Delaware Court Declines To Enforce Confession of Judgment Provisions in Spousal Loan Guaranty

February 2012Articles In the Zone

In RBS Citizens, N.A. v. Caldera Mgmt., Inc., et al., 2009 WL 3011209 (D. Del.), the U.S. District Court for the District of Delaware, in a memorandum opinion (Robreno, J.), ruled against RBS Citizens, N.A. in its attempt to enter judgment by confession against the guarantor spouse of a Sussex County developer and repeat borrower from the bank, holding that the financial institution failed to establish the spouse had effectively waived her constitutional due process rights to notice and hearing before the entry of judgment.

The central facts of the matter were not in dispute. RBS Citizens, N.A. (the bank), successor by merger to Citizens Bank, entered into a series of commercial real estate loans with entities owned and controlled by defendants Caldera Management, Inc., Mark G. McGreevy, and Daniel B. McGreevy. The loan transaction at issue in this case was a May 2006 commercial real estate loan in the amount of $6,535,098.31 to a land development single purpose entity owned or controlled by Caldera Management, Mark McGreevy and Daniel McGreevy. Defendants Caldera Management, Mark McGreevy, Daniel McGreevy and Margaret M. McGreevy (Guarantor McGreevy), the wife of Daniel McGreevy, guaranteed the loan pursuant to guaranty and suretyship agreements executed in favor of the bank. Each guaranty, including the one signed by Guarantor McGreevy (the guaranty), contained a confession of judgment clause. The borrower defaulted on the loan, and on April 28, 2008, the bank confessed judgment against the defendants, including Guarantor McGreevy, pursuant to the confession provisions in the guaranties, pursuant to Delaware Local Rule 58.1.1 as authorized by 10 Del.C. §2306. Defendants Caldera Management, Mark McGreevy and Daniel McGreevy stipulated to the judgment but reserved the right to contest execution on the judgment. Guarantor McGreevy objected to the entry of judgment, arguing that in signing the guaranty she did not knowingly, voluntarily and intelligently waive her right to notice and a hearing prior to entry of judgment.

In its opinion, the court noted that Guarantor McGreevy is a graduate of Widener University, with a four year bachelor’s degree in nursing. She had worked for more than 25 years as a licensed nurse. Guarantor McGreevy did not participate in the business or operations of Caldera Management or any associated entities. However, Guarantor McGreevy had executed at least five other commercial loan documents containing confession of judgment provisions, in addition to the guaranty in question in this case. Guarantor McGreevy testified she did not remember executing the guaranty but she believed her husband presented the document to her at home and asked her to sign it. She also testified she believed she may not have reviewed the document because “she trusted her husband” but had she reviewed the document, she would not have understood it. The court’s opinion noted that at the time Guarantor McGreevy signed the guaranty, she had “the opportunity to be informed about the waiver” through counsel, but no attorney nor representative of the bank was present, and the bank did not advise Guarantor McGreevy that she should retain or consult counsel in connection with the guaranty. In connection with the closing of the commercial loan and the execution of the required documentation, an opinion of counsel prepared by a Delaware attorney was delivered to the bank indicating that such attorney had acted as counsel to all of the guarantors, including Guarantor McGreevy, in connection with the guaranty. This legal opinion advised that the loan documents were legal, valid and binding obligations but did not specify or highlight the legal implications of the confession of judgment clause. Despite the contention of the Delaware attorney who prepared the legal opinion that he “acted as counsel” to the guarantors, Guarantor McGreevy testified she did not recall having been represented by such attorney, or any other attorney, in connection with the guaranty nor was she aware of the legal opinion given relating to this matter.

In its ruling, the court noted that the burden is on the party asserting the waiver to show that the defendant “effectively waived any right to notice and a hearing prior to the entry of judgment against the debtor.” The execution and delivery of a document containing cognovits provisions waiving the right to prejudgment notice and hearing is constitutional if the waiver is knowing, voluntary and intelligent. Pellaton v. Bank of New York, 592 A.2d 473 (Del. 1991) (quoting D.H. Overmyer Co., Inc. v. Frick, 405 U.S. 174 (1972)). In order for a waiver to be knowing, voluntary and intelligent, it must be an intentional relinquishment or abandonment of a known right or privilege. Id. The effectiveness of a waiver is determined by the totality of the circumstances. Mazik v. Decision Making, Inc., 449 A.2d 202 (Del. 1982). Under Delaware law, the following factors are considered: (1) The defendant’s business sophistication and experience with similar documents; (2) whether the defendant consulted an attorney; (3) whether all bargaining parties took the necessary steps to ensure the terms of the agreement were read and understood at the time entered into; and (4) whether the defendant had the opportunity and time to review the document containing the confession of judgment. The court also noted that the foregoing factors were not necessarily an exhaustive list. In analyzing these factors against the circumstances surrounding the execution and delivery of the document in this case, the court noted that all the bank could prove was that Guarantor McGreevy signed the guaranty (a fact that Guarantor McGreevy did not dispute) but the bank failed to point to any evidence of Guarantor McGreevy’s intentional abandonment or relinquishment of her right to notice and a hearing prior to the entry of judgment. The court noted that despite the fact it was printed in bold letters, the confession of judgment clause itself is highly technical and not self-explanatory; although admitting she had the opportunity to review the document, without the assistance of counsel, Guarantor McGreevy’s review of the document was uninformed.

The implications of this case for lenders, borrowers and guarantors and their counsel, are important.

For more information, please contact J. Breck Smith.