One of the most oppressive tools available to commercial landlords and lenders alike is what is called a warrant of attorney. Most loan and lease agreements contain a provision known as a warrant of attorney that allows such lenders and landlords the ability to enter a judgment of record against their tenants and borrowers, as the case may be, by simply filing a complaint alleging a default under the applicable loan or lease agreement and then demanding a confessed judgment of an amount certain.
A confessed judgment allows lenders and landlords to have a judgment of record entered in their favor against an allegedly defaulting borrower or tenant before the borrower or tenant even knows what happened.
All is not lost, however, when a confessed judgment is entered. After the complaint is filed and the judgment is entered of record, the borrower or tenant may then file a petition with the trial court seeking to strike or open the confessed judgment.
As illustrated by a recent trial court ruling in Republic First Bank v. Marke E. 14th St. LLC, the chances of success when filing such a petition are rather small in most cases.
In Marke, the bank and the principal of the defendant corporate entity had a longstanding relationship that began in approximately 2006, the opinion said. According to the opinion, several years into their relationship, the bank approached the principal of the defendant corporate entity about the possibility of two loans that the bank had with another borrower of the bank.
The first loan dealt with the financing of a commercial building consisting of an office and industrial flex space, while the second loan involved the financing for the acquisition of and construction of an apartment complex, the opinion said.
The defendant corporate entity was formed for the sole purpose of purchasing these loans. To fund most of the acquisition of these loans, the parties entered into a loan arrangement where the defendant corporate entity was the borrower and the defendant principal of the corporate entity was the personal guarantor of the loan, the opinion said.
According to the defendants in Marke, almost immediately after the closing of the loan took place, “it became apparent that the bank had made a series of false or misleading statements or otherwise concealed certain pertinent facts” in the process. The defendants alleged the bank “made false representations and failed to disclose material facts to its principal concerning these loans to coerce him into buying the loans,” which included inflating the value of the properties, providing false and incomplete due diligence that falsely depicted the status of the rents and rent collection, falsely representing the construction progress to [one of the] propert[ies], and failing to disclose existing code violations.”
Despite the bank’s alleged misrepresentations, the defendants were able to stay current with the debt service obligation arising from the new construction project by using the cash generated from the income-producing commercial property to fund the debt service. However, according to the defendants, this came to a halt when the bank forced the defendant corporate entity to sell the income-producing commercial property in order to satisfy the indebtedness due on that loan.
Unable to service the debt on the loan for the new construction project, the defendants attempted to work out an arrangement to purchase the property being developed and then sell that property in order to satisfy the remaining indebtedness due to the bank. According to the defendants, the bank initially agreed to lend the money for the property acquisition but eventually refused to do so.
According to the defendants, after the property acquisition fell through, they ceased making the loan payments. After that happened, the bank sent a written notice of default to the attorney representing the defendants, advising the attorney of the loan defaults and declaring the loan due.
The bank then filed a complaint for confession of judgment against the defendants with the Philadelphia Court of Common Pleas The defendants thereafter filed a petition to strike or open the confessed judgment.
The trial court denied the defendants’ attempt to strike the confessed judgment, concluding there were no fatal defects or irregularities on the face of the confessed judgment.
In Pennsylvania, “a petition to strike a judgment operates as a demurrer to the record and may only be granted when an apparent defect on the face of the record exists. In considering the merits of a petition to strike, the court is limited to reviewing the record as filed by the party in whose favor the warrant is given, the complaint and the documents which contain confession of judgment clauses. A court’s order that strikes the judgment annuls the original judgment and the parties are left as if no judgment had been entered.”
In Marke, the defendants pointed to a multitude of alleged defects and irregularities with the complaint confessing judgment, such as the bank failing to properly aver a default or a condition precedent, the bank failing to aver that the judgment was not being entered against a natural person in connection with a consumer credit transaction, the bank failing to verify its pleading, the bank failing to provide an itemized computation and the basis for seeking to recover certain components of its damages claimed, and the bank’s calculation and attempt to recover attorney fees as being erroneous and otherwise inconsistent and irreconcilable with its loan documents.
In the end, the trial court did not believe these grounds warranted the striking of the confessed judgment. In doing so, the trial court either indicated that such grounds did not exist or that even where there were defects and irregularities in how the complaint was drafted or filed, these defects and irregular were minor in nature and did not rise to the level of fatal ones that would require the trial court to strike the confessed judgment.
In particular, the trial court was dismissive of the defendants’ contention that the written notice of default was not served properly on them because the bank sent it to their attorney rather than to them directly. The trial court noted that no facts existed that the defendants were not made aware of the default notice and, more importantly, the warrant of attorney contained in the loan documents did not require that the written notice be provided to the defendants before the bank exercised its right under the warrant.
The trial court next denied the petition to open the confessed judgment because the defendants failed to demonstrate the existence of a meritorious defense or produced clear, direct, precise and believable evidence of said defense.
Unlike a petition to strike a confessed judgment, a petition to open a confessed judgment “looks beyond the confession of judgment documents and includes testimony, depositions, admissions, and other evidence” and “a petition to open is granted when the petitioner acts promptly, alleges a meritorious defense, and provides sufficient evidence to require submission of the issue to a jury.”
The trial court summarily shot down the defendants’ attempt to open the confessed judgment, concluding that they “neither demonstrated the existence of a meritorious defense, nor produced clear, direct, precise or believable evidence sufficient to warrant the opening of the confessed judgment.”
In the petition, the defendants relied upon the defenses of fraudulent inducement and economic duress as their “meritorious defenses.”
As for the defense of fraudulent inducement, the trial court emphasized that, even if the bank made fraudulent misrepresentations to the defendants concerning the profitability of the loans and the value and condition of the properties, the defendants ratified the loan documents by performing under the loan documents for years after the alleged inducement occurred.
The defendants’ defense of economic duress suffered the same fate. The trial court pointed out that the defendants failed to show that the bank placed the defendants in the position that prevented them from exercising their free will. Rather, according to the trial court, the defendants were represented by counsel during the loan transactions, are sophisticated in business, and have had prior arm’s-length dealings with the bank.
The underlying factual circumstances in Marke really highlight the reason why a plaintiff should exercise his or her right under a warrant of attorney whenever possible. From the outset, the burden is placed upon the defendant. A judgment of record has been entered and the defendant is forced to try to convince the trial court that the judgment should either be stricken or opened.
Even if the confessed judgment is stricken or opened, the plaintiff can still elect to proceed onward through the more traditional means of litigation (i.e., pleadings, discovery and ultimately trial). Many defendants lose sight of the fact that the complaint may be defective on its face and should be stricken or the confessed judgment should be opened because there is some plausible defense that needs to be fleshed out through full-blown litigation. However, the ultimate issue is whether the defendant owes any money to the plaintiff. Striking or opening a confessed judgment does not answer that question; instead, it merely levels the playing field going forward.
Alan Nochumson is the sole shareholder of Nochumson P.C., where his law firm’s primary practice areas consist of real estate, litigation, employment and labor, and land use and zoning. He is also president of Bear Abstract Services, where his title insurance company offers comprehensive title insurance, title examination and closing services. He can be reached at 215-399-1346 or by email at firstname.lastname@example.org.