One of the most oppressive tools available to commercial lenders is what is called a warrant of attorney. Most commercial loan documents contain a provision known as a warrant of attorney, which allows such lenders the ability to enter a judgment of record against their borrowers and guarantors, as the case may be, by simply filing a complaint alleging a default under the loan documents and then demanding a confessed judgment of an amount certain.
A recent ruling by the Superior Court of Pennsylvania in Dime Bank v. Andrews, 2015 PA Super 114 (May 8, 2015), illustrates what happens when a commercial lender obtains a confession of judgment after failing to strictly follow the terms and conditions of the loan documents.
In Andrews, a corporate entity borrowed almost $1 million from Dime Bank by way of a promissory note and Peter Andrews was one of three individuals who guaranteed the loan through the execution of a guarantee and surety agreement, the opinion said.
Under the guarantee and surety agreement, Dime Bank is obligated to provide Andrews with written notice of any default committed by the borrower under the loan documents at least 10 days prior to the commencement of litigation, the opinion said. The guarantee and surety agreement also contains a warrant of attorney allowing Dime Bank to confess judgment against Andrews in the event of the borrower’s default under the loan documents, the opinion said.
After the borrower defaulted under the promissory note, Dime Bank filed a complaint in confession of judgment against Andrews under the guarantee and surety agreement. Through the filing of the complaint, Dime Bank obtained a confessed judgment against Andrews based upon the entire balance then due under the promissory note. In the complaint, Dime Bank alleged that a default was committed under the promissory note and that the borrower failed to pay the money due and owing under the promissory note.
Thereafter, Andrews filed a petition to strike the confessed judgment, arguing that the confessed judgment should be stricken because of Dime Bank’s failure to comply with the condition precedent contained in the guarantee and surety agreement as well as Rule 2952 of the Pennsylvania Rules of Civil Procedure.
According to Andrews, Dime Bank was contractually required to provide Andrews with advance notice of 10 days as to any default committed by the borrower under the loan documents prior to commencing litigation against him.
Furthermore, in his petition, Andrews argued that the complaint filed by Dime Bank ran afoul of Rule 2952(a)(6), which provides that a complaint in confession of judgment must contain the following allegation: “If [the] judgment may be entered only after default or the occurrence of [a] condition precedent, an averment of the default or [of the] occurrence of the condition precedent.”
Andrews pointed out that the requirement of giving advance notice of 10 days before commencing an action to collect on a debt is such a condition precedent and Dime Bank’s failure to disclose the existence of the condition precedent in the complaint was a fatal defect appearing on the face of the complaint.
It is unclear from the record whether Dime Bank provided such advance notice to Andrews prior to filing the complaint in confession of judgment against him. However, it was undisputed that the complaint did not contain an averment recognizing either the existence of this condition precedent or whether Dime Bank fulfilled the condition precedent prior to the filing of the complaint.
After the petition was filed, the parties entered into a stipulation to allow Dime Bank to amend the complaint, with Andrews retaining the right to file a petition to strike the confessed judgment obtained by way of the amended complaint. In the stipulation, the parties also agreed that the original complaint would be rendered moot.
Dime Bank then filed an amended complaint that was materially identical to the original complaint. In response, Andrews filed a petition to strike the confessed judgment based upon the same grounds originally set forth.
In the end, the trial court denied the petition to strike the confessed judgment entered in favor of Dime Bank and against Andrews. While the trial court agreed with Andrews that Dime Bank did not conform to Rule 2952(a)(6) by failing to cure the fatal defect appearing on the face of the amended complaint, it believed that such defect could be remedied by another amendment of the complaint. In its opinion, the trial court found that the error committed by Dime Bank in the amended complaint was technical, not prejudicial, especially in light of the fact that Andrews had prior notice of the default committed under the loan documents through the filing of the original complaint against him.
Based upon the trial court’s ruling, Dime Bank provided Andrews with written notice of the default committed by the borrower under the loan documents, then filed a second amended complaint against him more than 10 days from his receipt of the written notice of default, and specifically referenced the issuance of the written notice of default in the second amended complaint.
After the second amended complaint was filed, Andrews appealed the order denying the petition to strike the confessed judgment entered by way of the first amended complaint that permitted Dime Bank to file the second amended complaint.
In a majority opinion written by Judge David Wecht, the Superior Court reversed the trial court’s ruling by holding that the defect contained in the first amended complaint was fatal and could not be cured by amendment.
Wecht cautioned that “it has always been held that formal defects, mistakes and omissions in confessions of judgment may be corrected by amendment where the cause of the action is not changed, where the ends of justice require the allowance of such amendment, and where the substantive rights of defendant or of any third persons will not be prejudiced thereby.”
Nonetheless, Wecht emphasized that “at a minimum, our case law suggests strongly that a failure to aver the occurrence of a condition precedent, when … the agreement under which judgment is confessed establishes such a condition, is an irremediable defect, obviating any obligation of the party against whom judgment has been entered to establish prejudice.” In doing so, Wecht cited to a long line of cases in Pennsylvania invalidating confessed judgments under similar circumstances.
Wecht, quoting the Superior Court’s ruling in A.B. & F. Contracting v. Matthews Coal, 166 A.2d 317 (Pa. Super. Ct. 1966), pointed out that the Pennsylvania Rules of Civil Procedure specifically pertaining to confessions of judgment have been written to give debtors additional protections by prescribing requirements on creditors who avail themselves of this powerful tool and that creditors should not be permitted to abrogate these protections by waiving these mandatory rules of civil procedure.
Simply stated, Wecht refused to allow Dime Bank to sidestep the procedural requirement contained within Rule 2952(a)(6).
In an interesting twist, Wecht, by way of the majority opinion, remanded the case back to the trial court for further proceedings, as the appeal did not challenge the validity of the second amended complaint. The trial court in Andrews will, thus, address whether the second amended complaint remains valid and sufficient to enable Dime Bank to confess anew or whether an entirely new proceeding may and must be commenced. As such, this may not be the last time we hear about this loan dispute. Stay tuned.
Reprinted with permission from the May 19, 2015 edition of The Legal Intelligencer © 2015 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, firstname.lastname@example.org or visit www.almreprints.com.