Opinion
EF001776–2018
03-13-2018
GTR SOURCE, LLC, Plaintiff, v. FUTURENET GROUP, INC. d/b/a Futurenet Group and Parimal D. Mehta, Defendants.
For Plaintiff: Steven S. Wells, Esq., Hodgson Russ LLP, Buffalo, NY, and Ariel Bouskila, Esq., New York, NY For Defendants: Shane R. Heskin, Esq. and Stuart Wells, Esq., White and Williams LLP, New York, NY
For Plaintiff: Steven S. Wells, Esq., Hodgson Russ LLP, Buffalo, NY, and Ariel Bouskila, Esq., New York, NY
For Defendants: Shane R. Heskin, Esq. and Stuart Wells, Esq., White and Williams LLP, New York, NY
Catherine M. Bartlett, J.
The following papers numbered 1 to 7 were read on Defendants' motion for an order vacating a judgment by confession entered against them on February 14, 2018:
Notice of Motion—Affirmation/Exhibits—Affidavit/Exhibits—Memorandum 1–4
Affirmation in Opposition/Exhibits—Affidavit/Exhibits—Memorandum 5–7
Upon the foregoing papers, it is ORDERED that the motion is disposed of as follows:
In November 2017, the parties entered into a "Merchant Agreement" (the "Agreement") pursuant to which plaintiff GTR Source, LLC ("GTR") purchased from defendant Futurenet Group, Inc. ("Futurenet") its future receivables in the amount of $291,800.00 for the total purchase price of $200,000.00. Futurenet's obligations under the Agreement were personally guaranteed by defendant Parimal D. Mehta ("Mehta"). Futurenet and Mehta are resident in the State of Michigan.
In conjunction with the Agreement Mehta executed an Affidavit of Confession of Judgment on behalf of Futurenet and himself. So far as pertains to the motion before this court, the Affidavit authorized the entry of judgment in favor of GTR and against Futurenet and Mehta in the Federal District Court for the Southern District of New York, and in the Supreme Court of the State of New York for the counties of Richmond, Orange, Westchester, Kings, Erie and Ontario.
In February 2018, Futurenet defaulted on its obligations under the Agreement, whereupon GTR, in reliance on the Affidavit of Confession of Judgment, entered Judgment in this Court on February 14, 2018 against Futurenet and Mehta in the amount of $95,849.00 (the amount confessed less the amount paid), plus attorney's fees pursuant to contract in the amount of 25% of the unpaid balance, plus interest and costs, totaling in all the sum of $120,154.42.
Defendants move to vacate the Judgment against them on the ground that the Affidavit of Confession of Judgment does not comply with the requirements of CPLR § 3218. Section 3218 provides in pertinent part:
(a) Affidavit of defendant . ...[A] judgment by confession may be entered, without an action, either for money due or to become due...upon an affidavit executed by the defendant:
1. stating the sum for which judgment may be entered, authorizing the entry of judgment, and stating the county where the defendant resides or if he is a non-resident, the county in which entry is authorized ;....
(b) Entry of judgment . At any time within three years after the affidavit is executed, it may be filed with the clerk of the county where the defendant stated in his affidavit that he resided when it was executed or, if the defendant was then a non-resident, with the clerk of the county designated in the affidavit ....
Defendants contend:
(1) that CPLR § 3218 requires an Affidavit of Confession of Judgment for out-of-state residents to designate a single county in which a Judgment by Confession may be filed;
(2) that the single-county requirement is jurisdictional ;
(3) that, inasmuch as the Affidavit of Confession of Judgment at issue here designated six New York counties wherein Judgment by Confession was authorized, it failed to comply with the requirements of CPLR § 3218 ; and consequently,
(4) that the Judgment herein must, upon motion by the Judgment Debtor , be declared void and vacated.
As a general matter, a debtor seeking to vacate a judgment entered against him upon the filing of an affidavit of confession of judgment may not proceed by way of motion, but must instead seek relief by commencing a separate plenary action. See, The Regency Club at Wallkill, LLC v. Bienish, 95 AD3d 879 (2d Dept. 2012) ; Rubino v. Csikortos, 258 AD2d 638 (2d Dept. 1999) ; L.R. Dean, Inc. v. International Energy Resources, Inc., 213 AD2d 455, 456 (2d Dept. 1995) ; City of Poughkeepsie v. Albano, 122 AD2d 14 (2d Dept. 198) ; Cash and Carry Filing Service, LLC v. Perveez, 149 AD3d 578 (1st Dept. 2017). See also, Siegel, New York Practice § 302 (6th ed.).
This rule is not without exception. "The theoretical basis for all judgments by confession is that a defendant may consent in advance to jurisdiction of a ‘given court’ ( National Equipment Rental, Ltd. v. Szukhent, 375 U.S. 311...)." Atlas Credit Corp. v. Ezrine, 25 NY2d 219, 227 (1969). Accordingly, a judgment by confession may be vacated upon motion at the behest of the judgment debtor when it was "entered without authority." See, Ripoli v. Rodriguez, 53 AD2d 638 (2d Dept. 1976). The Ripoli Court wrote:
Confessions of judgment are always carefully scrutinized and, in judging them, a liberal attitude should be assumed in favor of judgment***. Confession of judgment entered without authority may be vacated on motion .
Ripoli v. Rodriguez , supra (quoting 4 Weinstein–Korn–Miller, N.Y.Civ.Prac., ¶ 3218.04 [emphasis added] ). Thus, in Irons v. Roberts, 206 AD2d 683 (3d Dept. 1994), the Third Department held that the unauthorized entry of confessed judgment in a county other than one to which the debtor had consented was void as to the debtor). Id., at 684–685. Similarly, "if the judgment has been entered in violation of the affidavit's terms, such as where it states a time that has not arrived or a contingency that has not occurred," it has been entered without authority and is subject to vacatur on motion by the debtor. See, Siegel, NY Prac. § 302 (6th ed.).
Defendants, however, did authorize the entry of the judgment by confession at issue here: they consented to entry of this judgment in Orange County, and judgment was entered in accordance with the terms of their Affidavit of Confession of Judgment. They argue, instead, that a judgment by confession entry of which they authorized is nevertheless void as to them because the terms of the affidavit are defective , i.e., because those terms do not comply with the requirements of CPLR § 3218.
Under well established authority, the alleged violation of CPLR § 3218 may render the judgment by confession subject to vacatur at the behest of a bona fide creditor , but the debtor Defendants lack standing to contest the terms of their Affidavit of Confession of Judgment unless entry of judgment pursuant thereto was so unfair as to violate Defendants' due process rights.
As the First Department held in Cash and Carry Filing Service, LLC v. Perveez , supra :
[Debtors] lack standing to challenge the affidavit of confession of judgment. An affidavit of confession of judgment pursuant to CPLR 3218"is intended to protect creditors of a [debtor]," not the [debtor] itself.
Id., 149 AD3d at 578. See also, The Regency Club at Wallkill, LLC v. Bienish, 95 AD3d at 879. Accordingly, David Siegel observes:
While a defect in the terms of the affidavit may therefore be exploited by another creditor—even though the underlying transaction is valid—it may not be exploited by the debtor. If the transaction is proper, the affidavit is irrelevant as far as the debtor is concerned.
Siegel, NY Prac. § 302 (6th ed.). This principle is eloquently illustrated by Steward v. Katcher , 283 A.D. 50 (1st Dept. 1953).
Steward v. Katcher involved the application of C.P.A. § 543, the predecessor statute to CPLR § 3218. Section 543(1) provided that a statement (i.e., affidavit) of confession of judgment "may be filed with the county clerk of the county of which the defendant was a resident at the time of making such statement." The debtor corporation maintained its principal offices in Queens County, but explicitly agreed to entry of the judgment in New York County. The debtor thereafter sought to cancel and set aside the New York County judgment, asserting that because it was entered in a county other than its county of residence in violation of C.P.A. § 543, it was "jurisdictionally void." Id., 283 A.D. at 51–52.
The Steward Court crystallized the issue as follows:
This appeal poses the question as to whether a judgment entered upon a confession of judgment filed in a county other than the one in which the defendant resides is so jurisdictionally and fatally defective that it is a nullity; or whether it is voidable so that as between themselves, and if creditors' rights do not intervene, the parties may waive the filing requirements of Section 543.
Id., at 51. The Court recognized that if the requirements of C.P.A. § 543 were jurisdictional in nature, they could not be waived and the judgment was a nullity. However, observing that (1) the Legislature never indicated that a judgment entered in violation of Section 543 was void and unenforceable (id., at 52), (2) "[t]he legislative regulation of methods of obtaining judgments by confession has always been directed toward the protection of creditors of the defendant" (id., at 53), and (3) the salutary purpose thereof is "substantially accomplished when the improperly filed judgment may be voided by such a creditor" (id. ), the Court stated:
We cannot conclude, therefore, that the Legislature intended, inexorably and under all circumstances, to deprive such plaintiffs of the opportunity to enforce substantial rights because of procedural error, whether knowing or unknowing. To reach any other construction would require a conclusion that the Legislature intended a pointless, prejudicial and unreasonable discrimination. "A bad result suggests a wrong construction, for the legislature is presumed to have intended to do justice, unless its language compels the opposite conclusion" [cit.om.]. If valid as to any person, the judgment is not an absolute nullity. [cit.om.].
Steward v. Katcher , supra, 283 A.D. at 53–54.
Accordingly, the Steward Court concurred in the holding of Williams v. Mittlemann, 259 AD 697 (2d Dept. 1940) that a judgment by confession filed in a county other than that prescribed by C.P.A. § 543 was void as to a bona fide intervening judgment-creditor , but held that the judgment before it was not void as to the judgment debtor, and accordingly denied the debtor's motion to cancel and set aside the confessed judgment. Id., 283 A.D. at 54.
In opposition to the foregoing authority, Defendants cite Yellowstone Capital, LLC v. Sun Knowledge Inc., Orange County Index No. EF001023–2017 (Onofry, J., April 21, 2017). While Yellowstone involves CPLR § 3218, the successor statute to C.P.A § 543, the case is not otherwise meaningfully distinguishable from Steward v. Katcher , supra , but reaches a contrary result without taking account of Steward or the principles underlying that decision.
In support of its holding that a judgment by confession filed in a county other than that prescribed by CPLR § 3218 is subject to vacatur on motion by the judgment debtor, the Yellowstone court cited Cole–Hatchard v. Nicholson, 73 AD3d 834 (2d Dept. 2010). In that case, the debtor, the perpetrator of a Ponzi scheme, confessed judgment in favor of two of his many victims. A non-party receiver moved to vacate the judgment on behalf inter alia of other victims of the Ponzi scheme (i.e., of other creditors or potential creditors) on the ground that the affidavit of confession of judgment did not comply with the requirements of CPLR § 3218(a)(2). Based on an array of caselaw involving the standing of other creditors to move to vacate a judgment by confession, the Second Department in Cole–Hatchard held that the receiver had standing to move to vacate based on non-compliance with CPLR § 3218. See, id., 73 AD3d at 835–836.
Cole–Hatchard v. Nicholson has subsequently been cited, correctly, for the proposition that a judgment by confession filed upon an affidavit which does not comply with CPLR § 3218 is void as to, and subject to vacatur upon motion by, a bona fide intervening judgment creditor. See, Rubashkin v. Rubashkin, 98 AD3d 1018 (2d Dept. 2012) ; Massey Knakal Realty of Brooklyn LLC v. W.J.R. Associates, 41 Misc 3d 1239(A) (Sup. Ct. Kings Co. 2013). Indeed, the Massey court correctly applied the principle upheld by Steward v. Katcher , supra : it ruled that while affidavits which failed to comply with CPLR § 3218(a)(2) rendered judgments by confession "void to the extent the judgments affect the interests of third parties" (citing Cole–Hatchard ), "the defects in the affidavits do not affect the validity of the judgments of confession as against [the debtor] ." Massey Knakal Realty of Brooklyn LLC, supra, at *6 (emphasis added).
Inasmuch as the Yellowstone opinion reflects no consideration of this critical distinction between the standing of other creditors and the lack of standing of the judgment debtor to move to vacate a judgment by confession for non-compliance with CPLR § 3218, this court declines to follow Yellowstone Capital, LLC v. Sun Knowledge Inc., supra . Assuming without deciding that the Affidavit of Confession of Judgment herein was non-compliant with CPLR § 3218 and hence defective because Defendants consented therein to the entry of judgment in more than one county, the court holds that (1) the debtor Defendants lack standing to challenge the terms of their Affidavit, (2) the resulting Judgment by Confession is not void as to them, and (3) thus, the Judgment is not subject to vacatur on the grounds asserted in their motion.
Finally, Defendants rely on the Court of Appeals' decision in Atlas Credit Corporation v. Ezrine, 25 NY2d 219 (1969). In that case, the question was whether New York would afford full faith and credit to a Pennsylvania cognovit judgment entered upon a warrant of attorney which authorized entry of judgment by confession against the debtor anywhere in the world without notice. The Court began:
With the enactment of the Civil Practice Law and Rules (1962) there came a new requirement that the obligor state in the affidavit "the county where [he] resides, or, if he is a non-resident, the county in which entry is authorized" ( CPLR 3218, subd. (a), par. 1). The purpose of this change was "so that proper county for entry" of the judgment will be ascertainable from the affidavit (5th Report, Advisory Comm. on Prac. and Pro., NY Legis. Doc., 1961, No. 15, p. 503). Although the change was primarily to protect creditors, it affords some minimal protection to the obligor in that he may be able to ascertain whether judgment was been confessed against him .
Id., 25 NY2d at 226 (emphasis added). Noting that a warrant of attorney authorizing judgment is "so drastic that to honor consent to entry of a judgment anywhere in the world, in advance of commencement of an action, and coupled with a waiver of notice, is not in accordance with fundamental principles of justice and fair play," and stressing the "vital importance" of "particularity in the selection of a jurisdiction", the Court held that "a warrant of attorney which permits entry of a judgment by confession anywhere in the world without notice violates due process and deprives the rendering court of jurisdiction." Id., at 231–232.
However, in Fiore v. Oakwood Plaza Shopping Center, Inc., 78 NY2d 572 (1991)cert. denied 506 U.S. 823 (1992), the Court of Appeals reconsidered Atlas Credit Corporation in the light of intervening U.S. Supreme Court precedent and held that "the conclusion reached in Atlas concerning the per se unconstitutionality of the Pennsylvania cognovit scheme is...no longer valid in light of the subsequent Supreme Court decisions." Id., 78 NY2d at 579. More particularly, citing Overmyer Co. v. Frick Co., 405 U.S. 174, 185 (1972), the Fiore Court held that a debtor's "due process rights to notice and hearing prior to a civil judgment are subject to waiver", and further, that the effectiveness of a debtor's waiver of those rights by affidavit of confession of judgment depends on whether the waiver was "voluntary, knowing, and intelligently made." Id., at 578–579, 581.
See, Overmyer Co. v. Frick Co., 405 U.S. 174 (1972) (holding that Ohio cognovit procedure is not per se unconstitutional); Swarb v. Lennox, 405 U.S. 191 (1972) (holding that Pennsylvania cognovit procedure is not per se unconstitutional).
Defendants have proffered no due process or waiver analysis. Given the Court of Appeals' rejection in Fiore of Atlas ' holding that a procedure whereby entry of judgment without notice may be entered anywhere in the world constitutes per se a due process violation, it is quite clear that due process does not per se (1) require the designation by affidavit of a single county, or (2) prohibit the designation by affidavit of as many as six counties, for the potential entry of judgment by confession against a debtor. Furthermore, since Defendants have not raised the issue, the court is not at this juncture confronted with the question whether the particular circumstances of this case give rise to a due process violation, or whether the Defendants voluntarily, knowingly and intelligently waived their due process rights.
The court has considered Defendants' remaining contentions and finds them to be without merit.
Thus, Defendants have failed to demonstrate their entitlement to vacatur of the judgment by confession entered against them on February 14, 2018. Any relief from that Judgment must be pursued by way of a separate plenary action.
It is therefore
ORDERED, that Defendants' motion to vacate the February 14, 2018 Judgment by Confession against them is denied without prejudice to their seeking relief by way of plenary action.
The foregoing constitutes the decision and order of this Court.