Reducing Risk and Avoiding Legal Costs Through Confessions...

Reducing Risk and Avoiding Legal Costs Through

Confessions of Judgment, Payment Plans and

Settlement Agreements

Thomas R. Fawkes and Brian J. Jackiw Goldstein & McClintock LLLP

Agenda

• Balancing risks and rewards vis-à-vis delinquent customers

• Settlement Agreements and Payment Plans • Confessions of Judgment

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The Delinquent Customer Dilemma • A recurring dilemma for credit professionals is

how to maximize recoveries from a customer that has become seriously delinquent in the satisfaction of its debt

• Common responses: send account to third-party collector or to outside counsel to initiate breach of contract litigation

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The Delinquent Customer Dilemma • Third-party collector

– Pros: relieves in-house credit and collections staff of burden of collecting receivables; collection fees are generally less than using outside counsel

– Cons: can be more expensive than in-house collections; results can widely vary; on larger files, outside counsel may be able to drive better results; will likely result in termination of customer relationship

• Outside counsel – Pros: assuming a collectible customer and a strong evidentiary case,

outside counsel can drive strong results and significant recoveries – Cons: expensive; typical outside counsel contingency fee will be

between 25-33.3% of recoveries, plus court costs; will likely result in termination of customer relationship

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The Delinquent Customer Dilemma • For credit professionals that seek to maximize recoveries on

aged receivables and maintain an ongoing customer relationship, litigation is generally may not be the desired approach, because of its adversarial nature and the likely impact it will have on the vendor-customer relationship

• In these cases, a settlement agreement containing a payment plan may be desirable

• However, it is critical that such agreements be drafted so as to be legally enforceable and effective, and that creditors understand the possible consequences of entering into a payment plan

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Settlement Agreements and Payment Plans

• A settlement agreement provides for the resolution of outstanding indebtedness of a customer to a supplier, and the mechanism by which such indebtedness will be satisfied over a period of time.

• Among other things, a settlement agreement will often specify: – (i) the amounts that the customer agrees to repay – (ii) the time period during which such amounts will be repaid – (iii) the continuing trade relationship between the customer and

supplier (if any) – (iv) the consequences that the customer will face for a breach of

the agreement.

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Enforceability is Key

• Intent in entering into such an agreement must be to have that agreement be an enforceable contract that stands alone from other contracts that the parties have entered into over the course of their trade relationship

• By having the settlement agreement be a stand-alone, properly prepared contract, the creditor’s ability to enforce the contract in court, and exercise remedies against the customer, will be greatly enhanced

• Accordingly, it is critical that any settlement agreement be: – (i) incorporated in a writing; and – (ii) signed by an authorized agent of each party

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Enforceability is Key

• Other key benefits to an enforceable, standalone settlement agreement are: – They create a valuable shortcut to a successful litigation

outcome – They allow litigation to be brought to conclusion at lower cost to

the creditor – They can cover up omissions that may have existed in prior

customer contracts (such as a credit application or supply contract)

• Lack of jurisdiction/venue provisions • Lack of fee and cost-shifting provisions • Lack of interest provisions • Concern over responsible party (parents, subsidiaries, etc.)

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What Should Be Included in a Settlement Agreement?

• A settlement agreement is only as good as its drafting. An incomplete settlement agreement may provide little assistance to a creditor when attempting to enforce its rights against a debtor

• At a minimum, credit professionals should attempt to include the following provisions in the settlement agreement:

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• An acknowledgement by the debtor as to the amounts to which it is indebted to the creditor;

• An acknowledgement by the debtor that the claims of the creditor are valid and enforceable in all respects, and not subject to any defenses, counterclaims, setoffs or credits of any kind;

• A clear and concise schedule for the repayment of the indebtedness (i.e., the payment plan);

• A statement of any interest that will accrue on the indebtedness; • The method by which repayment of the indebtedness must be

made (wire transfer, check, etc.); • Broad releases by the debtor in favor of the creditor of any claims

and causes of action that exist from the beginning of the parties’ relationship through the effective date of the settlement agreement (cont.)

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• A clear recitation of acts and omissions triggering an event of default under the settlement agreement (i.e., failure to make installment payments when due, the filing of bankruptcy by the debtor), grace periods during which the debtor may cure a default, as well as the rights and remedies of the creditor in the event of a default;

• Fee and cost-shifting provisions, which provide that the debtor is responsible for reimbursing the creditor for any costs (including attorneys’ fees) incurred in enforcing the settlement agreement;

• Confessions of judgment (where permissible under applicable state law); and

• Choice of law, jurisdiction and venue clauses, under which the parties agree that the settlement agreement will be interpreted under the laws of the creditor’s home state, and pursuant to which the debtor consents to have any matters related to the settlement agreement litigated in the creditor’s home court.

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• With these provisions, the creditor positions itself for a substantial likelihood of success in any future litigation that may be brought against the debtor for non-payment – Debtor will have waived all defenses (including as

to the amount of the claim, and the quality/merchantability of the goods sold) as well as counterclaims

– Hence, the Debtor’s ability to mount a defense to an enforcement action will be severely limited

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Varieties of Payment Plans 1. Creditor declines to extend future credit; debtor

must satisfy entire indebtedness (or some portion thereof) over time before credit will be extended

2. Creditor agrees to extend future credit; debtor, in addition to payment for all going-forward invoices in accordance with terms, pays an additional amount to apply against past-due amounts

3. Hybrid approach: credit is extended on limited basis (or on highly restricted terms) pending repayment of prior indebtedness; assuming debtor adheres to repayment schedule, full credit/more attractive terms are offered

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Risks Associated with Payment Plans

• Are you simply delaying the inevitable? – If a customer is illiquid/insolvent, a payment plan may

do little to enhance your recoveries

• Bankruptcy preference risks – Payment plan “resets” the ordinary course; uncertain

as to whether settlement payments are or are not shielded in the event of a customer bankruptcy

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Confessions of Judgment • A confession of judgment is a contractual provision providing that if

a monetary default occurs in an agreement requiring a party to make payments to another party, the party that has defaulted agrees to the entry of a judgment in the creditor’s favor without a trial, or even notice

• This is an extremely powerful legal remedy that is surprisingly underutilized by creditors

• It is important to keep in mind, however, that they are not available in every state, and in the states in which they are permitted, they require satisfaction of very specific legal requirements – Accordingly, we recommend that you utilize the services of counsel

when drafting confession of judgment clauses

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Benefits of Confessions of Judgment • Confessions of judgment take off the table two of the primary

impediments to commencing litigation against a defaulting customer: the time commitment associated with litigation, as well as the high cost (in the form of attorneys’ fees)

• A properly-drafted confession of judgment allows the creditor to almost immediately (and sometimes, in the same day) obtain a judgment upon an event of default and to begin post-judgment enforcement proceedings

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The Confession of Judgment Process • Of the states that allow confessions of judgment, there is no

uniform process in place for documenting and enforcing them • Hence, it is important to look at your home state’s law to ensure

that all requirements are being followed • There are, however, commonalities among the states in how the

process works generally • We will use our home state, Illinois, to demonstrate how a

confession of judgment typically operates

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The Confession of Judgment Process • First, in the operative agreement (in this case, the

settlement agreement and payment plan), a provision will be written in that provides, at a minimum: – The authorization by the debtor of any attorney of any court of

record (generally, the creditor’s attorney) to appear for the debtor after payment is due;

– The authorization by the debtor to have that attorney confess judgment, without process, in favor of the creditor and against the debtor for any unpaid amounts, plus attorneys’ fees and collection costs (provided that a fee-shifting provision is in the settlement agreement);

– Waiver by the debtor of any errors which may intervene in the judgment proceeding; and

– Consent to immediate execution upon entry of the judgment.

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The Confession of Judgment Process

Sample confession of judgment provision

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The Confession of Judgment Process

Important note: some states require specific language to be set forth in a contract to “perfect” your right to seek a judgment by confession. For example, in Ohio:

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The Confession of Judgment Process • With a confession of judgment provision:

– Upon an event of payment default, the creditor’s attorney (or for that matter, any other licensed attorney) may file suit in a court having jurisdiction (and if you included a jurisdiction and venue clause, that will be the creditor’s home court), attaching the settlement agreement containing the confession of judgment provision, along with

• A confession of judgment signed by the attorney-in-fact; and • An affidavit of the creditor setting forth the amount of the judgment

being sought (taking into account settlement payments made, and including attorneys’ fees, accrued interest and other costs).

– In Illinois, the court will review the lawsuit and attached documents, and if satisfied that the statutory elements are met, will enter judgment in favor of the creditor, often on the same day. The creditor is then free to engage in post-judgment collection efforts, as authorized under Illinois law

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The Confession of Judgment Process • Other considerations/requirements:

– Some states require original signatures on documents being filed with the court as part of the confession process

– Ensure that the interest you are seeking as part of the confessed judgment is not usurious; the court may refuse to enter a confessed judgment if that is the case

– If you want post-judgment interest in excess of the statutory rate, your contract must expressly provide as such

– Keep it simple! Overly complex documentation and computation of your requested judgment may result in the court either rejecting the confessed judgment or requiring you to commence a special proceeding (which may require notice of the putative judgment debtor) to prove up your judgment

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Hurdles Associated With Confessions of Judgment

• Given the ability of a creditor to essentially avoid the court system through a confession of judgment provision, they are undoubtedly a remedy that should be explored by anyone entering into a settlement agreement.

• Keep in mind, however, that confessions of judgment are a minefield, with numerous risks, complexities and limitations inherent to them.

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• The risk factors/limitations include: – Confessed judgments are easily vacated: Certain states, such as

Massachusetts, allow a debtor to set aside a confessed judgment for almost any reason. They can also be set aside in Illinois upon a showing by the debtor of a valid defense to the underlying claim. Courts are generally favorably disposed to vacating confessed judgments because the judgment was obtained without due process.

– Any deviation from statutory procedure in obtaining a confession of judgment will likely result in the judgment being denied or voided: If a creditor seeks a judgment by confession, it is critical that all statutory requirements are followed without exception.

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• Risk factors/limitations (cont.): – Certain states outright prohibit confessions of judgment: It is

generally acknowledged that Florida prohibits judgments by confession. Other states may prohibit (or heavily condition) them as well.

– Confessions of judgment are almost universally prohibited in consumer transactions. To the extent that you engage in consumer transactions, it is advisable to avoid confession of judgment provisions altogether.

– Post-judgment enforcement is still required. Accordingly, if your debtor is insolvent or out of business, the confession of judgment will not necessarily result in you being paid.

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Is Confession of Judgment Allowed?

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State Law Allowed?

AK A.S. § 09.30.050

Allowed

AL Ala.Code § 8-9-11

Not allowed before commencement of the action

AR A.C.A. § 16-65-301

Allowed where the debtor appears before the court and confesses, with the assent of the creditor

AZ A.R.S. § 44-143

Allowed after the indebtedness becomes due

CA Cal.C.C.P. § 1132-33

Allowed where (1) the debtor's attorney files a signed certificate asserting that the attorney has examined the judgment, advised the debtor of rights and defenses, and advised the debtor to proceed with the confession of judgment; and (2) the debtor files a signed written statement authorizing the entry of judgment and stating facts to support the debtor's liability and the sum confessed

CO C.R.S.A. § 5-3-207

Not allowed in consumer credit transactions

CT C.G.S.A. § 36a-775

Not allowed in retail installment or installment loan contracts

DC DC St. § 28-3804

Not allowed in consumer credit sales or direct installment loans

DE 10 Del.C. § 2306

Allowed

FL F.S.A. § 55.05

Not allowed before commencement of the action

GA O.C.G.A. § 9-12-18

Allowed only after action has commenced

HI H.R.S. § 476-15

Not allowed in credit sale contracts

ID I.C. §28-43-305


IL 735 ILCS 5/2-1301(c)

Allowed but void in consumer transactions

IN I.C. § 34-54-3-2; I.C. § 24-4.5-2-415; I.C. § 24-4.5-3-407

Not allowed before the cause of action has accrued; Not allowed in any negotiable instrument or other written contract to pay money; Not allowed in consumer credit sales or consumer loans


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State Law Allowed?

IO I.C.A. § 676.1-3; I.C.A. § 537.3306

Allowed, generally, before an action, for judgments on money due where the debtor has filed a signed and verified statement; Not allowed in consumer credit transactions unless executed after default.

KS K.S.A. § 16a-3-306


KY KRS § 372.140

Not allowed

LA LSA-R.S. § 9:3590

Allowed after the maturity of the obligation

MA M.G.L.A. 231 § 13A

Not allowed

MD MD Code, Com. Law, § 12-607; MD Code, Com. Law, § 12-311

Not allowed in retail installment sales or consumer loans

ME 9-A M.R.S.A. § 3-306


MI M.C.L.A. § 600.2906; M.C.L.A. § 445.864

Allowed where the authority for confessing the judgment is contained in a proper instrument that is distinct for the contract; Not allowed in retail installment or charge agreements

MN M.S.A. § 548.22; M.S.A. § 325G.16

Allowed, generally; Not allowed in consumer credit transactions

MO V.A.M.S. § 511.070

Allowed

MS Miss. Code Ann. § 11-7-181

Allowed

MT M.C.A. § 27-9-101; M.C.A. § 27-9-102; M.C.A. § 28-2-709

Allowed, generally by the signed, verified statement of the defendant; Not allowed in written contracts creating a promise to pay money

Is Confession of Judgment Allowed? State Law Allowed?

NC NC Rules Civ.Proc.Rule 68.1; N.C.G.S.A. § 25A-18

Allowed, generally, upon the signed, verified statement of the defendant; Not allowed in consumer credit sales

ND N.D.R.Civ.P. Rule 68; NDCC § 51-13-02.1

Allowed, generally, upon the signed, verified statement of the defendant; Not allowed in retail installment sales

NE Neb.Rev.St. § 25-906; Neb.Rev.St. § 25-907; Neb.Rev.St. § 25-1309; Neb.Rev.St. § 8-823

Allowed, generally; Debtor may appear before the court and confess a judgment, with the creditor's assent; Not allowed in personal bank loans

NH N.H. Rev. Stat. § 515:2; N.H. Rev. Stat. § 361-A:7

Allowed, generally; Not allowed in retail installment sales of motor vehicles

NJ

N.J.S.A. § 2A:16-9; N.J.S.A. § 17:3B-13; N.J.S.A. § 17:3B-23; N.J.S.A. § 17:16C-37; N.J.S.A. § 17:16C-64

Not allowed in the body of any instrument for the payment of money; Not allowed in revolving credit plan agreements or closed end loans; Not allowed in retail installment contracts, retail charge accounts, or any separate agreement in connection therewith; Not allowed in home repair contracts

NM N. M. S. A. § 39-1-9 et seq.; N. M. S. A. 1978, § 56-1-5

Allowed where judgment is for money due and defendant files a signed and verified statement; Not allowed in any instrument for the payment of money before the cause of action has accrued; Not allowed in retail installment contracts

NV N.R.S. § 17.090; N.R.S. § 675.350; N.R.S. § 677.750

Allowed where defendant submits a signed and verified statement; Not allowed in installment loans or thrift company loans

NY NY CPLR § 3218; NY CPLR § 3201; NY Personal Property Law § 302

Allowed, generally, upon filing of an affidavit by the defendant; Not allowed before default in installment contracts worth $1500 or less; Not allowed in retail installment contracts

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OH R.C. § 2323.12; R.C. § 2323.13; R.C. § 1907.09;

Allowed where a debtor appears before the court and confesses judgment with the creditor's assent; Not allowed in consumer loans or transactions; Where the debtor appears before a county court and confesses judgment, judgment will be entered against the debtor in a sum not to exceed $15,000;

OK

12 Okl.St.Ann. § 689; 14A Okl.St.Ann. § 2-415; 14A Okl.St.Ann. § 3-407

Allowed where the debtor appears before the court and confesses, with the assent of the creditor; Not allowed in consumer credit sales, leases, or loans

OR OR Rules Civ. Proc. 73

Allowed upon the signed, verified statement of the defendant; Not allowed in consumer transactions absent an action

PA Pa.R.C.P. No. 2955 et seq.; 69 P.S. § 1401

Allowed generally; Not allowed in consumer credit transactions; Not allowed in retail installment contracts

RI Gen.Laws § 19-14.1-1

Not allowed in consumer loans prior to default

SC SC St. § 15-35-350 et seq.; SC St § 37-2-415; SC St § 37-2-407

Allowed where defendant files a signed, verified statement; Not allowed in consumer credit transactions and consumer loans

SD SDCL § 21-26-1 et seq.

Allowed where defendant files a signed, verified statement

TN T. C. A. § 25-2-101; T. C. A. § 62-6-508

Not allowed before an action is instituted; Not allowed in home improvement contracts


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TX

TX R.C.P. 314, 563, & 564; V.T.C.A., Civil Practice & Remedies Code § 30.001; V.T.C.A., Bus. & C. § 601.151; V.T.C.A., Finance Code § 342.504; V.T.C.A., Finance Code § 345.354; V.T.C.A., Finance Code § 347.053; V.T.C.A., Finance Code § 348.410

Allowed, generally, Not allowed before a suit is brought; Not allowed in consumer transactions, consumer loans, or retail installment contracts; Not allowed in home credit transactions or motor vehicle installment sales

UT U.C.A. § 78B-5-205; U.C.A. § 70C-2-201

Allowed, generally; Not allowed in consumer credit transactions

VA Va. Code Ann. § 8.01-431 et seq.; Va. Code Ann. § 6.2-1524; Va. Code Ann. § 6.2-2215

Allowed generally; Not allowed in consumer credit transactions; Not allowed in motor vehicle title loans;

VI 5 V.I.C. § 421-22

Allowed in a writing signed by both parties, with the assent of the creditor

VT 12 V.S.A. § 4671; 8 V.S.A. § 2229; 9 V.S.A. § 2456

Allowed, generally, upon the specification in writing on the claim upon which judgment is rendered; Not allowed in consumer loans or consumer contracts

WA RCWA § 4.60.010 et seq.

Allowed in writing subscribed by the parties, with the assent of the creditor

WI W.S.A. § 422.405


WV W. Va. Code, § 46A-2-117; W. Va. Code, § 50-4-10

Allowed, generally, in writing by defendant; Not allowed in consumer credit sales, consumer leases, or consumer loans

WY W.S. § 1-16-201; W.S. § 40-14-249; W.S. § 40-14-338

Allowed where defendant appears before the court and confesses judgment, with the creditor's assent; Not allowed in consumer credit sales, consumer leases, or consumer loans

Presenter Contact Information

Thomas Fawkes | Partner • E-mail: [email protected] • Phone: (312) 219-6702 • Twitter: @ThomasFawkesBK

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Brian J. Jackiw | Partner • E-mail: [email protected] • Phone: (312) 219-6703 • Twitter: @BrianJackiw

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