A confession of judgment is one of the most easily abused ways a creditor can collect a debt. It is a clause in an agreement that says a debtor agrees in advance to automatically lose if the creditor files a lawsuit, even if the debt is legitimately disputed for any reason. Utah has prohibited confessions of judgment in consumer loans since at least the 1970s.
A couple of years ago, some kids complained to their legislators that they were duped by a company into try selling stuff in another state and were sued for their travel expenses after they came home empty-handed. They had no chance to tell a court they had been misled because their employment contract had a confession of judgment. That incident resulted in a new Utah law prohibiting confessions of judgment in all agreements.
Prohibiting confessions entirely was a prudent decision. It doesn’t impair legitimate claims, it helps ensure fairness. Nevertheless, this year our Legislature passed a new law, SB220, sponsored by state Sen. Kirk Cullimore, an attorney specializing in evictions and collecting debts from renters, to permit confessions of judgment in business loans. Initially it would have also allowed confessions in consumer loans involving real estate, but that was taken out after some cities and the Utah Bar opposed it.
The supporters of this bill told the Legislature that the original law was too broad and had “unintended consequences” preventing lenders from offering credit to some borrowers that need the credit and didn’t need laws to protect them. A recent scandal in New York reveals why that is misleading.
The party behind this bill is a New York company that lends to small businesses across the nation. Many similar companies are also based in New York because, until recently, they were allowed to enforce confessions of judgment in business loans.
As described in a recent series of articles in Bloomberg Businessweek, those companies file lawsuits in remote places in New York that will enter judgment the same day and enable the lender to seize borrowers’ bank accounts before the borrower even knows it has been sued.
Some borrowers managed to travel to those upstate counties to try to get the judgment set aside, in some cases because they had not defaulted or the documents had been falsified, only to be told they had no remedy. They had confessed.
Once bank accounts are seized, the borrower usually goes out of business, even if it is otherwise sound. The borrower can’t make payroll or pay suppliers. Employees and other creditors often get nothing, even though employees have a legal right to payment before any other creditor.
In response to the Bloomberg articles, the New York Assembly passed a new law prohibiting confessions across the board. That made it necessary for these lenders to find some other place to set up shop. To make Utah an option, they hired a prominent local law firm with a strong lobbying group to find a sponsor to change the law in Utah.
Our legislators were not told about the problems in New York in the committee hearing or the floor debates. Bill opponents were not aware of the New York problems until after SB220 had passed the Senate and was about to pass the House on the last day of the session. Opponents did not know that New York had ended the use of confessions until after the session was over.
The abuses underlying SB220 are even more concerning, as government and banks move to protect small businesses during the current coronavirus crisis. Small businesses and their employees will be hit first and hardest. That should concern everyone, because the whole economy, except for government spending, begins with someone buying something.
Utah banks don’t use confessions. While most banks I work with are planning to assist those businesses, which is usually in the best interests of both parties, these New York lenders will be doing everything they can to shut them down and grab the money first. If that were not the case, they would not need confessions.
SB220 has not yet been signed by the governor and could be vetoed. At a minimum, Gov. Gary Herbert should veto this bill so the Legislature can consider it again after the legislators understand the real reason why the promoters want the law changed.
George Sutton is a Salt Lake City attorney specializing in banking and consumer credit. He was Utah commissioner of financial institutions from 1987 to 1992 and was named 2019 pro bono attorney of the year by the Utah Bar Association.