While New Jersey courts have long viewed confessed judgments with distaste, they have previously recognized and enforced such judgments entered in other jurisdictions so long as the court concluded that the defendant voluntarily waived the due process requirements of reasonable notice and an opportunity to be heard. (For those unfamiliar, a confessed judgment provision is a powerful tool in a creditor’s arsenal, generally permitting a lender to enter judgment against the borrower upon the borrower’s default with little or no prior notice or opportunity for the borrower to respond.)
The new law, which took effect on April 20, expressly prohibits the inclusion of confessed judgments in financing agreements extended to New Jersey businesses. The provision states, in pertinent part, that:
No provider of business financing shall extend business financing to a concern in this State that contains a judgment by confession.
N.J.S.A. 2A:16-9.1(a)(1). The statute’s definition of a “concern” is notably broad, encompassing “any trade, business or professional entity conducted for profit, and includes, but is not limited to, individuals, partnerships, corporations, joint ventures, associations and cooperatives.” N.J.S.A. 2A:16-9.1(c). The law still appears to provide a mechanism for enforcing a confessed judgment, providing that the judgment is entered “on motion after notice to the defendant served in lieu of summons in accordance with applicable court rules or by registered or certified mail. N.J.S.A. § 2A:16-9.1(a)(2).
But banks and other lending institutions extending financing to New Jersey businesses should take careful note of subchapter (b), which provides that a “provision of any contract for business financing that provides for a judgment by confession that does not meet the requirements of subsection a. of this section shall be invalid and unenforceable against any concern. N.J.S.A. § 2A:16-9.1(b) (emphasis added).
Of even more concern to lenders: the statute grants the attorney general the power to investigate alleged violations of the confessed judgment ban; to bring civil actions against violators; and to seek “$5,000 for the first violation, $10,000 for the second violation and $15,000 for each subsequent violation,” along with court costs and attorneys’ fees. N.J.S.A. § 2A:16-9.2.
As of now, no court has interpreted the new law. But its enactment raises multiple questions. For instance, can lenders contract around the confession prohibition by including in their loan documents a favorable choice-of-law provision? How will the law apply to, say, a loan made to a business located in Pennsylvania that is secured by collateral situated in New Jersey, particularly when the lender forecloses on the New Jersey collateral? Also, while a plain reading of the law clearly seems to apply to businesses physically located in New Jersey, could it also be applied to out-of-state businesses that are merely organized under New Jersey law?
While we await answers on how the courts will construe this statutory development, lenders to New Jersey businesses should take note of the new law and consider making changes to their lending agreements accordingly.
Author Christopher Leavell is an associate in the Bankruptcy & Restructuring Department at Klehr Harrison.