A recent Pennsylvania case, Graystone Bank v. Grove Estates, LP, upheld the enforceability of a confessed judgment provision even in light of alleged inconsistencies. In most cases, a confessed judgment is a debtor’s statement signed prior to a default that a stipulated amount is owed to a creditor and permits bypassing certain legal proceedings. In Greystone, the debtor’s arguments that the confessed judgment should be set aside because the provision was not on the same page as debtor’s signature, the subsequent loan modification failed to restate the confession of judgment and attorney’s fees set at 10% of the principal balance of the loan were unreasonable -- failed to sway the Pennsylvania court, even on appeal. The court remanded the decision for a review of the reasonableness of attorneys’ fees, but otherwise, upheld the confessed judgment provision.
While most states prohibit the use of confessed judgments in consumer loans, Virginia and Maryland (and even the District of Columbia under certain post-default situations) permit such provisions in commercial transactions. Virginia’s statute requires the use of particular language in 8 point or larger font on the first page of a document containing a confessed judgment, but a recent change in Virginia law now permits a substitute of attorney-in-fact where previously only a named party could enter the confessed judgment. In long-term debt transactions, ensuring that the party named as attorney-in-fact in the loan documents would still be associated with the lender at the time of default had been problematic to effect a Virginia confessed judgment. The recent amendment removes another hurdle to the use of confessed judgments in Virginia. Maryland has specific although less arduous requirements, but the courts have recently been more lenient to debtors by permitting the use of oral statements to challenge the use of confessed judgments. The District of Columbia’s courts are even more wary of the use of confessed judgments by creditors, but have permitted such provision to stand if the facts warrant such remedy.
Thus, although confessed judgments are not above attack, they still can be useful creditor’s weapons if a careful practitioner adheres to state law requirements. Other tips to the effective use of a confessed judgment provision include: (1) be conspicuous – use all capital letters and boldface print (and the statutory language, if available); (2) ensure that the document is signed by the debtor (and notarized, if required) in a manner that evidences the debtor knows that certain legal rights are being waived; (3) repeat the confessed judgment provision in any loan modification documents; (4) know that a stated attorneys’ fee term in the provision will be subject to review by the court – make it a reasonable charge; and (5) if the confessed judgment provision is being used by an attorney in a promissory note by a client for services rendered, ensure that the client was advised in writing to obtain independent counsel prior to signing the promissory note (and note that attorneys’ fees may not be awarded if an attorney is representing himself in exercising a confessed judgment against a delinquent client).