A confession-of-judgment2 is a draconian remedy that lets a creditor take a judgment without notice to the debtor – whose first knowledge of the lawsuit usually occurs when the creditor seizes the debtor’s bank accounts, demands financial information and seeks a turnover of assets. This article explores strategies to represent debtors facing such cases.
Your developer client borrows $5 million to improve a strip mall on Chicago’s northwest side. The developer signs a promissory note with a floating interest rate of 1% over Prime (as stated in the Wall Street Journal); its principal shareholder signs a guaranty.
The client’s timing could not be worse; the real estate market collapses shortly after construction finishes. The “anchor” tenant files for bankruptcy and disaffirms its lease, leaving the mall half-empty and unable to service the debt. The developer seeks new tenants, but the mall remains less than 50% occupied, and the debt exceeds the value of the realty.
The bank declares a default and accelerates the debt. The bank instructs its lawyer to hold off on foreclosure and to pursue a debt claim against the developer and guarantor. The bank’s lawyer reviews the LaserPro note and guaranty and sees a “confession-of-judgment” clause in each. Knowing the guarantor has substantial assets, the bank’s lawyer decides to seek a confession judgment. She prepares her complaint and the following exhibits:
Andrew R. Schwartz [email protected] is the manager of Schwartz & Kanyock, LLC in Chicago, where he concentrates his practice in commercial litigation with emphasis on complex collections and fraudulent transfers.
Confession-of-judgment” refers to a clause in an instrument wherein an obligor authorizes and empowers any attorney-at-law to (1) appear for the obligor in any court of record, (2) to waive notice of further proceedings, and (3) to confess judgment against the obligor. Cases may also use the terms “cognovit,” and “warrant of attorney.” In plain English, it means the obligor unconditionally surrenders ahead of time. A “confession judgment” means a judgment issued pursuant to a “confession-of-judgment” clause.
The bank’s lawyer also prepares a memorandum of judgment and citations to discover assets. However, the loan officer is unavailable to sign an affidavit; instead, his assistant sends an unsigned payoff letter showing the amounts due. The bank’s lawyer switches the payoff letter for the affidavit, signs the complaint and confession-of-judgment, and files suit.
A Cook County judge reviews the complaint, along with other confession-of-judgment cases scheduled for disposition that day. He confirms the figures in the confession-of-judgment and the proposed judgment, and signs the judgment and memorandum. The bank’s lawyer records the memorandum, has the citations issued, and delivers the citations to the guarantor’s bank / brokerage firm.
The next day the guarantor learns that his home mortgage payment just bounced. His private banker tells him all his business and personal accounts are frozen, including the $125,000 in his personal and business accounts, and his entire $3.5 million securities portfolio. The guarantor calls you, screaming that the bank seized his assets, that a personal judgment will cause his other business loans to default, and demanding that you correct this injustice.
Illinois law recognizes the draconian nature of a confession judgment3, and Illinois law limits their use. Any strategy for attacking the confession judgment described above begins with a discussion about those limits.
A confession judgment debtor’s lawyer must read 735 ILCS 5/2-1301(c), which requires the creditor to file a confession judgment suit only in counties where (1) the instrument containing the warrant of attorney was executed, (2) at least one defendant resides, or (3) any of the defendants own property. The statute also bars their use in consumer transactions.
If the confession judgment satisfies §2-1301(c), the debtor’s lawyer must determine its validity or voidness. The debtor’s lawyer should pull the Clerk’s file and scrutinize the pleadings. This section discusses different strategies to attack the confession judgment as void.
Oakland Nat. Bank v. Tomei, 215 Ill.App.3d 638, 640 (4th Dist. 1991) (“Judgments by confession are viewed circumspectly; … The policy underlying this rule of strict construction against the party in whose favor the power operates is based on the severity of the summary proceeding itself. The party granting such authority deprives himself of all defenses and delay of execution and places his cause in the hands of a hostile defender”)
The author usually defends confession judgments by attacking them as void for want of personal jurisdiction. Start with the obvious: A court cannot enter a valid money judgment without first obtaining in personam jurisdiction over the judgment debtor.4 5
A confession-of-judgment case uses a contract to bend the rules. “A confession-of-judgment clause usually authorizes the appointment of an attorney for a defaulting debtor to appear for the debtor in an action for an amount owed due, to waive personal jurisdiction and service, and to consent to a judgment against the debtor.”6 This is called a warrant of attorney.
The following checklist should help:
A “confession-of-judgment” clause may authorize the confession of judgment, but the process requires an additional step: Once the creditor files suit, an appointed attorney must actually appear for the debtor, waive personal jurisdiction and service, and confess a judgment against the debtor. The attorney-in-fact typically does this by including signing a document entitled “confession” or “confession-of-judgment,” which the complaint attaches.
If the creditor fails to submit a signed “confession-of-judgment,” the debtor’s lawyer should attack the judgment as void for lack of personal jurisdiction unless the Clerk’s file shows service of process. The argument is simple: No appearance equals no personal jurisdiction.7
The leading Illinois confession judgment case is Grundy County Nat. Bank v. Westfall,8 wherein our Supreme Court held:
Judgments by confession are circumspectly viewed. The power to confess a judgment must be clearly given and strictly pursued, and a departure from the authority conferred will render the confessed judgment void. The extent of the liability undertaken must be ascertainable from the face of the instrument in which the warrant is granted. A judgment by confession must be for a fixed and definite sum, and not in confession of a fact that can only be established by testimony
State Bank of Lake Zurich v. Thill, 113 Ill.2d 294, 308 (1986); Nelson v. Keene Corp., 283 Ill.App.3d 7, 11 (1st Dist. 1996)
C.T.A.S.S. & U. Federal Credit Union v. Johnson, 383 Ill.App.3d 909, 912 (1st Dist. 2008) 9 ILL. PRAC., Illinois Civil Trial Procedure § 37:3 (2010); Sears Bank & Trust Co. v. Scott, 29 Ill.App.3d 1002, 1009 (1st Dist. 1975)
Goldberg v. Schroeder, 10 Ill.App.2d 186, 191 (1st Dist. 1956) (“… jurisdiction of the person of the defendant is acquired by the entry of his appearance under authority granted in the warrant of attorney”) (emphasis added)
49 Ill.2d 498, 501 (1971)
outside of the written documents, required by the statute to be filed in order to enter up a judgment by confession. Freeman on Judgments, sec. 1321, states: “A warrant must state the amount for which judgment is authorized or state facts from which the amount can be definitely ascertained, and where it merely authorizes judgment for such sum as may be found to be due between the parties in their future dealings, it is void for uncertainty.”9
Based upon this passage, we typically argue that the Court cannot calculate the debtor’s entire liability from the face of the instruments containing the power.
The author believes the foregoing confession judgment is void because the trial Court needs extrinsic evidence to calculate the full extent of the debt and guaranty. For ease of reference, this article separates the problems into sections:
Grundy County invalidated a confession judgment based upon a guaranty where:
… the instrument guaranteed full and prompt payment by the defendant to plaintiff of ‘any and all indebtedness, liabilities and obligations of every nature and kind of said Debtor to said Bank, and every balance and part thereof, whether now owing or due, or which may hereafter, from time to time, be owing or due, and howsoever heretofore or hereafter created or arising or evidenced to the extent of ***.’ In the blank space ‘$50,000’ had been written so that at the time the judgment was entered it read ‘to the extent of $50,000.’
The guaranty’s scope – including future debts not then ascertainable – defeated its warrant of attorney because the Court needed extrinsic evidence to determine the nature and amount of the subsequent debts. The Supreme Court invalidated the confession judgment, holding that “[t]he authorization was not for a fixed sum specified or one ascertainable from the instrument itself.”
Mount Prospect expanded on Grundy County’s rationale as follows:
However, none of the instruments indicates the amount of the loan that was guaranteed. In fact, the instruments state that each guarantor could be liable for the full amount of any and all loans made by Bank to Sawmill up to the guarantor’s maximum liability. Thus, it is evident from the instruments that an initial loan could be completely paid off, other loans made, and the guarantors would still be liable for any amounts left unpaid on those other loans. Merely because the instruments state the maximum liability of each guarantor does not
49 Ill.2d at 500-01 (citations omitted); accord, State Nat’l Bank v. Epsteen, 59 Ill.App.3d 233, 234-35 (1st Dist. 1978); Mount Prospect State Bank v. Forestry Recycling Sawmill, 93 Ill.App.3d 448, 455 (1st Dist. 1980)
49 Ill.2d at 501 (emphasis added)
49 Ill.2d at 503 (1971)
render the power to confess judgment valid since at any given time the extent of liability could only be shown by evidence independent from the face of the instruments.
(Emphasis added). As the italicized text reflects, the Court expressed concern about its inability to determine the amount of the indebtedness from the face of the guaranty.
Now compare the language of our guaranty, which defines the “Indebtedness” as:
… all of the principal amount outstanding from time to time and at any one or more times, accrued unpaid interest thereon and all collection costs and legal expenses related thereto permitted by law, attorneys’ fees, arising from any and all debts, liabilities and obligations of every nature or form, now existing or hereafter existing or acquired, that Borrower individually or collectively or interchangeably with others, owes or will owe Lender. “Indebtedness” includes, without limitation, loans, advances, debts, overdraft indebtedness, credit card indebtedness, lease obligations, liabilities and obligations under any interest rate protection agreements or foreign currency exchange agreements or commodity price protection agreements, other obligations, and liabilities of Borrower, and any present or future judgments against Borrower, future advances, loans or transactions that renew, extend, modify, refinance, consolidate or substitute these debts, liabilities and obligations …
(Emphasis added). It covers amounts not due at the time of the loan and substitute future transactions. Our guaranty is indistinguishable from those in Grundy County and Mount Prospect. Proving the amount of the guarantor’s liability requires extrinsic evidence.
The “indebtedness” in a loan has three parts: (1) principal, (2) interest, and (3) fees allowed by the loan documents. If the Court cannot calculate any single component without extrinsic evidence, the author believes it cannot properly enter a confession judgment.
One common problem in confession judgment cases arises from the use of variable or “floating” interest rates in business loans. A “floating” rate is defined as a “[r]ate of interest that is not fixed but which varies depending upon the existing rate in the money market.”13 Most “floating” rates set the interest rate at some percentage over the Prime Rate or LIBOR. These rates fluctuate. To find the rate on any given date, a party must consult an outside index.
In our case, the note set the interest rate at 1% over Wall Street Journal Prime. Moreover, the “confession-of-judgment” clause in the note reads as follows in relevant part:
Borrower hereby irrevocably authorizes and empowers any attorney-at-law to appear in any court of record and to confess judgment against
93 Ill.App.3d at 456 (1st Dist. 1980)
BLACK’S LAW DICTIONARY at 576 (5th ed. 1979)
Borrower for the unpaid amount of this Note as evidenced by an affidavit signed by an officer of Lender setting forth the amount then due, attorneys’ fees plus costs of suit, and to release all errors, and waive all rights of appeal.
To calculate interest, a bank officer must furnish an affidavit with that calculation, which requires the officer to reference the Wall Street Journal Index.
The author believes the confession-of-judgment provision in our scenario fails for two reasons. First, a bank officer’s affidavit is “testimony outside the instrument containing the warrant of attorney” that Grundy County prohibits, raising a public policy argument. Second, one cannot calculate the interest simply by looking at the note; it requires reference to the Wall Street Journal – which is extrinsic to the note. The debtor should argue that the interest rates during the loan’s term probably did not exist on the date of the loan. The same arguments apply to the guaranty.
Although the “variable interest rate” argument appears untested by any U.S. appellate court, the author has enjoyed some success with it at the trial court level. Some judges apply Grundy County strictly and invalidate confession-of-judgment clauses in variable rate notes. Others hold that the language of the confession-of-judgment clause lets the lender look outside the note to determine the interest rate, and reject the public policy-based argument.
As discussed above, the Grundy County Court states:
The power to confess a judgment must be clearly given and strictly pursued, and a departure from the authority conferred will render the confessed judgment void.
If the lender does not comply strictly with the authority conferred, the debtor should argue that the non-compliance invalidates the confession judgment.
In our example, the bank’s lawyer made a huge mistake. The “confession-of-judgment” clauses in the note and guaranty require a bank officer to submit a signed affidavit attesting to the amount due and owing. However, the bank’s lawyer attached an unsigned payoff letter.
The debtors should attack the confession judgment as void for failing to submit the bank officer’s “affidavit” required by the confession-of-judgment clauses. In Illinois, an affidavit is a declaration, on oath, in writing, sworn to by a party before some person who has authority under the law to administer oaths.15 An affidavit must be sworn to, and statements in a writing not sworn to before an authorized person cannot be considered affidavits.
Farmers Ins. Co., our Supreme Court held that “[a]n affidavit that is not sworn is a nullity.
49 Ill. 2d at 501 (1971)
202 Ill.2d 490, 493 (2002), citing Harris v. Lester, 80 Ill. 307, 311 (1875)
Roth at 494; accord, People v. Tlatenchi, 391 Ill.App.3d 705, 714 (1st Dist. 2009)
Roth at 497, citing Hough v. Weber, 202 Ill.App.3d 674, 692 (2nd Dist. 1990)
You may also wonder how the bank’s lawyer could sign a confession-of-judgment on behalf of the developer and guarantor without creating a conflict of interest. The “confession of judgment” clause identifies her as the attorney for the developer and guarantor, and says she is appearing for them. Good question – but it may surprise you that prior Illinois law supported a creditor’s lawyer to sign a confession-of-judgment for the debtor. A 1971 First District case even scoffed at the argument,18 as did a 1982 Federal case.
The author believes the 2010 Rules of Professional Conduct (the “2010 RPCs”) changed the law, and that plaintiffs’ lawyers may no longer confess judgment against defendants in the same case. 2010 RPC 1.7(a)(1) and 1.7(b)(3) address “concurrent conflicts of interest.” 2010 RPC 1.7(a)(1) prohibits a lawyer from representing one client against another in the same case. While 2010 RPC 1.7(b) lists exceptions for situations where the lawyer obtains informed consents from conflicted clients, 2010 RPC 1.7(b)(3) absolutely forbids the concurrent representation of one client against another within the same litigation.
The Comment to 2010 RPC 1.7 includes a section entitled “Prohibited Representations,” 14, 17 and 23 of which provide further guidance, and explain that Illinois lawyers should not disregard the 2010 RPC 1.7(b)(3) ban against concurrent representations of one client against another within the same litigation, and that the client’s consent to such a conflict does not matter. Neither 2010 RPC 1.7 nor its Comment makes an exception for confession-of-judgment cases. Although no Illinois reviewing court has addressed this precise issue, the author recently made this argument successfully at the trial court level.
In our scenario, the bank’s lawyer concurrently signed the complaint for the bank, and the confession-of-judgment as the debtors’ lawyer. Given the plain language of 2010 RPC 1.7 and Comments ##14, 17 and 23, the debtors should move to disqualify her. If the bank responds with older cases, the debtors should reply that 2010 RPC 1.7 vitiated the older contrary law. If the bank characterizes the actions of an “attorney-in-fact” as something other than an attorney action, the debtors should reply that only a lawyer may appear in court for a client; if the bank’s lawyer did not appear for the debtors’ in that capacity, the court never had personal jurisdiction.
If the court disqualifies the bank’s lawyer, the debtors should attack the confession-of-judgment as invalid, and argue that it never gave the Court personal jurisdiction, rendering the judgment void. The bank lawyer’s conflict of interest may also eliminate any right to legal fees for work under that conflict20 and require the Court to vacate the judgment and reduce it.
Gecht v. Suson, 3 Ill.App.3d 183, 188 (1st Dist. 1971)
Citibank, N.A. v. Bearcat Tire, A.G., 550 F.Supp. 148, 150-51 (N.D.Ill. 1982)
Strong v. International Investment Union, 183 Ill. 97, 102 (1899); In re Marriage of Newton, 2011 Il App (1st) 090683, 41; King v. King, 52 Ill.App.3d 749, 753 (4th Dist. 1977)
A large adverse judgment can prove disastrous, and the judgment debtor’s lawyer faces formidable hurdles. Although the underlying obligations are beyond the scope of this article, these strategies may help confession judgment debtors free up frozen assets, and let them defend these cases on the merits more effectively.