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Judge Not Lest Ye Be Judged: Avoiding the pitfalls of an improperly drafted confession of judgment

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Written by Matthew J. Bialick and David G. Hellmuth

If drafted and used properly, a confession of judgment (“COJ”) is a unique and powerful way to ensure that a debtor performs under a forbearance or settlement agreement.  If drafted and used improperly, then a creditor could become embroiled in needless litigation.  Furthermore, a properly drafted COJ increases the value of the creditor’s claim by providing a quick enforcement remedy.

Apart from all of the formalities and procedural technicalities specified by statute, COJs need to do one thing above all others – clearly articulate precisely what must occur to trigger the creditor’s right to file a judgment against the debtor. This sounds easy and obvious, but is it?

In the recent Minnesota Court of Appeals case of Reigel v. DPS Properties, the parties of a lawsuit reached a settlement agreement, the performance of which was ensured by a COJ. The COJ stated that it may be filed upon the occurrence of one of several, vaguely defined, “events of default.”  One event of default was the failure to “satisfy a material term” of the settlement agreement.  The defendant did indisputably fail to fully perform under the agreement, but litigation arose out of whether the provisions violated were “material terms.”

Based on the ambiguity of the term “material,” the defendant brought a motion to vacate the judgment which was hotly litigated, but ultimately denied.  Then, when the trial court denied the motion, the defendant brought an appeal challenging the denial.  While the debtor was ultimately unsuccessful at the Court of Appeals, the judgment and collection efforts were substantially delayed and each party expended unfortunate additional litigation costs.  If the debtor had been successful, then the judgment would have been vacated and the original litigation would have resumed (and now with the potential argument that plaintiff had released the defendant from said litigation).  These problems were created simply due to the use of imprecise terms in the COJ.

While all of this additional litigation could have been avoided by saying that any default, no matter how minor, triggered the right to file a judgment based on the COJ, this type of language should be used with caution.  In Minnesota, there is a one year statute of limitations on filing a COJ.  This time period is triggered upon an initial default.  However, if you define “default” so broadly that it encompasses trivial, non-monetary defaults (that may be in existence already at the time of execution), a debtor could argue that the clock started running prior to the creditor realizing the existence of a default.  In this situation, when the creditor does ultimately file for a judgment under the COJ, said creditor may be hit with a statute of limitations defense that will severely compromise the value of the claim.  This could result in more litigation on the same supposedly resolved claim.

In closing, the moral of the story is this – when it comes to COJs, be very clear about what specific defaults trigger the right to file, and do not go any further than what is necessary to protect your legitimate interests. 

- Matt Bialick and David Hellmuth are banking law attorneys with Hellmuth & Johnson, PLLC.