In Catjen, LLC v. Hunter Mill West, L.C., addressing the procedure for a confessed judgment promissory note, the Supreme Court of Virginia reversed the trial court’s summary reduction of the amount of the judgment, holding that Virginia law “does not permit a trial court to enter a modified confessed judgment over the objection of the party seeking the judgment.” Rather, where a court grants a motion to set aside or reduce a confessed judgment, the matter must be set for a full trial on the merits of the creditor’s claim. Op. at 8.
A copy of the opinion is available here.
Background
Borrower obtained a commercial loan secured by real estate and evidenced by a promissory note that included a confession of judgment provision, which by its terms appointed an attorney-in-fact to confess judgment against the borrower for the unpaid balance of the Note, interest, court costs, expenses and reasonable attorney’s fees.
Borrower subsequently defaulted on the loan, and in the context of a bankruptcy hearing on the Creditor’s proof of claim, the bankruptcy court fixed the amount of the Creditor’s claim. Several years later, the Creditor foreclosed on the real estate, and after crediting the Note for the amount of the bid, Creditor sought a judgment for the deficiency, by exercising the confessed judgment provision of the Note.
Borrower timely filed a motion to set aside the confessed judgment, asserting several defenses, all of which were abandoned, except its claim that the Creditor had incorrectly calculated the amount of interest that accrued after the date of maturity. Borrower claimed that only simple interest should have accrued. Ultimately, the trial court set aside the confessed judgment, but instead of setting the matter for a trial on the merits, ordered that it would accept the borrower’s calculation of interest, and reduced the amount of the confessed judgment over Creditor’s objection. Creditor appealed.
Discussion
Addressing the nature of a confessed judgment, the Court explained that under Virginia Code § 8.01-432, it is “an extraordinary remedy that permits a creditor to obtain an enforceable judgment against a debtor without the need to file suit or to establish any fact other than the existence of a valid instrument permitting the creditor to direct an attorney-in-fact to confess the judgment.” Op. at 6. The statute provides that either a debtor or ‘any attorney-in-fact pursuant to a power of attorney, may at any time confess judgment in the clerk’s office of any circuit court in this Commonwealth, whether a suit, motion or action be pending therefor or not.’ Code § 8.01-432.” Op. at 6.
“A fundamental requirement to the entry of a confessed judgment is that the creditor must agree to the amount of the confessed judgment.” Upon confession, the judgment shall be entered by the clerk of the Court and “such judgment shall be as final and as binding as though confessed in open court or rendered by the court.” Op. at 6-7.
The Court noted that Virginia Code § 8.01-433 provides a limited exception to the finality of a confessed judgment for a debtor to assert a facially adequate defense or setoff. Op. at 7. Procedurally, the Court explained, “[a]t this initial stage, there is no requirement that the judgment debtor prove the merits of the asserted defense or setoff. Indeed, to do so would be illogical in that, upon granting the motion to set aside or reduce a confessed judgment, a court is required to place the matter ‘on the trial docket of the court, and the proceedings thereon shall thereafter be the same as if an action at law had been instituted upon the bond, note or other evidence of debt upon which judgment was confessed.’ In other words, where a court grants a motion to set aside or reduce a confessed judgment, the matter must be set for a full trial on the merits of the creditor’s claim.” Op. at 7-8.
Here, however, after setting aside the confessed judgment, the trial court failed to set the matter on the trial docket, and instead reduced the judgment. According to the Supreme Court, the trial court was under the misconception that it could treat a motion to reduce a confessed judgment differently from a motion to set aside a confessed judgment. In both instances, however, the trial court should have held “that the matter be set down for a full trial on the merits of the creditor’s claim.” Op. at 8. “[E]ven if the trial court were authorized to reduce the amount of the confessed judgment without a trial on the merits, that reduced amount would not be binding on the creditor unless the reduced amount was an amount that the creditor was willing to accept.” Op. at 8, n. 4.
Accordingly, the trial court’s order reducing the confession of judgment was vacated, and the matter remanded for a trial on the merits.