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Court Renders Confessed Judgements More Difficult To Attack

July 1, 2007

By: Catherine K. Hopkin

The Maryland Court of Special Appeals issued a ruling in December 2006 that strengthened the ability of creditors to collect debts by confessed judgment.  It also clarified the preliminary burden a debtor must meet if he or she attempts to open, vacate, or modify the judgment once it has been entered by the court clerk.

In NILS, LLC, et al., v. Gladys Antezana, 171 Md. App. 717 (2006), the Court held that a debtor cannot open, vacate, or modify a confessed judgment by attacking the validity of the debt underlying the debt instrument.  Instead, the debtor must prove that there is a meritorious defense to the execution of the instrument or the amount of the confessed judgment.

A helpful analogy in understanding the court’s opinion is to think of a confessed judgment as a transaction with several different layers.  The debtor creates the first layer when he incurs the debt owed to the creditor.  Both parties then create the second layer when they evidence the debt in a debt instrument, such as a note, and agree on the amount of the debt.  Finally, the court enforces a third layer when it enters the confessed judgment in a specified amount against the debtor.

The Court made clear in NILS that an attack on the first layer, or the debt that the debtor initially incurred, is not sufficient for a debtor to open the confessed judgment.  The reason is that the debtor already agreed that the original debt was valid when he signed the instrument with the confessed judgment provision.  He has, in effect, missed his chance to argue about the validity of the first layer of the transaction.

However, if the debtor now has a defense regarding the second or third layer of the transaction, he can make that argument and try to open, modify, or vacate the judgment.  The Court gave examples of these kind of meritorious defenses, including:  who signed the note; whether it was signed voluntarily and was authorized; and whether the amount due on the note is correct or whether the Court failed to take into account certain credits or payments when it entered the judgment amount.

The facts of the case are as follows:  The creditor, a wife representing herself and the estate of her deceased husband, sold the debtor a residence for $5 million.  The debtor paid a $1 million down payment on the house and executed two promissory notes to the owners, secured by deeds of trust, for the remainder of the purchase price.  He failed to make some payments on the notes, and late fees began accruing on his missed payments.  However, the debtor found alternate financing to pay off the remainder of the principal of the note.

After obtaining financing, the debtor also executed two notes in the amount of $75,000 each in favor of the creditors.  These two notes were not based on the principal owed on the money the debtor borrowed to purchase the house; rather, they evidenced the amount he owed in late fees after the missed payments.  Each note contained a confessed judgment provision in the event of non-payment when the notes matured.

The maturity dates on the two notes passed, and a judgment by confession in favor of the creditors was entered on each note in the Circuit Court for Montgomery County in September, 2005.  The debtor moved to vacate the judgment on the ground that the late fees underlying the two notes were invalid.  Specifically, the debtor argued that the late fees were an unenforceable penalty and were not permitted by law.

The Court pointed out that the debtor has the burden to show that his defense is meritorious, or worthy of opening the judgment.  Also, the determination of whether a particular defense is meritorious is a question of law for the judge.  In this regard, the judge must look at whether the defense is to the second or third layer of the debt instrument and not an “attack on the antecedent debt or obligation itself.”  In this case, the defense related to the antecedent debt, the validity of the late fees, and, therefore, did not constitute a meritorious defense.

In fact, the Court even went so far as to conclude that a defense that the debtor was financially pressured to sign the note or instrument containing the confessed judgment provision would not be a meritorious defense because it still goes to the first layer of the transaction.  Though this seems particularly harsh to debtors, the Court reasoned that few obligors willingly or charitably execute debt instruments; so long as the debtor willingly acknowledged that the first layer of the debt was valid and signed the note freely and voluntarily, there is no reason to look beyond the instrument itself in such a scenario.

In light of the Court’s finding, creditors can rest easy that once the debtor signs a note or other instrument containing the confessed judgment clause, he has completed the first layer of the transaction; the obligor’s defenses to that first layer are cut off.

However, as always, creditors must also be aware that defenses to the second or third layer of the transaction could still allow the court to open, modify, or vacate the judgment.  As the Court pointed out in NILS, a judgment by confession may still be freely stricken on a motion, as long as the defense goes to how the instrument was created or whether the amount of the judgment is correct.

For more information about this and other issues regarding creditors' rights, contact Catherine Hopkin at 410.752.9768 or via email.

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