The Pennsylvania Superior Court recently rejected a debtor's attempt to escape from three confessed judgments by challenging the format of the confession of judgment clauses at issue. In First National Community Bank v. The Powell Law Group, P.C., the defendant law firm guarantied the repayment of three loans, and the documents that memorialized the guaranties contained confession of judgment clauses. When the borrowers defaulted on the underlying loans, the lender confessed judgments against the law firm.
The firm petitioned the Court of Common Pleas of Luzerne County to strike the confessed judgments, arguing that: (1) the confession of judgment provisions were not in the correct format and location; and (2) the attorneys' fees added to the judgments were grossly excessive. The trial court denied the petitions to strike, but slashed the amount of the attorneys' fees included in each judgment by 50% or more.
On appeal, the firm argued that the confession of judgment provisions in the guaranties were invalid under Pennsylvania law because they: (a) did not have headings; (b) were spread over more than one page; (c) were in fine print; and/or (d) were not on the same page as the signature line. Superior Court rejected this argument and affirmed the trial court in three separate but similar opinions (which are available through these links: Opinion 1, Opinion 2 and Opinion 3). The Court held that, because the confession of judgment provisions appeared in all capital letters in documents that were not particularly lengthy (between 3 and 11 pages), the provisions were conspicuous to the debtor, regardless of the absence of a heading or the location of the signature line.
The Court also rejected the firm's argument that the judgments should be stricken because the attorneys' fees included in them – even as reduced by the trial court – were grossly excessive. Each guaranty provided that, in the event of default, the lender would be entitled to confess judgment in the amount of the loan balance, plus attorney's fees in the amount of a specified percentage of the unpaid loan balance. After noting that the lender properly followed the formula in the confession of judgment provision when calculating attorneys' fees, the Court first seemed to suggest that it might have affirmed a judgment that included the original, unreduced attorneys' fees had that issue been before it (it was not). Ultimately, the Court concluded that the firm failed to establish that the reduced fees were excessive.
Although the First National opinions teach that confession of judgment provisions need not contain headings, be confined to a single page or appear on a page of the agreement that the borrower or guarantor signs, lenders should consider formatting agreements in a fashion that strips debtors of the ability to make these arguments in the first place. Minor formatting changes today could reduce defense costs tomorrow.
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