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Confessions of Judgment Still Enforced in PA--Part 2 (of 2)

[In Part 1 of our review of Confessions of Judgment (see our Blog of January 14, 2016), we explained that Confessions of Judgment are remedies which allow commercial creditors and landlords to not only institute suit against a defaulting debtor or tenant, but to also allow the attorney for the creditor/landlord to "confess judgment," against the debtor/tenant. This means that a judgment is entered against the debtor/tenant without giving the tenant/debtor the opportunity to present a defense. In this Part 2 of our review, we describe some efforts to limit the use and effect of Confessions of Judgment, and whether such efforts have been successful.]

One way to try to minimize the effect of a Confession of Judgment clause is to find irregularities in the language of the clause. An attorney for the debtor/tenant will try to find an ambiguity within the language of the clause as a means to fight the enforcement of the clause. Since the creditor/landlord is usually in a position of strength, and since the Confession of Judgment clause is almost always drafted by the creditor/landlord, and since the entering of a confessed judgment is almost always a devastating blow to the debtor/tenant, a court will often hold that, if there is an ambiguity, such ambiguity should be interpreted in favor of the debtor/tenant.

A related method of trying to attack a Confession of Judgment is to argue that any contract containing such a clause is inherently unfair and against public policy as a contract of adhesion. A "contract of adhesion" means that the debtor/tenant was in such a poor bargaining position that the debtor/tenant had no ability to negotiate, and was forced to simply adhere to whatever document was provided by the creditor/landlord. In this situation, the debtor/tenant is arguing that, even if there is no ambiguity of language in the Confession of Judgment clause, either the clause or the entire contract should be held to be unenforceable. That argument was the basis for Pennsylvania courts to limit Confessions of Judgment enforcement to commercial contract actions, and to eliminate their enforcement in residential real estate leases, residential mortgage loans and consumer goods contracts.

In commercial lease cases, landlords use two types of Confession of Judgment clauses: One is for the collection of past and future rent, and one is for the right to take possession of the leased premises. Attorneys for defaulting tenants will often argue that, if the landlord uses the Confession of Judgment clause in order to take possession of the premises, then the landlord should not be able to obtain a judgment for future rent. Attorneys will also argue that, at the very least, the landlord should have the duty to mitigate damages, i.e., to rent out the real estate to someone else, and to deduct the rent received from the new tenant from the accelerated rental amount for which it confessed judgment. In a recent Philadelphia case, Vasiliades Partnership v. Uncle John's Pizzaria & Cafe, Inc., the trial judge ruled that a landlord can avail itself of both possessory and monetary relief, and is under no duty to mitigate damages, provided that the contract is properly drafted, and the procedure followed by the landlord to confess judgment is appropriate.

In the Philadelphia case, the judge acknowledged that there are cases in which a landlord may be precluded from obtaining accelerated rent if the landlord initially took possession by confession of judgment. However, in the case at hand, the tenant had voluntarily vacated the premises, so the issue was moot. The court also indicated that, even in cases in which there is no voluntary vacating of the real estate, if a landlord enforces the Confession of Judgment for money first, and then, upon tenant failing to pay, the landlord enforces a Confession of Judgment for possession, the landlord can preserve both remedies.

Since Confessions of Judgment are apparently alive and well in Pennsylvania commercial contracts, what can you do if you are a debtor or a tenant trying to protect yourself from a Confession of Judgment clause? One thing you should do would be to make sure you have plenty of notice and time to cure if there is a breach or perceived breach. Another thing you might try would be to offer a larger security deposit, or to have an amount of money held in escrow or available in a letter of credit, as a substitute for a Confession of Judgment clause. In any event, the lesson is clear: When faced with a commercial contract, hire a business attorney to assist you before you or your company signs the contract.

Ken Milner