Vacating a Judgment by Confession Due to Fraud

• Posted on: Jul 29 2024

By Jeffrey M. Haber

A confession of judgment is an agreement whereby a defendant or debtor agrees to the entry of judgment against him/her in an amount certain. It is a procedural device whereby the plaintiff or creditor can bypass the commencement of a lawsuit to obtain the amount “confessed.” 

Confessions of judgment are used in a variety of circumstances. For example, parties to a litigation may use a confession of judgment as part of a settlement whereby the defendant agrees to pay the plaintiff money. In that situation, the defendant agrees to the confession of judgment until he/she satisfies the payment obligations under the settlement agreement. If the defendant fails to make the agreed-upon payment(s), then the plaintiff, who typically holds the confession of judgment in escrow, can file the confession of judgment with a county clerk without having to commence an action for breach of the settlement agreement. 

Sometimes, parties to a dispute who wish to avoid the costs and burdens of litigation, will use a confession of judgment to ensure the payment(s) required by their out-of-court settlement.

In New York, confessions of judgment are governed by Section 3218 of the Civil Practice Law and Rules (“CPLR”). Under CPLR § 3218(a), 

Except as provided in section thirty-two hundred one, a judgment by confession may be entered, without an action, either for money due or to become due, or to secure the plaintiff against a contingent liability in behalf of the defendant, or both, upon an affidavit executed by the defendant;

1. stating the sum for which judgment may be entered, authorizing the entry of judgment, stating the county where the defendant resides and, if applicable, stating that the interest rate for consumer debt pursuant to section five thousand four of this chapter applies;

2. if the judgment to be confessed is for money due or to become due, stating concisely the facts out of which the debt arose and showing that the sum confessed is justly due or to become due; and

3. if the judgment to be confessed is for the purpose of securing the plaintiff against a contingent liability, stating concisely the facts constituting the liability and showing that the sum confessed does not exceed the amount of the liability.

When an amount certain is confessed, the affidavit required under CPLR § 3218(a) must state the facts from which the debt arose to demonstrate that the confessed amount is just.[1] In doing so, the statute requires the affiant to “concisely” state “the facts out of which the debt arose and showing that the sum confessed is justly due or to become due.”[2] This means that “there must be sufficient genuine detail to enable other creditors to investigate the claim and ascertain its validity ….”[3] As the courts have noted, CPLR § 3218 “is designed for the protection of third persons who might be prejudiced in the event that a collusively confessed judgment is entered ….”[4] It is “not for the protection of the defendant.”[5]

Notwithstanding, defendants and debtors have tried to vacate confessions of judgment on the grounds that the judgment was procured by fraud, or the debt owed was void ab initio.[6] Such was the case in Oakshire Props., LLC v. Argus Capital Funding, LLC, 2024 N.Y. Slip Op. 03943 (4th Dept. July 26, 2024) (here).

Plaintiffs commenced the action seeking, inter alia, to vacate an ex parte judgment taken by confession. The action arose from an “Agreement for the Purchase and Sale of Future Receipts” (the “Agreement”) entered into between an affiliate of plaintiffs—nonparty Oakshire Mushroom Sales, LLC (“Oakshire”)—and defendant Argus Capital Funding, LLC, which purported to sell $554,850 of Oakshire’s future receipts for $411,000, less a $10,995 origination fee. Pursuant to the Agreement, Argus was entitled to automatically withdraw daily payments of $2,935.71 from Oakshire’s bank account, which it represented to be 15% of Oakshire’s average sales. The Agreement was secured by a personal guarantee from Oakshire’s principal, as well as by an affidavit in confession of judgment signed by the principal on behalf of himself, Oakshire and all of its affiliated entities. Although the Agreement contained a provision requiring monthly reconciliation of the withdrawn daily payments with the specified percentage of the future receipts, the provision also stated that defendant’s failure to reconcile the payments would not constitute a breach of the agreement and, further, that any prospective adjustment to the amount of the daily payments would be in the sole discretion of defendant. The Agreement further stated that a default on the part of Oakshire would occur where, inter alia, “two or more [automatic withdrawal] transactions attempted by [defendant] within one calendar month are rejected by [the] bank,” immediately accelerating the entire amount due and authorizing the ex parte filing of the confession of judgment.

On December 18, 2018, Oakshire notified defendant that it had experienced a significant decrease in sales and requested a downward adjustment to the daily payment amount. Defendant did not consent to the requested reduction and, two days later, filed an ex parte action in the Ontario County Clerk’s Office for a judgment by confession against Oakshire, its principal and all of its affiliated entities, for the remaining balance of $319,993.20, plus $105,822.75 in attorney’s fees, costs and disbursements, which was granted. Shortly thereafter, Oakshire and one of its affiliated entities filed for bankruptcy protection.

Plaintiffs subsequently commenced the action seeking, among other relief, to vacate the judgment by confession against them, alleging that the underlying transaction was not a sale of future receipts but, rather, a loan that contained a criminally usurious interest rate. Defendant and co-defendant Park Avenue Recovery, LLC (collectively, “defendants”) moved to dismiss the amended complaint against them pursuant to CPLR 3211 on the grounds that, inter alia, the causes of action sounding in fraudulent inducement and fraud were not pleaded with the specificity required by CPLR 3016, and documentary evidence established that the underlying transaction was not a usurious loan.

The motion court granted the motion with respect to the two causes of action for usury, which it determined were barred by the one-year statute of limitations under CPLR 215(6) and denied the motion with respect to the remaining causes of action.

Defendants appealed. The Appellate Division, Fourth Department affirmed.

The Court held that plaintiffs sufficiently pleaded their causes of action for fraudulent inducement and fraud in connection with the underlying transaction as a sale of future receivables, and not a usurious loan. The Court also held that plaintiffs sufficiently pleaded the elements of fraud and supplied sufficient detail to satisfy the pleading requirements of CPLR 3016 (b).[7]

[Eds. Note: As discussed in the briefing on appeal, Oakshire argued that the affidavit used to obtain the judgment by confession was false and fraudulent in that, among other things, it: (i) represented that the Agreement was an “Agreement for the Purchase and Sale of Future Receivables,” i.e., an agreement not subject to usury laws; (ii) represented that Oakshire had defaulted on the Agreement; and (iii) represented that Oakshire had agreed to the payment of legal fees (as opposed to reasonable attorney’s fees). In reliance on the allegedly false and fraudulent affidavit, defendants signed the affidavit for confession of judgment, which the Clerk entered, causing them to be injured in their business and property.]

Additionally, with respect to all of the causes of action that were not dismissed by the motion court, the Court “conclude[d] that the allegations in the amended complaint that the underlying transaction [was] a usurious loan [were] sufficient to survive a motion to dismiss.”[8]

“When determining whether a transaction is a loan, substance—not form—controls.”[9] The transaction “must be considered in its totality and judged by its real character, rather than by the name, color, or form which the parties have seen fit to give it.”[10] The primary question is “whether the [purported lender] is absolutely entitled to repayment under all circumstances [because, u]nless a principal sum advanced is repayable absolutely, the transaction is not a loan.”[11]

There are three factors the courts generally consider to determine whether a repayment is absolute: “(1) whether there is a reconciliation provision in the agreement; (2) whether the agreement has a finite term; and (3) whether there is any recourse should the merchant declare bankruptcy” or go out of business.”[12]

Applying the foregoing factors, the Court held “that repayment was absolute.”[13] In so holding, the Court provided three reasons for its conclusion:

First, although there is a reconciliation provision in the [A]greement, the provision appears illusory inasmuch as [defendant] may not be subject to any consequences for failing to comply with its terms and, further, [defendant] has sole discretion to adjust the amount of the daily payments. Second, it appears that there was an implied finite term in the agreement inasmuch as plaintiffs allege that the daily payment amount was set to ensure that [defendant’s] targeted return would be met in a predetermined period of time as opposed to having been set based on the specified percentage of Oakshire’s sales. Third, it appears that [defendant] had a means of recourse in the event Oakshire went out of business inasmuch as the agreement allowed [defendant], in its sole discretion, to continue making daily payment withdrawals even if the daily payment amount exceeded Oakshire’s sales, thereby providing [defendant] with a means to compel an event of “default” upon which it could then immediately accelerate the entire debt and file a confession of judgment against Oakshire’s affiliated entities and personal guarantor.[14]

Consequently, the Court concluded “that the amended complaint sufficiently allege[d] that the transaction [was] a loan subject to usury laws.”[15]

__________________________________________

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

[1] CPLR § 3218(a)(2).

[2] Id.

[3] Princeton Bank & Trust Co. v. Berley, 57 A.D.2d 348, 354 (2d Dep. 1977) (citations omitted).

[4] Mall Commercial Corp. v. Chrisa Rest., 85 Misc. 2d 613, 614 (Sup. Ct., App. Term, 1st Dept. 1976).

[5] Id.

[6] A motion to vacate may be brought pursuant to CPLR 5015(a)(3), which provides that the court may vacate a judgment on grounds of “fraud, misrepresentation, or other misconduct of an adverse party.”

[7] Slip Op. at *2 (quoting Baird v. Baird, 221 A.D.3d 1465, 1467 (4th Dept. 2023)).

[8] Id.

[9] Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320, 334 (2021); see Ujueta v. Euro-Quest Corp., 29 A.D.3d 895, 895 (2d Dept. 2006).

[10] LG Funding, LLC v. United Senior Props. of Olathe, LLC, 181 A.D.3d 664, 665 (2d Dept. 2020) (internal quotation marks omitted)).

[11] Samson MCA LLC v. Joseph A. Russo M.D. P.C./IV Therapeutics PLLC (appeal No. 2), 219 A.D.3d 1126, 1128 (4th Dept. 2023) (internal quotation marks omitted).

[12] Id. (internal quotation marks omitted); see also LG Funding, LLC, 181 A.D.3d at 666.

[13] Slip Op. at *2.

[14] Id.

[15] Id. (citations omitted).