How an obscure legal document turned New York’s court system into a debt-collection machine that’s chewing up small businesses across America.

Look out, the stranger on the phone warned. They’re coming for you.

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 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.

As the Duncans soon learned, tens of thousands of contractors, florists, and other small-business owners nationwide were being chewed up by the same legal process. Behind it all was a group of financiers who lend money at interest rates higher than those once demanded by Mafia loan sharks. Rather than breaking legs, these lenders have co-opted New York’s court system and turned it into a high-speed debt-collection machine. Government officials enable the whole scheme. A few are even getting rich doing it.

Janelle and Doug Duncan

“Somebody just comes in and rips everything out. It’s cannibalized our whole life”

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.

“Somebody just comes in and rips everything out,” Doug said one evening in August, pulling up a stool at a Starbucks and recounting the events that killed the Duncans’ business. After a long day spent selling houses for another company, the name tag pinned to his shirt had flipped upside down like a distress signal. “It’s cannibalized our whole life.”

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.

For David Glass, they were the solution to a problem: People were stealing his money. Among the hustlers and con men who work the bottom rungs of Wall Street, Glass is a legend. Before he was 30, he’d inspired the stock-scam movie Boiler Room. Later busted by the FBI for insider trading, he avoided prison by recording incriminating tapes of his old colleagues. Even his enemies say Glass, who declined to comment for this story, is one of the sharpest operators they’ve ever dealt with.

In 2009, while still on probation, Glass and a friend named Isaac Stern started a company called Yellowstone Capital LLC. (ABC, the firm that wiped out the Duncans, is one of more than a dozen corporate names used by Yellowstone’s sales force.) Operating out of a red-walled office above an Irish bar in New York’s financial district, these salespeople phoned bodegas and pizzerias and pitched their owners on loans. The rates sometimes exceeded 400 percent a year, and daily payments were required, but borrowers were desperate.

Cases

3.5K

3.0

2.5

2.0

1.5

1.0

14 cases

before 2014

0.5

0.0

2016

2017

2018

2013

2014

2015

Note: Totals by quarter

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

In the aftermath of the financial crisis, banks were cutting back on lending just when small businesses most needed cash. Companies such as Yellowstone stepped in. They got around lending regulations by calling what they did “merchant cash advances,” not loans—a distinction judges recognize though there’s little practical difference. The same people who’d pushed stock swindles in the 1990s and subprime mortgages a decade later started talking small businesses into taking on costly debt. The profits were huge, and the industry grew. Last year it extended about $15 billion in credit, according to an estimate by investment bank Bryant Park Capital.

Yellowstone would hire anyone who could sell. A nightclub bouncer sat next to ultra-Orthodox Jews fresh out of religious school. The best brokers earned tens of thousands of dollars a month, former employees say; others slept at the office, fought, sold loose cigarettes, and stole from each other. A video posted on YouTubeshows Glass firing an employee. “Get the f— out of my firm,” he yells. “Why are you still sitting there, fat ass? Get out of my company!” To keep the troops focused, management would stack a pile of cash on a table and hold a drawing for closers.

Glass’s problem was that some borrowers took Yellowstone’s money with no intention of paying it back. Lawsuits against deadbeats proved pointless, dragging on for months or years. Then a lawyer who worked for Yellowstone and other cash-advance outfits came up with the idea of requiring borrowers to sign confessions of judgment before receiving their loans. That way, at the first sign of trouble, lenders could start seizing assets, catching borrowers unawares.

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. The biggest filer by far, with a quarter of the cases: Yellowstone Capital.

The Duncans’ ordeal began in November 2017 with an unsolicited fax from a broker promising term loans of as much as $1 million at a cheap rate. The couple had owned their agency, a Re/Max franchise, for three years and now had 50 employees, but they still weren’t turning a profit. A planned entry into the mortgage business was proving more expensive than expected. Doing some quick math, Doug figured he could borrow $800,000 to fund the expansion, pay off some debt, and come out with a lower monthly payment. The spam fax felt like a gift from God.

On the phone, the broker said that to qualify for a big loan, Doug would first have to accept a smaller amount and make a few payments as a tryout. He sent over the paperwork for a cash advance, not a term loan—and included confessions for both Doug and Janelle to sign. Without talking to a lawyer, they did. Why not? Doug thought. They intended to pay the money back on time.

The advance turned out to be for $36,762, repaid in $800 daily debits from their bank account starting the day after they got the money. This would continue for about three months, until they’d repaid $59,960, amounting to an annualized interest rate of more than 350 percent. A small price to pay, Doug figured—soon he’d have all the money he needed in cheaper, longer-term debt. But when he followed up the next month to inquire about the status of the bigger loan, he got no response. The trouble started soon after.

A few hours after learning that their bank accounts had been frozen, the Duncans met with a local attorney, Jeffrey Dowd, in a law office squeezed between a nail salon and a transmission shop. Their bank, SunTrust, refused to tell them who was behind the freeze. It wasn’t clear why Yellowstone would target them. Their contact there was still pleading ignorance; the lender had collected its $800 payment as recently as the previous business day. Janelle was on the verge of tears.

A broad-shouldered man with a white goatee, Dowd handles everything from wills to lawsuits for small-business owners in the Tampa suburbs. After assuring the Duncans he’d get to the bottom of it, he logged on to his computer. He soon found a legal website showing that Yellowstone had won a judgment against the Duncans a few hours after Janelle received the warning phone call. The lender had gone to a court in the village of Goshen, 60 miles north of New York City.

“I hereby confess judgment,” read the documents Doug and Janelle had signed. Attached was a statement signed by the same person at Yellowstone who’d assured Doug everything was fine. It said the Duncans had stopped making payments.

Beau Phillips, a Yellowstone spokesman, said in an email to Businessweek that the company was within its rights, because the Duncans had blocked one payment and never made up for it. The Duncans respond that if a block had taken place, it must have been a computer error. Why stop paying and then resume the next day?

The court papers revealed the name of Yellowstone’s lawyer, and on a whim, Dowd searched for her other cases and found more than 1,500 results. The Duncans’ predicament was no aberration. “It was like a rabbit hole,” Dowd says. He dove in, clicking on case after case after case.

Goshen, N.Y., is a bucolic stop on the harness-racing circuit, just west of the Hudson River. Not far from the track, in the Orange County Clerk’s office, women with ID lanyards around their necks sit behind Plexiglas windows, processing pistol permits and recording deeds. One clerk prints out proposed judgments sent electronically by cash-advance companies and makes them official with three rubber stamps.

Orange is one of a handful of counties in upstate New York that together handle an outsize share of the nation’s cash-advance collections. Industry lawyers pick offices known to sign judgments quickly; there’s no need for the borrower or lender to have a connection to the area. In even smaller Ontario County, cash-advance filings make up about three-quarters of the civil caseload. No matter how abusive the confessions might be, clerks have no choice but to continue processing them, says Kelly Eskew, a deputy clerk in Orange County.

To obtain a judgment, a lawyer for a cash-advance company must send in the confession along with a sworn affidavit explaining the default and how much is still owed. The clerk accepts the statement as fact and enters a judgment without additional review. Once signed, this judgment is almost impossible to overturn. Borrowers rarely try. Few lawyers will take on a client whose money is already gone, and getting a ruling can take months—too long to save a desperate business. It’s a trap with no escape.

Clicking around a database of New York state court records, Dowd did find some cases in which cash-advance borrowers had sought to overturn judgments. They’d almost always failed. New York judges took the view that debtors waived their rights when they signed the papers. Dowd concluded it would probably cost the Duncans $5,000 to retain a lawyer to travel to Orange County. He advised them not to bother.

It’s possible that if the Duncans had tried to overturn the judgment, they would have discovered that the confessions they’d signed were later altered. The signed originals contain an apparent drafting error, failing to identify the Duncans’ company as subject to the judgment, a flaw that might have prevented Yellowstone from seizing their money. In the version filed in court, someone had replaced the first two pages of each confession with the mistake corrected. Asked by Businessweek about the discrepancy, Phillips didn’t provide an explanation.

Altered Documents

The confession of judgment signed by the Duncans (left) and the one filed by Yellowstone in court

Borrowers have accused Yellowstone of forgery before. Just in the past year, a Georgia contractor presented evidence in court that a confession used against him was a complete fabrication, and a Maryland trucker complained to Yellowstone that a key term in his confession had been changed after the fact, as had happened with the Duncans. The company backed off from those borrowers but faced no further consequences. Phillips declined to comment on the accusations.

While Dowd didn’t challenge the ruling against the Duncans in court, he did think he could get SunTrust to help them. He told the bank that one of the couple’s accounts held funds that didn’t belong to them because it was used to collect rent on behalf of landlords. Dowd says a banker at the local branch wanted to help but was overruled by higher-ups. The account remained frozen. A spokesman for SunTrust declined to comment.

When Dowd finally reached Yellowstone’s lawyer, she referred him to a marshal who she said was handling the case. Dowd was confused. Why would a U.S. marshal be involved? His clients weren’t fugitives. He called the phone number, and somebody with a Russian accent answered.

The person on the phone wasn’t a federal official. Dowd had reached the Brooklyn office of Vadim Barbarovich, who holds the title of New York City marshal. He’d stumbled onto an arcane feature of the city’s government that’s become another powerful tool for cash-advance companies.

New York’s 35 marshals are government officers, appointed by the mayor, who collect private debts. They evict tenants and tow cars, city badges dangling from their necks. When they recover money, they get a fee of 5 percent. The office dates to Dutch colonial days, formed by a decree of Peter Stuyvesant’s council. Fees for the biggest jobs were initially set at a dozen stivers, less than one-tenth the price of a beaver pelt.

Barbarovich’s office is in the immigrant enclave of Sheepshead Bay. Before he was appointed in 2013, he’d tracked inventory at a Brooklyn hospital and volunteered as a Russian translator. He’s now the go-to marshal for the cash-advance business and has gotten rich in the process. Last year, city records show, he cleared $1.7 million after expenses.

As soon as Yellowstone had obtained its judgment against the Duncans, it had sent a copy to Barbarovich, who issued legal orders demanding money from Atlanta-based SunTrust and another bank in Alabama where the couple kept their personal funds. By law, New York marshals’ authority is limited to the city’s five boroughs, but a loophole vastly extends their reach: They’re allowed to demand out-of-state funds as long as the bank has an office in the city, as SunTrust does. A few big banks refuse to comply with the orders, but most just hand over their customers’ money.

The Duncans scrambled to make up the shortfall. Doug got another, larger cash advance from a different company to keep afloat. The daily payments on that loan were too much for them to handle, though, and they were soon short of cash again. Sensing trouble, employees fled.

One evening, Janelle thought she was having a heart attack. Her pulse raced, her limbs went numb, and she grew nauseous. An ambulance rushed her to the hospital. Her heart was fine. Her insurance claim was denied.

Unlike the Duncans, most of the dozens of borrowers interviewed by Businessweek really did fall behind on their debt payments. Their experiences were no less wrenching. They spoke of divorce, of lost friendships, of unpaid medical bills.

“You can’t defend yourself,” says Richard Schilg, the owner of a human resources company in Ohio who borrowed hundreds of thousands of dollars with at least six advances. “As long as you still have a business, as long you have a personal checking account, they’re going to hound you. Your life is ruined by their contract.” Schilg says he always tried to honor his debts. But his access to money has been so restricted by cash-advance judgments that he’s had to sell furniture to buy food.

He’s one of many borrowers who’ve received nasty threats from debt collectors. “I will make this my personal business to f— you,” a Yellowstone executive named Steve Davis told Schilg on a voicemail heard by Businessweek. Davis texted another: “I will watch you crash and burn.” Asked about the messages, Davis says, “People defraud us. When that happens we have to do what’s best for us.”

Jerry Bush, who ran a plumbing business with his father in Roanoke, Va., signed confessions for at least six cash advances from companies including Yellowstone, taking one loan after another as his payments mounted to $18,000 a day. In January, Davis called him while he was accompanying his wife to a chemotherapy appointment and threatened him with the confession in a dispute over payment terms. Davis denies menacing Bush, but according to Bush’s account of their conversation, Davis said he would pursue Bush until his death and take all of his money, leaving nothing to pay for his wife’s treatment. Bush also says Davis then offered to send flowers to Bush’s wife.

Jerry Bush

“I wake up every morning afraid what else they will take. And every morning I throw up blood”

In August, Bush closed his business, laid off his 20 employees, and stopped making payments on his loans. Yellowstone never filed its signed confession in court, but other lenders went after him over theirs. One sunny day that month, he walked to a wooded area near his home, swallowed a bottle of an oxycodone painkiller, and began streaming video to Facebook. To anyone who might have been watching, he explained that he’d taken out cash advances in a failed attempt to save his business. Now the lenders had seized his accounts, Bush said, his voice wavering. One had even grabbed his father’s retirement money.

“I signed ’em, I take the blame for it,” he said. “This will be my last video. I am taking this on me.” He asked his friends to take care of his family, then sobbed as he told his wife and teenage son he loved them.

Someone who saw the video alerted the police. They found Bush unconscious in the woods a few hours later—he credits them with saving his life. But the pressure from his confessions of judgment hasn’t relented. “I wake up every morning afraid what else they will take,” he says. “And every morning I throw up blood.”

Bush’s contracts with Yellowstone show that the company advanced him a total of about $250,000 and that he paid them back more than $600,000. Davis, who parted ways with Yellowstone in August, says he didn’t mistreat Bush or other borrowers and always followed the company’s protocols. “You know why people put the blame on me is because I’m successful,” he says. “It’s just haters.”

As for the Duncans, each morning at their house still begins with a prayer and a Bible verse. Their retirement savings evaporated with their agency, but they’ve been able to keep their house. They continue to believe God has a plan for every one of his children, but they’ve learned to trust some of those children less. “If we don’t have peace from God, and we live in outrage, it destroys us,” Janelle says. “So I’m choosing to have hope to start again, and we’re relying on the Lord to replace what the enemy has stolen and turn it around for good.”

Everyone else involved in the collection process got a slice, too. SunTrust got a $100 processing fee. Barbarovich’s office got approximately $2,700, with about $120 of that passed along to the city. The Orange County Clerk’s office got $41 for its rubber stamps. The New York state court system got $184.

To date, no state or federal regulator has tried to police the merchant-cash-advance industry. Its lawyers designed it to avoid scrutiny, sidestepping usury laws and state licensing requirements by keeping the word “loan” out of paperwork and describing the deals as cash advances against future revenue. And because the customers are technically businesses, not individuals, consumer protection laws don’t apply, either.

With regulators sidelined and lawmakers oblivious, Yellowstone and its peers keep growing. After Glass stepped back a couple of years ago from day-to-day operations—his criminal record was making it harder to find investors—Wall Street investment bankers arranged a $120 million line of credit to finance more advances. In 2016 the company moved from its grimy downtown Manhattan offices to a shiny building in Jersey City, pocketing $3 million in state tax incentives. On Instagram, a top salesman shows off flights on private jets, a diamond-encrusted watch, and a Lamborghini. Yellowstone advanced $553 million last year, its highest total ever.

In April, on the same day Janelle Duncan was selling the last of her office furniture, Yellowstone executives marked the company’s ninth anniversary with a luncheon in Jersey City. In a celebratory email marking the occasion, Stern, the co-founder, wrote, “I am continually blown away at the success and achievements we continue to have.”