If a confession of judgment sounds ominous, it is. These provisions allow the debtor to appoint the creditor as his or her agent and appear before a court and confess judgment in the event of default. As a practical matter, when a default occurs, the creditor can obtain a judgment without advance notice to the debtor (borrower) and without filing a lawsuit or appearing before a judge. This makes the confession of judgment an extraordinary remedy.
In this post we discuss the Virginia confession of judgment process but the remedy is not exclusive to the Old Dominion state. We have encountered them in New Jersey (where they are disfavored by the court), Pennsylvania, California and Michigan. Because their treatment varies widely from state to state this post discusses the Virginia confession of judgment process only.
A typical confession will have language that says, "The undersigned irrevocably authorizes any attorney to appear in any court of competent jurisdiction and confess a judgment without process in favor of the creditor for such amount as may then appear unpaid hereon, and to consent to immediate execution upon such judgment." That means the debtor is appointing the lender in advance to obtain a judgment by just filing the confession with the court. No summons. No trial. No judicial review.
Virginia has its own statutory language, more on that below.
Virginia Statutes and Confessions of Judgment
The Virginia Legislature established a comprehensive scheme regulating confessions of judgment. These rules can be found in Chapter 17 of Title 8, the state’s Civil Remedies code. We will quickly describe the process although we remind readers that this summary is no substitute for consulting with a lawyer. We offer this discussion for general information purposes only.
Section § 8.01-431 says, “In any suit a defendant may, whether the suit is on the court docket or not, confess a judgment in the clerk's office for so much principal and interest as the plaintiff may be willing to accept a judgment or decree for. The same shall be entered of record by the clerk in the order book and be as final and as valid as if entered in court on the day of such confession.”
Section § 8.01-432 similarly says, “Any person being indebted to another person, or any attorney-in-fact pursuant to a power of attorney, may at any time confess judgment in the clerk's office of any circuit court in this Commonwealth, whether a suit, motion or action be pending therefor or not, for only such principal and interest as his creditor may be willing to accept a judgment for, which judgment, when so confessed, shall be forthwith entered of record by the clerk in whose office it is confessed, in the proper order book of his court. Such judgment shall be as final and as binding as though confessed in open court or rendered by the court, subject to the control of the court in the clerk's office of which the same shall have been confessed.”
Read together, these provisions allow the creditor (lender) to file the confession with the clerk. There is no requirement for advance notice, summons or a hearing. As noted earlier, the confession you sign today can later be entered as a judgment against whenever the lender feels you are in default. It's no wonder that banks love these provisions.
A typical Virginia confession of judgment should have the following language (or something very similar):
"Virginia: In the clerk's office of the __________ court of the __________ of __________, I, (or we) A.B., (or A.B. and C.D., etc.) hereby acknowledged myself (or ourselves) to be justly indebted to, and do hereby confess judgment in favor of (name of creditor) in the sum of __________ dollars ($_____) with interest thereon from the __________ day of __________, two thousand __________, until paid, and the cost of this proceeding (including the attorney's fees and collection fees provided for in the instrument on which the proceeding is based) hereby waiving the benefit of my (or our) homestead exemptions as to the same, provided the instrument on which the proceeding is based carries such homestead waiver.
Given under my (or our) hand, this __________ day of __________, two thousand and __________
(Signatures)
or, if by an attorney-in-fact, signatures and seals of debtors,
By ____________________
his (or their) attorney-in-fact." See §8.01-436
Enforceability of Virginia Confession of Judgment
We won’t say that Virginia courts disfavor confessions of judgment but they do strictly construe the statutory requirements. That means the creditor (lender) must carefully follow all the rules or the courts may declare the confession void.
One of those procedural requirements is found in §8.01-433-1. It says that every promissory note or other debt containing a confession must have a statement in bold print and of not less than size than eight-point type that says:
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.
One Virginia court set aside a confession because that language was lacking. In setting aside the confession, the court said that creditors can’t negotiate around that language. The court also suggested the notice must be in every document that the creditor intends to rely on. That means if the prior five notes have the Virginia confession of judgment notice but a recent forbearance agreement does not, the confession may be found invalid.
Other courts have said the confession should also name each person being named the attorney- in-fact for the debtor as well as the court in which the confession is to be entered.
Bank personnel frequently switch jobs, retire, etc. Some banks address this situation by placing substitution language in the confession allowing them to have any officer of the bank appear on behalf of the debtor. A 2010 Virginia Attorney General opinion says this practice violates public policy. This represents another avenue for borrowers to challenge confessions of judgment.
A third method of challenging confessions may be available if the confession contains an attorney’s fee provision. The statutory language authorizes a creditor to seek legal fees in a confession although we have heard that some court clerks don’t believe they have the authority to make a subjective determination of how much in fees is “reasonable.” Banks stand a better chance of having the confession honored if it stipulates an amount of fees or a percentage formula that takes the subjectiveness out of the equation.
What does the U.S Supreme Court say about judgment confessions?
The United States Supreme Court issued two back-to-back rulings in 1972 relating to confessions of judgment. They say that the confession of judgment procedures do not violate due process if the waiver of constitutional rights made by a confession of judgment is voluntary, knowing, and intelligently made. The court also said confessions must be reviewed on a case-by-case basis.
In a case called Swarb v. Lennox the court said confessions might not be valid where the contract is one of adhesion, where there is great disparity of bargaining power, and where the debtor receives nothing for the confession. Those cases are sometimes useful in consumer cases but aren’t overly helpful in the average commercial lending case where the borrower is represented and considered a sophisticated party.
The Bank Has Done Everything Right, Now What?
Simply because the bank has complied with all of the procedural requirements for a confession of judgment doesn’t mean the borrower has no rights or remedies. The Virginia confession of judgment process is certainly a powerful tool for banks and lenders but the game doesn’t end when the bank walks into a clerk’s office and obtains a judgment.
Let’s go back to the Virginia statutes. There we find a provision that says,
“Any judgment confessed under the provisions of § 8.01-432 may be set aside or reduced upon motion of the judgment debtor made within twenty-one days following notice to him that such judgment has been entered against him, and after twenty-one days’ notice to the judgment creditor or creditors for whom the judgment was confessed, on any ground which would have been an adequate defense or setoff in an action at law instituted upon the judgment creditor's note, bond or other evidence of debt upon which such judgment was confessed. Whenever any such judgment is set aside or modified the case shall be placed on the trial docket of the court, and the proceedings thereon shall thereafter be the same as if an action at law had been instituted upon the bond, note or other evidence of debt upon which judgment was confessed…”
In simple terms, a borrower has 21 days to challenge the confession. Any defense the borrower may have against the claim can be raised. At that point the case goes on the court’s calendar and proceeds just as if the bank had sued the borrower and the borrower filed an answer.
And that brings us in a full circle. A Virginia confession of judgment is an extraordinary remedy that allows banks to short circuit the court process and immediately get a judgment in the event of a default. A skilled lender liability lawyer can often attack the confession on procedural grounds. Even if the confession is upheld, borrowers can still raise all defenses by filing a challenge within 21 days.
The lender liability lawyers at Mahany Law and Judge, Lang & Katers represent borrowers. That means we sue banks and never defend them. We don’t have the direct and indirect conflicts of interest that so many other business and lender liability lawyers have. Please note that our practice is limited to large commercial cases with a minimum out-of-pocket loss of $5 million or more. We consider cases nationwide.
For more information contact attorney Brian Mahany online by email at [hidden email] or by phone 888.249.6944.