When it comes to SBA lending, all participating lenders are no strangers to loan documents that include confession of judgment provisions (“COJ Provisions”). By way of background, COJ Provisions are written statements typically found in mortgages, deeds of trust, promissory notes and guarantees (“Loan Documents”). COJ Provisions are conspicuous and are typically accompanied by a waiver of rights and a disclosure form that advises the signatory to the Loan Documents that he or she is about to execute a document containing COJ Provisions.
Although, most states have repealed, limited, or otherwise prohibited confessions of judgment, the practice of documenting COJ Provisions in commercial transactions is still allowed in some capacity in certain states. For this specific reason, if the borrower or the guarantor is a resident of Maryland, Virginia, Pennsylvania, Delaware, or Ohio, the SBA Loan Authorization must contain relevant state specific COJ Provisions as dictated by the National 7(a) Authorization Boilerplate, and the failure to do so may drive up litigation costs, compromise enforceability or otherwise harm lenders in any guarantee purchase submission.
The basic purpose of COJ Provisions is to allow creditors to obtain a judgment against a borrower or guarantor without having a formal trial. Borrowers who seek SBA financing grant such authority to lenders voluntarily. However, courts frequently scrutinize COJ Provisions and may strike or open judgments obtained by confession if the Loan Documents with COJ Provisions are not in strict compliance with relevant statutory authority or if COJ Provisions include vague, ambiguous or subjective terms.
Lately, a growing and concerning trend encountered by participating SBA lenders when negotiating with borrowers or their counsel, is a request to modify the COJ Provisions of the Loan Documents. More specifically, borrowers will often request to change the COJ Provisions that allow the lender to recover only “reasonable attorney fees” in the event of default. The problem is that judgments are confessed before a Clerk of Court, who has no authority to determine which fees are “reasonable” and which are not. Given the fact that lenders will only have one opportunity to confess judgment, the COJ Provisions must be clear and free from doubt on how attorney fees are calculated, because any subjective verbiage that puts legal fees into question will be enough to permit the court – upon petition from the borrower – to open or strike the judgment in order to give the judge an opportunity to figure out which fees are reasonable or were actually incurred. In order to avoid this protracted legal battle, the best practice is to insert language identifying the amount that is easily calculated by the court and other related parties. By way of example, COJ Provisions should specify the amount of attorney fees that will be added to the judgment, such as a flat dollar amount (e.g., $5,000.00) or a percentage of the outstanding debt (e.g., 10-15%). This standard should be applied to all borrowers and guarantors regardless of whether said parties are commercial entities or individuals.
For further assistance please contact the attorneys at Starfield & Smith, PC at 215-542-7070.