As a creditor, there is perhaps no greater tool than a valid confession of judgment clause within your written agreement with a customer.
Imagine a customer fails to make payment on its commercial credit account. Now you must decide whether or not to hire an attorney and initiate a lawsuit. However, the last time a lawsuit was filed on one of your accounts it was months, maybe longer, before you received payment. At the very least, the customer, now former customer, had to be served with a Complaint. Then your attorney informed you that your former customer had to be given the opportunity to file an Answer. Next, there was discovery and a hearing where you had to prove they were in default. All of this time to obtain a judgment. Additional time and money will be spent executing on the judgment if the former customer decides not to voluntarily pay. At this point, you are astonished; this was the simplest of transactions. The customer purchased and used the goods without objection and failed to pay you for them. Yet it has taken you significant amounts of time and money to obtain a judgment against him or her.
Aside from refusing to deal with this customer on a credit basis, you ask yourself whether there was anything else you could have done to protect your business. The short answer is yes. You could have negotiated a confession of judgment clause into your agreement with this customer.
A confession of judgment clause provides that one party agrees to allow the other party to the contract to enter judgment against him or her. The clause permits a creditor, or their attorney, to apply to the court for judgment against a debtor in default without requiring or permitting the debtor to respond or contest the judgment at that point in time. More importantly, there can be an immediate judgment entered without having to follow the timely process set forth above. The customer has voluntarily submitted to the jurisdiction of the court and for the entry of judgment without service of process in the event of a default.
As stated above, a confessed judgment is entered without notice or a hearing. Depending on your personality, you are probably wondering how this is possible, or why is this not done more often. In fact, such a concept seems counterintuitive to one of the basic principles upon which our nation was founded, due process of law. The Constitution provides that no person shall be deprived of life, liberty or property without due process of the law. Typically, due process of the law requires notice and a hearing whereby one can defend themselves against the actions of others. Therefore, confessions of judgment clauses are generally disfavored under the law because such a contractual provision essentially deprives a person from having his or her day in court. Courts will strictly scrutinize confession of judgment clauses because of the constitutional due process concerns associated with enforcing such clauses. However, in certain situations, and if certain procedures are followed, two parties can effectively contract away one’s right to notice and a hearing.
First, it is important to determine whether or not you are the type of creditor that can utilize a confession of judgment clause. Under Pennsylvania law, judgment cannot be confessed against any natural person in connection with a consumer credit transaction. A consumer credit transaction is defined as any credit transaction in which the party to whom credit is extended is a natural person and the money, property or services which are the subject of the transaction are primarily for personal, family or household purposes. For example, judgment may not be confessed against an individual who purchases new furniture on a credit account for use in their home. However, if that same person purchases new furniture on credit for use in one of many apartment units that he or she owns and manages, then it may be possible to confess judgment against that person for non-payment on this credit account.
Next, the language of the confession of judgment clause itself must be sufficient to withstand court scrutiny. This includes not only the text of the language, but also the location of the confession of judgment clause itself. For the actual text of a confession of judgment it is best to consult an attorney to determine what language must be included to ensure validity of your confession of judgment clause. Generally, a valid of confession of judgment clause must be CONSPICUOUS, and the signature of the party who is authorizing judgment to be confessed against them must bear a direct relation to the clause itself. These strict linguistic requirements are because it is this executed instrument that the court will review if the confessed judgment were to be challenged. If properly drafted, a valid confession of judgment clause will convey to the court that there is no doubt that the signor was conscious of the fact that he or she was authorizing the other party to enter judgment against them without notice or a hearing.
Lastly, there are special procedural requirements that must be followed when enforcing a confession of judgment clause. The most common method of enforcing a confession of judgment clause is to file a complaint in confession of judgment. Generally, the complaint in confession of judgment must include: 1) the names and addresses of the parties; 2) the original or a reproduction of the instrument showing the defendant’s signature; 3) a statement regarding any assignment of the instrument; 4) a statement that judgment has not been entered in any other jurisdiction; 5) an averment of default or condition precedent, if required by the instrument before the entry of judgment; 6) an itemized computation of the amount due based on matters outside the instrument, including interest and attorneys fees if authorized; 7) a demand for judgment as authorized by the instrument; and 8) signature and verification as required by the rules of civil procedure. It is this filing that instructs the Prothonotary to enter judgment in the amount stated and against the named defendant.
As you can see, a confession of judgment clause is an effective, but complicated tool that requires both careful planning and implementation. It is critical to make sure that the confession of judgment clause is properly drafted, and that the proper steps are taken in its enforcement, in order to take full advantage of this powerful collection tool. For more information regarding confession of judgment clauses, contact Bernstein-Burkley, P.C. for an in-depth look into your business, and how a confession of judgment clause may specifically benefit your business.
For additional information on perfection of security interests and the usage of other credit enhancements, please see the other articles in this Publications section.