Gov. Andrew Cuomo approved legislation Friday that will limit the use in state courts of so-called confessions of judgment, which previously allowed creditors to both freeze and seize a borrower's assets, without any litigation, by filing an affidavit in a New York state court.

The practice allowed creditors to file a judgment in New York to seize those funds, even if the borrower lived elsewhere.

The bill was sent to the Legislature this year at the request of the state Office of Court Administration, which has seen an uptick in creditors using the state's courts for that purpose.

"We are looking to correct the abuse of confessions of judgment within the state," said Lucian Chalfen, an OCA spokesman. "The overarching aim is to prevent creditors from abusing confessions of judgment by using New York courts as a venue to profit from debtors with no New York connection."

It was a priority for State Sen. Brad Hoylman, D-Manhattan, who was chosen to chair the Judiciary Committee in his chamber this year. He decried the practice in a statement celebrating the new law Friday.

"Where there's a loophole, there's a bad actor willing to exploit it to make money, no matter the cost to ordinary Americans," Hoylman said. "The entire business model of lenders who exploited New York's court system and laws to prey on out-of-state small businesses through confessions of judgment was immoral."

Confessions of judgment are usually included in an application for a loan, and contain language that allows a creditor to enter a judgment in court in lieu of litigation when a borrower misses a payment. They essentially give up their right to defend the seizure.

Until the legislation was signed Friday, creditors were able to use state courts in New York to execute confessions of judgment against a borrower — even if both entities are out-of-state — and freeze and seize their assets.

The new law will only allow confessions of judgment to be entered in the state's courts if the affidavit for such an agreement was executed in New York. A creditor will only be allowed to file a confession of judgment in the county where the borrower lived at the time.

That would apply to both in-state borrowers, and those who made the agreement in New York but have since moved. If the affidavit involves a nonnatural person, like a corporation, that entity would be considered to reside in the county where it has its principal place of business, according to the law.

Government agencies, which typically use confessions of judgment to ensure they can recover assets during a prosecution or civil case, would still be allowed to enter such judgments in any county of the state.

The law was sent to the Legislature in response to a news report from Bloomberg last year that highlighted how some creditors have used state law in New York to pursue confessions of judgment against borrowers across the country.

According to an analysis by Bloomberg of data from the state court system, judgments of confession in favor of creditors spiked from just 14 cases before 2014 to more than 3,500 in the third quarter of last year. The report was published in November 2018.

Assemblyman Jeffrey Dinowitz, D-Bronx, who chairs the Judiciary Committee in the lower chamber, gave Bloomberg a shoutout in a statement on the new law Friday.

"For too long, New York has been used as a property seizure mill for the entire country because of loopholes in our laws governing confessions of judgment," Dinowitz said. "Thanks in no small part to a diligent journalist at Bloomberg News, we were able to identify and correct this problem so that our civil courts will be able to focus on protecting the rights of New Yorkers—not expediting corporate greed from around the country."

Confessions of judgment do have a practical purpose in the lending industry. They can be used by creditors to seize the assets of someone who hasn't lived up to the agreement of their financing, and when there's no other alternative for the creditor to recoup their investment.

The new law takes effect immediately and will apply to judgments by confession filed on or after Friday, according to the legislation.

"By closing this loophole, we are strengthening our state's legal system and helping to ensure both in-state and out-of-state borrowers will not fall victim to these opportunistic schemes," Cuomo said.

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