An Examination of Confession of Judgment Statutes in the Mid-Atlantic States
Updated May 31. 2007
"There is no refuge from confession but suicide; and suicide is confession" - Daniel Webster
Argument on the murder of Captain White (April 6, 1830)
Although it is unlikely that Daniel Webster was referring to confession of judgment clauses, his sentiment is somewhat appropriate for those of us who attempt to navigate these often troublesome waters. Of the fifty states, very few permit what are commonly known as "confession of judgment" or "cognovit" clauses in commercial transactions. These clauses allow a creditor to enter a judgment against a debtor without giving prior notice to the debtor or giving the debtor the opportunity to defend him/her/it self in court prior to the entry of the judgment. Historically, the use and acceptance of these clauses was more widespread; however, most states have abandoned their use because the clauses have been seen to deprive debtors of their property without due process of law. The states discussed herein have retained the use of these clauses, although their use and application have been modified over the years to address the due process concerns that have caused other states to abandon the use of confession of judgment clauses entirely. Confession of judgment clauses are most widely used in the mid-atlantic states. However, other states may also retain vestiges of confession of judgment laws.
This article will provide an overview of confession of judgment clauses, a synopsis of the law in the certain states where they are still commonly used in commercial transactions (most states have banned the use of confession of judgment clauses in residential/consumer transactions) and will highlight the differing requirements in each state examined herein to enable creditors to produce loan documents with valid confession of judgment clauses.I.
General Considerations: There are several elements of confession of judgment clauses that are constant throughout the mid-atlantic states that allow their use:
1. Confession of judgment clauses may only be used for commercial transactions and are forbidden in consumer/residential transactions (note that confession clauses may be used when a residence is pledged as additional collateral for a commercial loan, although there are certain restrictions on a creditor's ability to execute against residential real property without a prior hearing).
2. Confession of judgment clauses must be in writing.
3. Confession of judgment clauses must be conspicuous (i.e. bold face, larger type than the rest of the document, bold, set apart from other portions of the document, etc.). FDIC v. Deglau, 207 F.3d 153 (March 13, 2000);
4. Documents containing confession of judgment clauses must be signed by the person(s)/entity(ies) that the creditor would seek to enforce the provision against (e.g. a creditor can only confess judgment against a personal guarantor if the personal guarantor has signed a document containing the confession clause. It is not enough that the principal borrowers have signed the confession clause).
5. The language of the confession of judgment clause must be clear enough to put the debtor on notice that he/she/it is waiving important rights and must be sufficient to make the debtor's waiver knowing, intelligent and voluntary. D. H. Overmyer Co., Inc. v. Frick Co., 405 US 174, 92 F Ct. 775, 31 L.Ed.2d 124 (1972); Jordan v. Fox, Rothschild, O'Brien & Frankel, 20 F.3d 1250 (1994); Billingsley v. Lincoln National Bank, 271 Md. 683, 320 A.2d 34 (1974); Atlantic Leasing & Financial, Inc. v. IPM Technology, Inc., 885 F.2d 188 (1989); Cheidem Corp. v. Farmer, 449 A.2d 1061 (1982); Pennsylvania House, Inc. v. Kauffman's of Delaware, Inc., 1997 WL 855701 (Del. Super.) (1997); and Osmond v. Spence, 359 F.Supp. 124 (1972).II.
State Specific Considerations:
A. Delaware, Maryland and Pennsylvania
1. No specific language is required to be in confession of judgment clauses in Delaware, Maryland or Pennsylvania (a sample confession clause is attached).
2. In Pennsylvania a knowing and intelligent waiver is presumed, unless the debtor who is signing the warrant of confession of judgment has an annual income of less than $10,000.00 a year, in which case the creditor must prove that the waiver was knowing and intelligent. Swarb v. Lennox, 405 U.S. 191, 92 S.Ct. 767, 31 L.Ed.2d 138 (1972).
3. Delaware does not enter a final judgment on confession until there has been an opportunity for the defendant/debtor to have a hearing regarding whether the debtor "understandingly waived his or her right to notice and an opportunity to be heard prior to the entry of final judgment against him or her." The burden is on the creditor to prove that the defendant/debtor has effectively (knowingly, intelligently and voluntarily) waived his or her rights to notice and a hearing prior to the entry of judgment. See Cheidem Corp. v. Farmer; Pennsylvania House, Inc. v. Kauffman's of Delaware, Inc.; and Osmond v. Spence, supra. Also, Delaware has a particular affidavit allowing confession of judgment against a non-resident of Delaware. 10 Del.C _2306. See attached sample.
B. Ohio
1. Oh. St. _2323.13. provides that the following notice must appear directly above or below the space or spaces provided for signatures in such type or distinctive marking that it appears more clearly and conspicuously than anything else on the documents:
"WARNING--BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME, A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE."
2. In addition to the above language, a confession of judgment clause similar to that used for Delaware, Maryland or Pennsylvania must be incorporated into the document.C.
Virginia
1. VA ST Section 8.01-433.1 provides that a valid confession of judgment clause requires the following statement to be typed in bold faced print of not less than eight point type on its first page:
IMPORTANT NOTICE THIS INSTRUMENT CONTAINS A CONFESSION OF JUDGMENT PROVISION WHICH CONSTITUTES A WAIVER OF IMPORTANT RIGHTS YOU MAY HAVE AS A DEBTOR AND ALLOWS THE CREDITOR TO OBTAIN A JUDGMENT AGAINST YOU WITHOUT ANY FURTHER NOTICE."
This language must appear in notes, bonds, and any other evidence of debt containing confession of judgment provisions (i.e. guarantees).
2. VA ST Section 8.01-435 provides in the alternative:
a. that the confession of judgment clause must be "duly executed and acknowledged by [debtor] as deeds are required to be acknowledged, before [a notary public] . . ." In the SBA lending context, this requirement applies to guarantees, but not to notes or bonds; or,
b. in the case of a "power of attorney incorporated in, and made part of, any note or bond authorizing the confession of judgment. . . against the [debtor(s)] in the event of default . . . need not be acknowledged, but shall specifically name . . . the attorney or attorneys or other person or persons authorized to confess such judgment and the clerk's office in which the judgment is to be confessed." While multiple attorneys may be named, they must each be identified by name. Multiple courts for the confession of judgment are not acceptable - one court, usually that in which the real estate is situated is preferred.III.
Conclusion: Although the confession of judgment clause is a useful tool for lenders and/or other creditors who wish to proceed quickly against a debtor in default, there are several pitfalls that, if not properly planned and drafted for, can create issues for the lender in the event of a default. Careful planning and observance of the requirements of each of the states that allow the use of confession clauses will help ensure proper protection of the lender's rights and avoid creating problems in default situations.
Questions regarding confession of judgment clauses in the Mid-Atlantic states should always be directed to your legal counsel. You may feel free to contact the author at 215-542-7070.
CONFESSION OF JUDGMENT DISCLOSURE FORM - RECOMMENDED FOR USE IN ALL FIVE CONFESSION STATES
DISCLOSURE FOR CONFESSION OF JUDGMENT I have executed a promissory note (the "Note") in the original amount of $____________ obligating me to repay that amount. Initials:_____________
I understand that the Note contains wording that would permit [LENDER] to enter judgment against me in Court, without advance notice to me and without offering me an opportunity to defend against the entry of judgment, and that the judgment may be collected immediately by any legal means. Initials:_____________
In executing the Note, I am knowingly, understandingly and voluntarily waiving my rights to resist the entry of judgment against me at the courthouse, including any right to advance notice of the entry of, or execution upon, said judgment, and I am consenting to the confession of judgment. Initials:_____________
I certify that my annual income exceeds $10,000; that the blanks in this disclosure were filled in when I initialed and signed it; and that I received a copy at the time of signing.
________________________________ [BORROWER]
Signed, acknowledged and delivered in the presence of:________________________________ Witness
SAMPLE CONFESSION OF JUDGMENT CLAUSE FOR DELAWARE, MARYLAND AND PENNSYLVANIA
CONFESSION OF JUDGMENT CLAUSE
THE UNDERSIGNED HEREBY AUTHORIZES AND EMPOWERS ANY ATTORNEY OR CLERK OF ANY COURT OF RECORD IN THE UNITED STATES OR ELSEWHERE TO APPEAR FOR AND, WITH OR WITHOUT DECLARATION FILED, CONFESS JUDGMENT AGAINST THE UNDERSIGNED IN FAVOR OF THE HOLDER, ASSIGNEE OR SUCCESSOR OF HOLDER OF THE NOTE, AT ANY TIME, FOR THE FULL OR TOTAL AMOUNT OF THIS NOTE, TOGETHER WITH ALL INDEBTEDNESS PROVIDED FOR THEREIN, WITH COSTS OF SUIT AND ATTORNEY'S COMMISSION OF TEN (10) PERCENT FOR THE COLLECTION; AND THE UNDERSIGNED EXPRESSLY RELEASES ALL ERRORS, WAIVES ALL STAY OF EXECUTION, RIGHTS OF INQUISITION AND EXTENSION UPON ANY LEVY UPON REAL ESTATE AND ALL EXEMPTION OF PROPERTY FROM LEVY AND SALE UPON ANY EXECUTION HEREON; AND THE UNDERSIGNED EXPRESSLY AGREES TO CONDEMNATION AND EXPRESSLY RELINQUISHES ALL RIGHTS TO BENEFITS OR EXEMPTIONS UNDER ANY AND ALL EXEMPTION LAWS NOW IN FORCE OR WHICH MAY HEREAFTER BE ENACTED.
SAMPLE CONFESSION OF JUDGMENT CLAUSE FOR OHIO
Immediately preceding signature(s):
WARNING--BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME, A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE.
Body of Note/Guarantee:
CONFESSION OF JUDGMENT CLAUSE
THE UNDERSIGNED HEREBY AUTHORIZES AND EMPOWERS ANY ATTORNEY OR CLERK OF ANY COURT OF RECORD IN THE UNITED STATES OR ELSEWHERE TO APPEAR FOR AND, WITH OR WITHOUT DECLARATION FILED, CONFESS JUDGMENT AGAINST THE UNDERSIGNED IN FAVOR OF THE HOLDER, ASSIGNEE OR SUCCESSOR OF HOLDER OF THE NOTE, AT ANY TIME, FOR THE FULL OR TOTAL AMOUNT OF THIS NOTE, TOGETHER WITH ALL INDEBTEDNESS PROVIDED FOR THEREIN, WITH COSTS OF SUIT AND ATTORNEY'S COMMISSION OF TEN (10) PERCENT FOR THE COLLECTION; AND THE UNDERSIGNED EXPRESSLY RELEASES ALL ERRORS, WAIVES ALL STAY OF EXECUTION, RIGHTS OF INQUISITION AND EXTENSION UPON ANY LEVY UPON REAL ESTATE AND ALL EXEMPTION OF PROPERTY FROM LEVY AND SALE UPON ANY EXECUTION HEREON; AND THE UNDERSIGNED EXPRESSLY AGREES TO CONDEMNATION AND EXPRESSLY RELINQUISHES ALL RIGHTS TO BENEFITS OR EXEMPTIONS UNDER ANY AND ALL EXEMPTION LAWS NOW IN FORCE OR WHICH MAY HEREAFTER BE ENACTED.
SAMPLE CONFESSION OF JUDGMENT CLAUSE FOR VIRGINIA
First Page:
IMPORTANT NOTICE
THIS INSTRUMENT CONTAINS A CONFESSION OF JUDGMENT PROVISION WHICH CONSTITUTES A WAIVER OF IMPORTANT RIGHTS YOU MAY HAVE AS A DEBTOR AND ALLOWS THE CREDITOR TO OBTAIN A JUDGMENT AGAINST YOU WITHOUT ANY FURTHER NOTICE.
Body of Note/Guarantee:
CONFESSION OF JUDGMENT. IN THE EVENT OF ANY DEFAULT UNDER THIS INSTRUMENT, INCLUDING, BUT NOT LIMITED TO ANY PAYMENT UNDER THIS INSTRUMENT NOT BEING PAID WHEN DUE, WHETHER AT MATURITY, BY ACCELERATION OR OTHERWISE, BORROWER HEREBY IRREVOCABLY APPOINTS AND CONSTITUTES __________________, _____________________, AND/OR _____________________ WHOSE ADDRESS(ES) IS/ARE _____________________________, ANY ONE OF WHOM MAY ACT WITHOUT THE JOINDER OF THE OTHER(S), AS BORROWER'S DULY CONSTITUTED ATTORNEY-IN-FACT TO APPEAR IN THE CLERK'S OFFICE OF THE CIRCUIT COURT FOR ______________ COUNTY/CITY, VIRGINIA, OR IN ANY OTHER COURT OF COMPETENT JURISDICTION, AND TO CONFESS JUDGMENT PURSUANT TO THE PROVISIONS OF SECTION 8.01-432 OF THE CODE OF VIRGINIA OF 1950, AS AMENDED, AGAINST BORROWER FOR ALL PRINCIPAL AND INTEREST AND ANY OTHER AMOUNTS DUE AND PAYABLE UNDER THIS INSTRUMENT AS EVIDENCED BY AN AFFIDAVIT SIGNED BY AN OFFICER OF THE LENDER OR SBA SETTING FORTH THE AMOUNT THEN DUE, TOGETHER WITH ATTORNEY'S FEES AND COLLECTION FEES AS PROVIDED IN THIS INSTRUMENT (TO THE EXTENT PERMITTED BY LAW). THIS POWER OF ATTORNEY IS COUPLED WITH AN INTEREST AND MAY NOT BE TERMINATED BY BORROWER AND SHALL NOT BE REVOKED OR TERMINATED BY BORROWER AND SHALL NOT BE REVOKED OR TERMINATED BY BORROWER'S DEATH, DISABILITY OR DISSOLUTION. IF A COPY OF THE INSTRUMENT, VERIFIED BY AFFIDAVIT, SHALL HAVE BEEN FILED IN THE ABOVE CLERK'S OFFICE, IT WILL NOT BE NECESSARY TO FILE THE ORIGINAL AS A WARRANT OF ATTORNEY. BORROWER RELEASES ALL ERRORS AND WAIVES ALL RIGHTS OF APPEAL, STAY OF EXECUTION, AND THE BENEFIT OF ALL EXEMPTION LAWS NOW OR HEREAFTER IN EFFECT. BORROWER SHALL, UPON LENDER'S OR SBA'S REQUEST, NAME SUCH ADDITIONAL OR ALTERNATIVE PERSON(S) DESIGNATED BY LENDER'S OR SBA AS BORROWER'S DULY CONSTITUTED ATTORNEY(S)-IN-FACT TO CONFESS JUDGMENT AGAINST THE BORROWER. NO SINGLE EXERCISE OF THE POWER TO CONFESS JUDGMENT SHALL BE DEEMED TO EXHAUST THE POWER AND NO JUDGMENT AGAINST FEWER THEN ALL THE PERSONS CONSTITUTING THE BORROWER SHALL BAR SUBSEQUENT ACTION OR JUDGMENT AGAINST ANY ONE OR MORE OF SUCH PERSONS AGAINST WHOM JUDGMENT HAS NOT BEEN OBTAINED IN THIS INSTRUMENT.
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