A warrant of attorney to confess judgment, or a cognovit clause, in a lease, mortgage or other loan document is a powerful remedy available to lenders when a commercial lessee or borrower defaults on its obligations. It is so powerful, in fact, that the Pennsylvania Supreme Court has likened the effect of a warrant of attorney on the lessee/borrower to "a warrior of old entering a combat by discarding his shield and breaking his sword."
Essentially, a warrant of attorney to confess judgment permits a creditor's attorney to enter a judgment against a debtor, without permitting the debtor to contest the judgment prior to its entry. This is possible because under the contract, the debtor specifically submits itself to the jurisdiction of a particular court and authorizes the creditor's attorney to enter judgment against the debtor without prior notice. Because there is no notice or opportunity to be heard prior to entry of a confessed judgment, courts of this Commonwealth require that a warrant of attorney be explicit and strictly construed. More specifically, Pennsylvania courts have held that a warrant of attorney must: (1) be in writing; (2) be signed by the person to be bound by it; (3) have a signature bearing a direct relation to the warrant and not be implied.
From a practical perspective, it is easy enough to ensure that the warrant of attorney to confess judgment is in writing and signed, but it is less clear how to ensure that the signature bears a direct relation to the warrant. This is particularly the case where parties employ separate signature pages to streamline the execution process and amend agreements frequently.
Take for example the matter of Graystone Bank v. Grove Estates, L.P., where Grove Estates L.P. (the "Borrower") executed a $9.5 million Promissory Note (the "Note") in favor of Graystone Bank (the "Bank"). The Note contained a warrant of attorney to confess judgment, which was typed in all-capital letters and located on the last page of the Note that immediately preceded the signature page. Following the execution of the Note, the parties executed a Change in Terms Agreement to extend the maturity date of the Note from September 1, 2010, to November 5, 2010 (the "Amendment"). The Amendment did not further modify the terms of the Note and did not itself contain a warrant of attorney to confess judgment or any specific reference to it.
On February 14, 2011, the Bank confessed judgment against the Borrower after the Borrower had failed to pay the balance of the principal and accrued interest by the extended maturity date.
The Borrower subsequently filed a Petition to Open and/or Strike the Confessed Judgment and Request for Stay (the "Petition"), alleging that the warrant of attorney to confess judgment was fatally defective because it did not appear on the signature page of the Note, nor did it appear anywhere in the Amendment. The Petition also asserted that the judgment should be opened because of certain defenses alleged by the Borrower. The Court of Common Pleas of York County denied the Borrower's Petition, and the Borrower appealed to the Superior Court of Pennsylvania.
On appeal, the Superior Court affirmed, adopting the lower court's reasoning. The court held that the warrant was valid because the Borrower's signature on the Note directly related to the warrant of attorney to confess judgment, which was located on the preceding page. In so holding, the court specifically rejected the Borrower's contention that the signature must appear on the same page as the warrant of attorney in order to "directly relate" to it.
Additionally, the Superior Court agreed with the trial court and held that the complete absence of the warrant of attorney from the Amendment did not affect the validity of the warrant in the original Note. The court reasoned that the Amendment was nothing more than an extension of the original Note's maturity date and not a new comprehensive agreement, which would have necessitated a separate warrant of attorney.
The Borrower filed a petition for review with the Supreme Court of Pennsylvania, and the Court granted the petition as to the issues of whether confessed judgments must be supported by a warrant of attorney in the contract on which judgment was confessed and the standard for opening confessed judgments. The parties have submitted briefs to the Court; however, the Court has not yet scheduled a hearing, nor issued a decision on these issues.
While the Superior Court's holding does not upset the practice of most lenders today, it is important to recognize that a decision by the Supreme Court of Pennsylvania could well change that. A decision by the Supreme Court of Pennsylvania holding that a warrant of attorney to confess judgment must be present in each subsequent amendment executed by the parties, for example, would have significant implications for creditors with loans subject to Pennsylvania law. It can be assumed that a significant number of confession of judgment clauses in existing financing transactions, which have been modified or amended without an express renewal of the warrant of attorney, will be rendered ineffective.
It is also important to note that while the Superior Court decided in favor of the creditor in Graystone Bank, the trial court and the Superior Court took great care to point out that that the only purpose of the Amendment was to extend the maturity date of the loan. A number of other Superior Court decisions concerning amendments to loan agreements, forbearance agreements and commercial leases that involve more substantial amendments to the underlying deal terms have held that a warrant of attorney was invalid where it is not explicitly renewed in the amendment documents, either by way of a complete inclusion of the warrant of attorney or, at a minimum, a general recitation by the borrower that the warrant of attorney is expressly reaffirmed and reincorporated in the amendment.
In light of this risk, lenders and commercial landlords should consider the following when documenting new loans or amending existing loans:
- Including the warrant of attorney to confess judgment on the tenant's/borrower’s/guarantor’s signature page or the page immediately before the signature page together with a separate signature or initial block on the page where the warrant of attorney appears; and
- When modifying a loan or lease, restating the warrant of attorney to confess judgment in its entirety in the amendment of any loan document or lease that originally contained a warrant of attorney.