Tag: Default

Is the Confession of Judgment Provision In My Contract Enforceable?

Answer: In a consumer transaction, no.¹ In a commercial transaction, it depends.

A typical “confession of judgment” provision in a commercial contract (e.g., a promissory note) authorizes the creditor upon a default under the agreement to obtain a judgment for the amount owed without notice to the debtor(s) or guarantor(s), and allows the creditor to immediately execute on the judgment. The clause will most likely contain a “warrant of attorney” authorizing the appointment of an attorney to appear for the debtor, to waive personal jurisdiction and service, and to consent to an amount due and owing by the creditor. Thus, a party in default under an agreement containing a confession of judgment provision often first learns about the lawsuit against him after collection efforts have begun, when his bank accounts have been frozen or a lien has been recorded against his property. Courts will permit this judicial “shortcut” only if (a) the contractual provision is enforceable in the first place, and (b) the creditor takes the right steps to obtain the judgment after a default.

On the first point, a judgment by confession is void where it requires extrinsic evidence to prove the underlying debt. The Illinois Supreme Court in Grundy County Nat. Bank v. Westfall, 49 Ill.2d 498, 500–01 (1971) has 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 outside of the written documents, required by the statute to be filed in order to enter up a judgment by confession.” See also Ninow v. Loughnane, 103 Ill.App.3d 833, 836 (1st Dist. 1981); State National Bank v. Epsteen, 59 Ill.App.3d 233 (1st Dist. 1978). Numerous other courts have likewise held that a guaranty or underlying instrument purporting to grant power to confession judgment that is all-encompassing—for example, one that refers to “any and all debts, liabilities and obligations of every nature or form of the debtor,” including future debts, is so broad as to be void. Thus, if your confession of judgment clause is broad-sweeping or does not clearly describe the extent of the debtor’s liability, or if proving the amount owed requires reference to other documents extraneous to the instrument itself, the confession of judgment clause – and any judgment later obtained thereon – is void. While it is certainly advisable for clients finding themselves on the defensive end of this situation to act quickly, Illinois law permits a void judgment to be attacked at any time.

As to the second point, because the confession of judgment remedy is a creature of an Illinois statute, it must be strictly construed. See 735 ILCS 5/2-1301(c).  Voidness issues aside, that section requires the creditor to file a confession judgment suit only in the county in which (1) the note or obligation containing the confession of judgment clause was executed, (2) one or more of the defendants reside, or (3) in which any real or personal property owned by any of the de­fendants is located.

Because Illinois courts view judgments by confession with some skepticism, the law affords various remedies and means of challenging them not covered by this article. For further information on how to defend a judgment by confession case or to use such a provision offensively, contact:

Katherine A. Grosh at:

(312) 368-0100 or kgrosh@lgattorneys.com.


¹ A “consumer transaction” is defined as the “sale, lease, assignment, loan, or other disposition of an item of goods, a consumer service, or an intangible to an individual for purposes that are primarily personal, family, or household.” 735 ILCS 5/2-1301(c). If the instrument authorizing the judgment by confession in a consumer transactions was executed prior to September 24, 1979, however, it is still enforceable. Id.

Borrower May Still Face Foreclosure Even After Making Monthly Payments Following Default

If a borrower has a mortgage, the lender sends a notice of default, the borrower nonetheless makes monthly payments for more than two years thereafter that the lender accepts, can the lender still sue to foreclose?  The issue is whether the lender waived its right to foreclose by accepting the monthly payments.  A recent case answers that question.  The answer is “no”.

In July 2004, Timothy Martin borrowed $140,000 to purchase a residence.  The note was secured by a deed of trust.  Wells Fargo Bank eventually acquired the note and deed of trust.

The deed of trust contained the lender’s right to accelerate the debt upon default and to foreclose, as well as the following non-waiver clause:

“12.  Borrower Not Released;  Forbearance By Lender Not a Waiver.  Extension of time for payment or modification or amortization of the sums secured by this [DOT] granted by Lender to Borrower or any Successor in Interest of Borrower shall not operate to release the liability of Borrower or any Successors in Interest of Borrower…Any forbearance by Lender in exercising any right or remedy including, without limitation, Lender’s acceptance of payment from third person, entities or Successors in Interest of Borrower or in amounts less than the amount then due, shall not be a waiver of or preclude the exercise of any right or remedy.”

In December of 2009 Martin was late with his monthly payment.  But thereafter he made monthly payments through June of 2011.

To his surprise, Wells Fargo returned his May and June 2011 mortgage payments and notified him the property would be sold at a foreclosure sale.  The property was sold for $168,000 at the foreclosure sale held on December 4, 2012.

Martin sued Wells Fargo contending that Wells Fargo waived its right to foreclose by accepting mortgage payments for sixteen months after his initial default and not foreclosing until almost three years after declaring a default.  The court did not see it this way.

The reason the court ruled in favor of Wells Fargo was the non-waiver clause.  It allowed Wells Fargo to accept partial payment of Martin’s debt after his default without waiving its right to foreclose.  A waiver would have occurred if Wells Fargo had declared his entire debt due and payable following his default and thereafter had accepted his monthly payments.  But that did not happen.  Wells Fargo had never declared his entire debt due and payable.

The point is this:  if a borrower is in default, no further payment should be made to the lender unless the lender waives the default in writing.  Otherwise, anytime thereafter, the lender can call for payment of the entire debt and, if not paid in full, can commence foreclosure.

If you have any questions in this area, please contact:

Michael L. Weissman at:

mweissman@lgattorneys.com or 312-368-0100.

testimonials

"We've worked with Levin Ginsburg since the 1980s...we have grown with them and have a very high level of comfort and confidence with this firm." Jay Nichols, President,
Badger Murphy
"Astute, responsive and practical. Those are three reasons why we work with Levin Ginsburg." Bryan L. Oyster, V.P. and General Manager,
Bentley Forbes