Merchant cash advance agreements are drafted in a way that offers an advantage to the lender. Since the documents anticipate a default in payment by the buyer, why then do merchant cash advance companies record judgments in New York?
In the past, merchant cash advance companies and other lenders required their clients to sign a confession of judgment that could, in the event of default, be entered in New York without any further notice if and when the default occurred.
Due to abuse, New York outlawed the practice of allowing confessions of judgments executed outside of New York to be filed within the state. That means a borrower residing in Texas, Florida, or anywhere other than New York, could no longer grant the lender immediate judgment in New York.
But why would an out-of-state lender seek to enter a judgment against a resident of any of the 50 states in New York Why not have the borrower sign the necessary documents to allow the entry of judgment in the state where the lender is located or in the state where the borrower and/or its company reside?
The goal of the merchant cash advance lender, or any lender, is to be able to enter a judgment and seize assets quickly once a loan goes bad. The loans almost always include a personal guaranty, which provides relief for the lender against more than the corporate borrower, who might likely be failing.
We have found that many merchant cash advance (MCA) lenders include an “agreed judgment” for the borrowers to sign and return as part of the loan package. The agreed judgment is filed with the Texas court, which accepts the “agreed judgment” regardless of where the borrower is located. The agreed judgment, once entered, becomes a judgment of record against the guarantor and corporate borrower.
Once a judgment is entered in Texas, the Texas county sheriff can execute on assets within the county where the sheriff is located. They can not execute statewide. Attempts to restrain bank accounts or seize other assets within the state, require a separate action: a new distinct lawsuit against the bank or other institutions where you believe the debtor has assets.
If you were wrong, the bank or other institution is entitled to costs and possible legal fees.
If your borrower and or the corporation are Texas residents and/or out-of-state residents but maintain assets in Texas, you might be able to collect on the judgment.
But, if the Texas residents or the out-of-state residents use out-of-state financial institutions which do not maintain an office or branch within the state of Texas, you will not be able to seize an out-of-state debtor’s bank account.
New York is one of the most liberal states when it comes to judgment enforcement. However, New York does not recognize out-of-state judgments obtained on default. The attorneys seeking to enforce the Texas consent judgments here in New York, record the judgments with New York as if they were obtained on the merits. But, the judgments are in fact obtained on default and so, when it comes to vacating the restraints, judgments filed here in New York are obtained originally by using the Texas consent judgments.
Based on New York’s past and current legislature, I believe New York’s recognition of out-of-state consent judgments will soon be prohibited.
If you have questions about a debt collection matter, contact Frank, Frank, Goldstein and Nager. We have the experience that pays.
