Lending Law Update
“For years
Delaware banks
have relied on
the language
in confession
of judgment
clauses to prove
effective waiver
of these rights.”
Confessions of Judgment
Not to Be Taken for Granted
26 Delaware Banker - Spring 2010
C
onfessed judgment provisions that
authorize banks to enter judgments
upon loan defaults have long been a
staple of commercial loan documentation
in Delaware. Since judgments have
priority from the date entered, the purpose
of these clauses is to get ahead of other
creditors pursuing a borrower or guarantor.
Confessed judgment actions start with the
entry of the judgment; in other lawsuits,
the amount owed the judgment is entered
only upon the successful conclusion of
the action. If the borrower or guarantor
contests the confessed judgment, then
the bank must prove at a court hearing
that they effectively waived their right
to notice and hearing prior to the entry
of judgment. For years Delaware
banks have relied on the language in
confession of judgment clauses to prove
effective waiver of these rights. This is
not unreasonable, given Delaware case
law such as Pellaton v. Bank of New
York, holding that the bank had proved
a knowing, voluntary, and intelligent
waiver of the right to prior notice and a
hearing, even though the guarantor did
not read the loan documents, had no
knowledge that the guaranty included
a confessed judgment clause, and the
guarantor’s attorneys did not review the
documents with the guarantor or mention
the clause.
New Decision May Require More
Reliance on documents may no longer be
enough. Last fall the U.S. District Court
for the District of Delaware, in RBS
Citizens, N.A. v. Caldera Management,
Inc., found that a guarantor had not
knowingly, voluntarily, and intelligently
waived the right to notice and a hearing
prior to the entry of judgment. This
case is not binding on Delaware courts
because it was issued by a federal court;
nevertheless, it is troubling for banks since
the court interpreted existing Delaware
case law in reaching its decision. The
court held that the bank did not establish
a valid waiver by only showing that the
guarantor (who was a college-educated
wife of a real estate developer and who had
signed guaranties with similar confession
of judgment clauses before) had signed
the guaranty. They found that the
guarantor did not have the benet of legal
representation in signing the guaranty
(despite an opinion letter from counsel
stating they represented the guarantor)
and stressed that the legal implications
of the confession of judgment must be
brought to the attention of the guarantor.
Recommendations
The RBS Citizens opinion contemplates
loan closings at which bankers, borrowers,
guarantors, and their attorneys meet at
the same time to sign loan documents—
largely obsolete in the age of the Internet.
Ideally, the bank should make sure
counsel represents the borrower and
guarantors and explains the confessed
judgment provisions; if not possible, then
the bank might require that guarantors
who are not themselves sophisticated
in commercial lending transactions be
represented by counsel; if still unrealistic,
then a bank representative should explain
that the confession of judgment clause is
a waiver of the important constitutional
rights of notice and a hearing prior to
judgment. Banks also need to revise form
commitment letters, notes, and guaranties
to make it clearer that an important
constitutional right is waived.
by
Brent C. Shaffer, Esq.
Commercial Real Estate Banking
and Land Use Department
Young Conaway Stargatt & Taylor, LLP
