homophone. Should be "rein in" not "reign in"
(Score: 2) by Whoever on Wednesday November 21 2018, @05:16PM
You should read the text of the links that you reference:
"In the United States the right to a fair trial is sometimes illusory."
(Score: 2) by jelizondo on Wednesday November 21 2018, @05:25PM (2 children)
Form the quoted Wikipedia item:
The "criminal charge" is what invalidates your position. In civil proceedings, the judge adjudicates according to whatever was agreed on the signed contract, unless any such provision is against the law. Given that the law allows you "to confess" there is no violation of any rights.
And at any rate, from the same Wikipedia link [wikipedia.org]:
(Score: 2) by loonycyborg on Wednesday November 21 2018, @05:47PM (1 child)
The same article says "As a minimum the right to fair trial includes the following fair trial rights in civil and criminal proceedings:", that is it covers both civil and criminal cases. And it appears in the section that details US fair trial handling implying that this applies to US too. And example given in US subsection applies to a criminal case.
(Score: 2) by HiThere on Wednesday November 21 2018, @06:39PM
Since they're saying that in the US the right to a fair trial is somewhat illusory, there's no contradiction when they say that under particular circumstances you can't get a fair trial.
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