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Confession of Judgment and Political Advertising

Posted By Cliff Tuttle | November 7, 2016

No. 1,289

The TV advertising on both sides of the Pennsylvania Senatorial race has been an abomination of untruth, half truth and true but irrelevant statements.  So perhaps one more wrong allegation doesn’t matter very much. In fact, some of the claims are so outrageous, that even a child could see through them. Nevertheless,  the allegations regarding use of confession of judgment clauses are not obvious to non-lawyers and therefore is worthy of discussion.

Katy McGinty’s campaign criticizes Senator Toomey for authorizing the practice of confession of judgment in commercial lending by a bank in which he owns a stake and had once served as chairman of the board.  This ignores the fact that, in Pennsylvania, a  commercial (business) mortgage and the accompanying commercial promissory note almost always contain such a clause. They are also commonplace in commercial leases for offices, store rooms and other business property.

A “confession” means that the borrower agrees in advance to entry of judgment without a trial.  In Pennsylvania, as in many other states, this powerful legal tool cannot be used in a consumer transaction, one where the proceeds are used to fund the purchase of consumer goods or services, including a personal residence.  Most of the time, a confession of judgment is not entered on the public record until after there is a default.  But the agreement could provide for entry of judgment at any time the lender feels insecure about repayment of the debt. Sometimes the agreement provides for advanced notice and an opportunity to cure (usually pay)in order to avoid entry of judgment.  Sometimes not.

While most commercial borrowers cannot persuade the lender to waive a confession of judgment clause entirely, they may be able to negotiate the terms — perhaps to require advanced notice. An experienced business transaction lawyer may be able to get other concessions, depending upon circumstances.

A lender may also secure a commercial loan with a mortgage on the residence of the borrower. However, in this case, there is a certain amount of protection under Pennsylvania law.  The lender must go through the foreclose process, as it would under a residential mortgage.

Yes, a judgment does create lien the personal residence of the commercial borrower.  And yes, the commercial borrower could lose that residence through a sheriff sale. But the opportunity to present a defense is available.

Confession of judgment is not a practice that is unique to the bank where Senator Toomey owned a small interest.  Every bank that makes commercial loans in Pennsylvania could demand a confession of judgment in its loan documents.  Far from it being a predatory practice, as alleged in the commercials, it is a standard practice and is  authorized by federal and state bank regulators for commercial lending.  As a matter of fact, the failure to utilize this legal weapon in certain types of commercial lending might be viewed by regulators as an unsound practice — exposing the bank to an unnecessary risk of loan loss.

Perhaps there should be a policy discussion regarding this lending practice.  But the anti-Toomey advertising campaign is not the place to do it.

CLT

 

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CLIFF TUTTLE has been a Pennsylvania lawyer for over 45 years and (inter alia) is a real estate litigator and legal writer. The posts in this blog are intended to provide general information about legal topics of interest to lawyers and consumers with a Pittsburgh and Western Pennsylvania focus. However, this information does not constitute legal advice and there is no lawyer-client relationship created when you read this blog. You are encouraged to leave comments but be aware that posted comments can be read by others. If you wish to contact me in privacy, please use the Contact Form located immediately below this message. I will reply promptly and in strict confidence.

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