CONFESSIONS OF JUDGMENT: LOAN DEFAULT

March 15, 2023

Normally, when a customer defaults on a loan, commercial lenders must file a complaint in court to initiate proceedings and obtain a judgment. This can take months—or even longer—all the while the lender is left with legal bills and continues without the money it is owed.

To avoid the delay and costs of a traditional legal process, commercial lenders can negotiate a confession of judgment clause into their contracts.

A confession of judgment clause allows a lender to submit a request to the court for a judgment once a default occurs. The court may then enter judgment against the debtor in the form of money damages or the repossession of real property—all while avoiding a trial.

At its most basic level, the debtor is agreeing, via the clause and contract, to forego the usual guarantees of due process of law that would otherwise exist when a lender seeks to recover on a default.

By negotiating a confession of judgment clause, lenders can bypass the standard legal process (complaint, discovery, trial, judgment, etc.), skip to the judgment phase, and recover in a quick and efficient manner.

Basic Elements of a Confession of Judgment

In Pennsylvania, confessional judgment clauses must, among other requirements, be clear and conspicuous when negotiated into the contract. Courts will not enforce these clauses when there is reason to believe that a party attempted to conceal the clause.

Importantly, these clauses can only be used in commercial contexts—any attempts to employ them with consumers will be void.

Enforcing Confessional Judgments

So, how does enforcement work? Once the debtor defaults, the lender can file the confession of judgment with the court. The lender does not need to engage in the usual process of filing a complaint.

At this point, if the court rules that the lender has complied with the filing requirements (i.e., providing a copy of the contract signed by the defendant), then judgment will be entered against the defendant.

Once the defendant has exhausted his limited opportunity to petition the court (see below), the plaintiff can apply to the court to execute upon the money judgment or order a writ for possession of real property.

It might surprise you that the legal system can work this quickly; but once the requirements have been met, courts are authorized to enter judgment without going through the typical litigation process.

Opening & Striking Confessional Judgments in Pennsylvania

Once the court enters judgment, the defendant has 30 days to “strike” or “open” the judgment.

Defendants may file a petition to strike the judgment if there is a defect on the face of the filing submitted to the court. For example, if a lease provides a cure period of 30 days after an event of non-payment, and the plaintiff files the confession of judgment before the 30 days are up, a court may vacate the judgment.

A petition to open the judgment generally asserts that there are more serious and contested issues of fact, requiring that the case be submitted to a jury or to the judge at a bench trial.

For example, the defendant might argue that the confession of judgment clause was contained in an addendum to the contract, and that the defendant was not required to sign and acknowledge the addendum. If a debtor is successful in opening the judgment, the lender will have to resort to the standard trial process to recover on a default.

Other Remedies Available to Commercial Lenders

Lenders and commercial parties may also consider another remedy with some resemblance to a confession of judgment: a liquidated damages clause.

A liquidated damages clause requires that parties agree in advance to predetermined damages in the event of a breach by a party. So, in the event of litigation, the judge or jury would have to accept the damages negotiated into the contract.
While liquidated damages don’t provide the quick resolution of a confession of judgment clause, they are still useful in narrowing the scope of litigation for parties.

Conclusion

There are many tools available to commercial lenders and other creditors to ensure that they are protected in the event of defaults or other financial distress. We can help lay out and implement the best options for your business needs. Contact us to learn more at 215-717-2200.