Jeffrey S. Feldman, Esquire

Lenders who make loans to businesses in Pennsylvania frequently include a confession of judgment clause in their loan documents as a prompt means of securing a judgment against loan obligors who default on their obligations.  Confession of judgment clauses are a very powerful form of legal recourse because they essentially allow the lender's counsel to enter his or her appearance in court on behalf of the defaulting parties and admit to the debts that are owed, without providing the debtor with an opportunity to defend against the judgment or put the lender to its proofs.

In order to ensure that debtors are given adequate due process before their assets are encumbered or seized, Pennsylvania has adopted a procedural framework for allowing debtors who have had judgments confessed against them to assert that the judgment was either procedurally defective or is otherwise subject to a meritorious defense. This due process takes the form of a petition filed by the debtor to strike or open the confessed judgment.

A party can file a petition to strike a confessed judgment whenever a procedural defect regarding the judgment appears of record in the case.  Because confessed judgments are disfavored under the law, the validity of a confession of judgment requires both strict compliance with the procedural rules and a rigid adherence to the provisions of the warrant of attorney in the loan documents. Any ambiguity in the document authorizing the confession of judgment is resolved in favor of the debtor.

A debtor petitioning  a court to open a confessed judgment must act promptly, allege a meritorious defense, and present sufficient evidence of that defense to raise a jury question.  In ruling on the petition, the court reviews the record in a manner most favorable to the debtor.

In Pennsylvania, the promptness requirement for the filing of a petition to strike or open a confessed judgment is tied to the service of a notice of the lender's intent to execute on the confessed judgment.  Thus, in Pennsylvania, the time for the debtor to file a petition regarding the confessed judgment does not begin to run when the debtor receives notice of the confessed judgment from the court.  Instead, once the debtor is served by the lender with one of the written notices required by the Pennsylvania Rules of Civil Procedure indicating that the lender intends to execute on the judgment, the debtor has 30 days from the date it is served with that notice to file its petition.

Thus, until such time as a lender's collections attorney serves the debtor with the required notice of execution, the confessed judgment remains of record but subject to a potential attack by the debtor. Lenders should work closely with their counsel to determine when it is to their best advantage to serve the execution notice. The execution notices themselves have no timeliness requirement; a judgment creditor may delay execution on the confessed judgment until the debtor acquires sufficient assets to satisfy the judgment.  Alternatively, lenders may wish to serve the execution notice quickly so that the debtor's deadline to contest the confessed judgment begins as soon as possible.

Lenders should always be sure to ask their legal counsel about any potential lender liability issues that might arise with regard to these situations, as well as any regulatory compliance issues that could potentially jeopardize their SBA guarantee, if applicable.

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