Sign Here to Lose Everything

Part 3

Rubber-Stamp Justice

Sign Here to Lose Everything

Part 1: “I Hereby Confess Judgment”

Part 2: The $1.7 Million Man

Part 3: Rubber-Stamp Justice

Part 4: Business-Loan Kingpin

Part 5: A Visit from Gino

Predatory lenders have co-opted New York’s court system to put the screws to borrowers nationwide.

Story by Zachary R. Mider and Zeke Faux

Data analysis by David Ingold and Demetrios Pogkas

November 29, 2018, 5:00 AM EST

Before the predatory lenders descended, days would come and go with no new court cases filed at the county office building in sleepy Canandaigua, New York, population 10,289.

Ontario County Clerk Matthew Hoose and his staff had plenty of other things to do, processing gun permits and drivers’ licenses for people who live among the vineyards and dairy farms on the northern end of the Finger Lakes region. A former corrections officer and tae kwon do instructor, he holds the same post his grandfather once did.

Then around eight months ago, Hoose noticed he was getting busier. A half-dozen new court cases a day were coming in from out-of-town lawyers. They were representing companies with names like High Speed Capital and Cash Crunch.

Image of Canandaigua, New York in Ontario County. — Canandaigua, New York, in Ontario County.

PHOTOGRAPHER: PHILIP SCALIA/ALAMY

The new cases had no connection to Ontario County. In each, a small-business operator—a plumber in Arkansas, a shopkeeper in California—had borrowed money at a steep interest rate, and now the lender was asking for the court’s help, saying the company wasn’t paying.

Something else was strange: Each one included a document called a confession of judgment, saying the borrower had agreed in advance to lose any court dispute about the transaction. The confessions were signed weeks or months before any case existed and before any payments would have been made or missed.

The confessions meant the paperwork went straight to Hoose for his signature, bypassing a judge. No proof of missed payments was required, and the borrower wasn’t even notified. Hoose or a deputy simply signed a piece of paper to make the judgment final and collected a $225 fee. He says he eventually learned that lenders use Ontario because he often approves cases the same day he gets them.

“They say we’re very quick,” Hoose says. “Word just gets around.”

Hoose and several other clerks in upstate New York counties have become crucial enablers of a nationwide predatory lending operation. Their sign-offs—with electronic signatures or old-fashioned rubber stamps—give loan companies the legal authority to raid borrowers’ bank accounts and seize other assets, bypassing the fuss and expense of a trial. Borrowers say lenders often abuse this power, inflating balances or grabbing money when it’s not justified. But as long as the paperwork is in order, the clerk is required by law to approve the case, before a borrower has a chance to object.

Note: Numbers are totals from the beginning of 2012 through Nov. 14, 2018

Sources: Bloomberg News analysis of New York State Unified Court System documents; New York State GIS Clearinghouse

The lenders are part of the merchant cash-advance industry, which got big after the U.S. financial crisis a decade ago. It’s driven by telephone salesmen who offer small businesses fast money at costs that can exceed an annualized interest rate of 400 percent. They get around usury laws by saying they aren’t making loans but advancing cash in exchange for a share of future revenue. Over the past few years, lenders have begun requiring borrowers to sign such confessions as part of the application.

To shed light on this emerging practice, Bloomberg News obtained and analyzed New York State court cases filed by more than 350 cash-advance companies since the industry began using confessions around 2012. It found more than 25,000 such cases entered in courts around the state, most of them in the past two years, involving lenders and borrowers from all over the country. The judgments are worth an estimated $1.5 billion.

The data show a sharp increase in filings each year, as more lenders adopted the use of confessions and the industry expanded. By September, clerks were entering more than 1,200 judgments a month. Ontario is the most popular county this year, overtaking Erie, the home of Buffalo, which was tops in 2017. In October, Ontario received 455 cash-advance filings, more than four-fifths of the county’s total civil caseload.

Note: Totals by quarter

Source: Bloomberg News analysis of New York State Unified Court System documents

The lenders choose New York courts because state law is especially friendly to confessions of judgment. Responding to a surge in their use in consumer lending after World War II, many states restricted them, citing concerns about abuse. A few deemed it a criminal offense to obtain one. The Federal Trade Commission banned them nationwide for consumer loans in 1985.

How we crunched the numbers

When we heard that predatory lenders were using confessions of judgment to collect debts against small businesses, and that nearly all the legal action was happening in New York State, we set out to quantify the phenomenon.

Most New York trial-court records are publicly available online, but we hit a roadblock right away. The state court website doesn’t allow searches based on whether a case involves a confession of judgment. And court officials declined to make the state’s database available.

So we built our own database. We identified more than 500 names associated with merchant cash-advance companies from a variety of sources, including industry publications and lawyers’ client lists, and we searched state court records for filings by these companies. That led us to more than 30,000 New York court cases.

We manually downloaded docket information for each of these cases. Then we wrote code to identify cases that involved a confession and resulted in a judgment being entered against the defendant.

The result: A tally of more than 25,000 judgments obtained by cash-advance companies over the past six years. The data show the skyrocketing use of this powerful instrument; the companies that use it the most; and the county clerks who rubber-stamp the most.

—Zachary R. Mider, Zeke Faux, David Ingold and Demetrios Pogkas

Skepticism about these instruments goes back much further. “The field for fraud is too far enlarged by such an instrument,” a Missouri judge wrote in 1909. “Oppression and tyranny would follow.”

Other states that still allow confessions for business loans impose safeguards. In California, a borrower can’t sign one without a lawyer’s written recommendation. In Pennsylvania, a lender must give notice to the borrower and wait 30 days before acting on the judgment. But no matter where they’re located or who they’re giving money to, cash-advance companies can avoid such restrictions by filing their cases in New York.

Norman Valz, a Philadelphia cash-advance lawyer, says he used to file judgments in Pennsylvania but came to regret it. While he waited for the 30-day period to lapse, his borrowers would often have their assets seized by another lender using quicker New York courts. “New York,” he says, “is the place to do it.”

Image of Ontario County Clerk Matthew Hoose. — Ontario County Clerk Matthew Hoose.

SOURCE: FACEBOOK

Hoose, the Ontario clerk, says most of the $225 fee is passed along to the state court system. The $41 his county keeps isn’t enough to cover labor costs, he says. But since state law allows creditors to file against out-of-state debtors anywhere they want, Hoose has been processing them all, figuring there was nothing he could do to stop it.

That’s about to change soon. Hoose says he plans to start rejecting cases from outside the county. “I believe we have the grounds,” he says. “Stay tuned.”

For Paul Piperato, the clerk in Rockland County, 20 miles north of New York City, the breaking point came around the end of 2016. “We were getting inundated,” Piperato says. “So I went to my staff, I said, let’s reject it. They don’t have any ownership in Rockland, no local address. I’m rejecting it.” Piperato says the lawyers got the message. The volume of cases tailed off, from 575 in 2016 to just 22 the next year.

In Westchester County, it was a judge who presented a roadblock. The county was the top choice of cash-advance companies in 2015 and 2016. Then, Judge David Everett tossed out three judgments there, concluding that the deals were loans after all. In a December 2016 case involving a Tennessee pharmacy, he ruled, “The fact that the loan agreement is denominated by another name does not shield it from a judicial determination that such agreement contemplates a criminally usurious transaction.”

Note: 2018 data through Nov. 14

Source: Bloomberg News analysis of New York State Unified Court System documents

Filings in the county dropped, with the volume diverted to other upstate locales. To the industry’s relief, dozens of subsequent rulings in Westchester and elsewhere went the lenders’ way. These judges accepted their long-standing contention that the transactions aren’t really loans and are therefore exempt from usury laws. This year, a state appeals court upheld that view.

No county has awarded more judgments over the past six years than Erie, where Michael Kearns, a former state assemblyman, became clerk last year. He’s gathered data about cash-advance judgments and says he plans to discuss the matter with state lawmakers and fellow county clerks.

“The more I learn about these, it does make me feel uneasy,” Kearns says. “Someone at least should make the legislators aware of this practice.”

Borrowers hardly ever challenge judgments against them. For many, that’s because the debts are legitimate. Others can’t afford a lawyer because their money had been seized.

Those who persevere get a swift lesson in geography. “It is odd that the attorney went to Ontario to file the claim when he is located in New York City,” wrote Vyacheslav Borisov, a Los Angeles builder who represented himself in a bid in May to vacate one of Hoose’s judgments. Borisov went bankrupt before he could get a hearing in Canandaigua.

Because the industry lends to small businesses, not individuals, consumer laws and protections generally don’t apply, and the Consumer Financial Protection Bureau has never asserted jurisdiction. Just as they avoid usury rules, companies sidestep almost all state licensing requirements by saying their products aren’t loans. California regulates some cash-advance companies, but many operate there without a license.

Last year, cash-advance executives feared New York was trying to regulate the industry. New York Governor Andrew Cuomo included language in his budget proposal that they believed would open the door to oversight by the state’s Department of Financial Services. The industry sent a delegation to Albany to register its concern. The language didn’t survive in the budget adopted by the legislature. Cuomo, whose office declined to comment, didn’t float the idea again this year.

This is the third in a series of articles about the merchant cash-advance industry. Read more about how local, state and federal officials are trying to crack down on it as a result of the Bloomberg News investigation.

Design and development: Demetrios Pogkas and Christopher Cannon. With assistance from Dean Halford and Mira Rojanasakul.

Edited by Robert Friedman and John Voskuhl.

Notes: Details of more than 30,000 civil court cases associated with cash-advance companies since 2012 were analyzed to identify those in which the plaintiff filed a confession of judgment and the court entered a judgment in the plaintiff’s favor. The dollar value of about one-third of the judgments was available in the state court database. Bloomberg estimated the value of the remainder based on those values and a random sample of more than 1,200 cases where the amount in court filings hadn’t been entered in the electronic database.

Sign Here to Lose Everything

Part 3

Rubber-Stamp Justice

Where the Action Is

A Confessions Boom

Changing Places

Sign Here to Lose Everything Part 3 Rubber-Stamp Justice

Where the Action Is

A Confessions Boom

Changing Places

Sign Here to Lose Everything

Part 3

Rubber-Stamp Justice