Debtor-Creditor Business Ethics: Are Confessions of Judgment Ethical?

business_ethics_highlights_2Like an arbitration agreement, a confession of judgment waives a right to pursue one’s rights through the court system. Unlike an arbitration agreement, a confession of judgment does not provide an alternative forum for adjudicating disputes and, indeed, amounts to one party agreeing that the other is in the right. In most U.S. states confessions of judgment are either unenforceable or are enforceable in only a narrow class of commercial agreements.

The linked article is the first in a multi-part series about how New York State’s court system has become a profit center for lenders making subprime business loans to desperate business owners, using confession-of-judgment provisions to skip adjudication and go straight collections.

That many jurisdictions refuse to enforce or actively condemn confessions of judgment suggests that there may be something unethical about them. The difficult part is saying what, exactly, that is. Some people maintain that any waiver of a right to pursue one’s rights through the court system is unethical. That, however, can’t be correct: any settlement of a legal case involves one party waiving the right to pursue the matter further in court. If any waiver of a right to pursue one’s rights through the court system is unethical, then – implausibly – all settlements are unethical.

This piece and its followups could be good classroom fodder for discussing the ethical aspects of creditor-debtor relationships. >>>

LINK: Sign Here to Lose Everything (Part 1): How an obscure legal document turned New York’s court system into a debt-collection machine that’s chewing up small businesses across America (by Zachary R. Mider and Zeke Faux for Bloomberg)

The man identified himself as a debt counselor. He described a bizarre legal proceeding that he said was targeting [Janelle] Duncan without her knowledge. A lender called ABC had filed a court judgment against her in the state of New York and was planning to seize her possessions. “I’m not sure if they already froze your bank accounts, but they are RIGHT NOW moving to do just that,” he’d written in an email earlier that day. He described the lender as “EXTREMLY AGGRESSIVE.” Her only hope, the man said, was to pull all her money out of the bank immediately.

His story sounded fishy to the Duncans. They had borrowed $36,762 from a company called ABC Merchant Solutions LLC, but as far as they knew they were paying the money back on schedule. Doug [Duncan] dialed his contact there and was assured all was well. They checked with a lawyer; he was skeptical, too. What kind of legal system would allow all that to happen 1,000 miles away without notice or a hearing? They shrugged off the warning as a scam.

But the caller was who he said he was, and everything he predicted came true. The following Monday, Doug logged in at the office to discover he no longer had access to his bank accounts. A few days on, $52,886.93 disappeared from one of them. The loss set off a chain of events that culminated a month later in financial ruin. Not long after her agency went bankrupt, Janelle collapsed and was rushed to the hospital, vomiting bile.

The lenders’ weapon of choice is an arcane legal document called a confession of judgment. Before borrowers get a loan, they have to sign a statement giving up their right to defend themselves if the lender takes them to court. It’s like an arbitration agreement, except the borrower always loses. Armed with a confession, a lender can, without proof, accuse borrowers of not paying and legally seize their assets before they know what’s happened. Not surprisingly, some lenders have abused this power. In dozens of interviews and court pleadings, borrowers describe lenders who’ve forged documents, lied about how much they were owed, or fabricated defaults out of thin air.

Confessions of judgment have been part of English common law since the Middle Ages, intended as a way to enforce debts without the fuss and expense of trial. Concerns about their potential abuse are almost as old. In Charles Dickens’s 1837 novel The Pickwick Papers, a landlady who’s tricked into signing one ends up in debtors’ prison. Some U.S. states outlawed confessions in the middle of the 20th century, and federal regulators banned them for consumer loans in 1985. But New York still allows them for business loans.

Confessions aren’t enforceable in Florida, where the Duncans signed theirs. But New York’s courts are especially friendly to confessions and will accept them from anywhere, so lenders require customers to sign documents allowing them to file there. That’s turned the state into the industry’s collections department. Cash-advance companies have secured more than 25,000 judgments in New York since 2012, mostly in the past two years, according to data on more than 350 lenders compiled by Bloomberg Businessweek. Those judgments are worth an estimated $1.5 billion. . . .

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