A recent amendment to the Confession of Judgment law in New York State could have a significant effect on litigation and settlement strategies for creditors who do business with companies and/or individuals who are non-New York residents.

On August 30, 2019, Governor Andrew Cuomo signed Senate Bill No. 6395, amending Civil Practice Law and Rules (“CPLR”) §3218 and eliminating filing in New York Confessions of Judgment (“COJ”) against non-New York residents. The language of the new law does not take into account the circumstance behind the execution of the COJ. For example, it does not expressly address circumstances where the COJ was part of a settlement resolving a pending litigation in which the court had personal jurisdiction over the confessor; was to secure payment on a business loan rather than a consumer loan; or was given after default rather than being required at the time a loan was originated. Instead, the new law in New York is a blanket prohibition against filing a COJ against an individual or entity that never resided in the State of New York.

The law, as amended, only allows a COJ to be filed with the Clerk of the county where the affidavit states the defendant resided when it was executed or where the defendant resides at the time of filing. If the defendant does not reside in the State of New York either at the time the COJ was executed or at the time of filing, the new law prohibits the Clerk from entering judgment against the defendant.

If a New York individual or entity relocates to another state after executing a COJ and was a New York resident at the time they executed the COJ, a judgment can still be entered in the county where that individual or entity resided at the time of execution. Additionally, if an out of state individual or entity executes a COJ and later becomes a New York resident, a judgment may be entered in the county where that individual or entity resides at the time of filing. It should be noted that the statute provides that “residence” for an entity is in any county in which that entity has a place of business.

Based upon the language set forth in the amendment, it appears as though the law will be applied retroactively. Thus, New York Clerks will not be authorized to enter a COJ executed by non-New Yorkers regardless of when it was executed. While the purpose of the law seems to be directed at preventing non-New York creditors from using New York resources to enter judgments against unsophisticated non-New York debtors with respect to transactions that have no connection to New York, the law appears (perhaps unintentionally) to effectively nullify all COJs that are executed by non-New Yorkers, regardless of the circumstances behind the execution of the COJ, even if the parties are sophisticated business entities or the creditor or transaction has a connection to New York. Due to the retroactive application, many parties may now face a scenario in which they have lost the benefit of a bargain previously agreed to.

With the passage of this new law, it appears that creditors who wish to settle pending lawsuits with non-New York residents and seek to have the ability to enter judgment upon a default will have to rely upon CPLR §3215(i) to do so (a Clerk’s judgment after default under a Stipulation of Settlement). However, unlike a COJ, which allows a pending action to be discontinued, in order to have a New York Clerk enter a judgment pursuant to CPLR §3215(i), an action must be pending. In order for creditors to adequately protect themselves and take advantage of CPLR §3215(i), in the event of a default under a settlement agreement, the action cannot be discontinued. However, if the terms of the settlement agreement require the defendant make payments over time, the defendant may not be willing to settle or may demand more favorable terms due to the fact that a public litigation will still be pending against him or her until the settlement amount is paid in full.

It is important to note the two main takeaways from the passage of this law: first, the law may seriously hinder a creditor’s ability to settle a lawsuit with a non-New York resident, and, second, the law appears to effectively nullify all COJs that are executed by non-New Yorkers.

So, what should you do?

The initial question should be to determine whether you are attempting to settle a lawsuit or whether a non-New York individual or entity has already executed a COJ as part of a settlement. If you have not yet settled the action and the individual or entity is not a New York resident, you should tailor your litigation and/or settlement strategy accordingly. If you already have an executed COJ, look for an opportunity to modify the settlement documents at an appropriate time to cause the non-New York individual or entity to execute a COJ in the state of his or her residence.