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The client’s timing could not be worse; the real estate market collapses shortly

after construction finishes. The anchor tenant files for bankruptcy and disaffirms

its lease, leaving the mall half-empty and unable to service the debt, which now ex-ceeds the value of the realty.

The bank declares a default and ac-celerates the debt, instructing its lawyer to hold off on foreclosure and to pursue a debt claim against the developer and guarantor. The bank’s lawyer reviews the note and guaranty and sees a “con-

Defending Confession Judgment Cases in Illinois

By Andrew R. Schwartz

A confession of judgment lets a creditor take a judgment without notice to the debtor, who usually first learns of the lawsuit when the creditor seizes his bank accounts and takes related steps. Here are strategies for representing commercial debtors facing such judgments.

Y our developer client borrows $5 million from a bank to improve a strip mall on Chicago’s northwest side. The developer signs a promissory note with a floating interest rate of 1 percent over the Wall Street Journal prime rate,

and its principal shareholder signs a guaranty.

Andrew R. Schwartz <andy@schwartz-lawyer.com> is the manager of Schwartz & Kanyock, LLC in Chicago, where he concentrates his practice in commercial litigation with emphasis on complex collections and fraudulent transfers.

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fession-of-judgment”1 clause in each. Knowing the guarantor has substantial assets, the bank’s lawyer decides to seek a confession judgment. She prepares her complaint and the following exhibits:

• A “confession-of-judgment” that reads as follows: “The developer and guarantor, by their undersigned attorney, hereby appear, waive service of process and confess that there is due from each of borrower and guarantor to the plain-tiff the sum of $5,150,000, plus the lend-er’s costs and attorneys’ fees.”

• An affidavit of the bank’s loan offi-cer calculating the amounts due.

• A proposed judgment order includ-ing a $20,000 line item for “attorneys’ fees” (which she expects her law firm to expend to prepare and present her com-plaint). She includes this item because the loan documents permit fee-shifting upon a default.

The bank’s lawyer also prepares a memorandum of judgment and citations to discover assets. However, the loan of-ficer is unavailable to sign an affidavit; instead, his assistant sends an unsigned payoff letter showing the amounts due. The bank’s lawyer switches the payoff letter for the affidavit, signs the com-plaint and confession-of-judgment, and files suit.

A Cook County judge reviews the complaint, along with other confession-of-judgment cases scheduled for disposi-tion that day. He confirms the figures in the confession-of-judgment and the pro-posed judgment and signs the judgment and memorandum. The bank’s lawyer records the memorandum, has the cita-tions issued, and delivers the citations to the guarantor’s bank/brokerage firm.

The next day the guarantor learns that his home mortgage payment just bounced. His private banker tells him all his business and personal accounts are frozen, including the $125,000 in his personal and business accounts and his entire $3.5 million securities portfolio. The guarantor calls you, screaming that the bank seized his assets and that a per-sonal judgment will cause his other busi-ness loans to default. He demands that you correct this injustice.

Limitations upon the power to confess judgment

Illinois law recognizes the draconian nature of confession judgments2 and limits their use. Any strategy for attack-ing the confession judgment described above begins with a discussion about

those limits.Statutory limits on confession judg-

ments. A confession judgment debtor’s lawyer must read section 2-1301(c) of the Illinois Code of Civil Procedure, which requires the creditor to file a confession judgment suit only in counties where (1) the instrument containing the warrant of attorney was executed, (2) at least one defendant resides, or (3) any of the de-fendants own property.3 The statute also bars their use in consumer transactions.

If the confession judgment satisfies section 2-1301(c), the debtor’s lawyer must determine its validity or voidness. The debtor’s lawyer should pull the clerk’s file and scrutinize the pleadings.

The typical way to defend confession judgments is to attack them as void. Start with the obvious: A court cannot enter a valid money judgment without first ob-taining in personam jurisdiction over the judgment debtor.4

A confession-of-judg-ment case uses a contract to bend the rules. “A con-fession-of-judgment clause usually authorizes the ap-pointment of an attorney to appear for the debtor in an action for an amount owed due, to waive per-sonal jurisdiction and ser-vice, and to consent to a judgment against the debtor.”5 This is called a warrant of attorney.

The following list should help law-yers for debtors make the case that the confessed judgment is void and therefore ineffective.

The judgment is void because the lender forgot to submit the signed “confession”

A “confession-of-judgment” clause may authorize the confession of judg-ment, but the process requires an addi-tional step: once the creditor files suit, an appointed attorney must actually appear for the debtor, waive personal jurisdic-tion and service, and confess a judgment against the debtor. The attorney-in-fact typically does this by signing a docu-ment entitled “confession” or “confes-sion-of-judgment,” which is attached to the complaint.

If the creditor fails to submit a signed “confession-of-judgment,” the debtor’s lawyer should attack the judgment as void for lack of personal jurisdiction un-less the clerk’s file shows service of pro-cess. The argument is simple: No appear-

ance equals no personal jurisdiction.6

The judgment is void because it requires extrinsic evidence to prove the debt

The leading Illinois confession judg-ment case is Grundy County National Bank v. Westfall, wherein the supreme court held as follows:

Judgments by confession are circum-spectly viewed. …The power to confess a judgment must be clearly given and strictly pursued, and a departure from the authority conferred will render the con-fessed judgment void. The extent of the liability undertaken must be ascertainable from the face of the instrument in which the warrant is granted. …A judgment by confession must be for a fixed and defi-nite sum, and not in confession of a fact that can only be established by testimony outside of the written documents, required by the statute to be filed in order to enter

up a judgment by confession. Freeman on Judgments, sec. 1321, states: “A warrant must state the amount for which judg-ment is authorized or state facts from which the amount can be definitely as-certained, and where it merely authorizes judgment for such sum as may be found to be due between the parties in their future dealings, it is void for uncertainty.”7

Based on this passage, you can argue __________

1. A “confession-of-judgment” clause is one in which an obligor authorizes and empowers any attor-ney-at-law to: (1) appear for the obligor in any court of record; (2) waive notice of further proceedings; and (3) confess judgment against the obligor. Cases may also use the terms “cognovit,” and “warrant of attorney.” In plain English, it means the obligor uncondition-ally surrenders ahead of time. A “confession judgment” means a judgment issued pursuant to a “confession-of-judgment” clause.

2. See, e.g., Oakland National Bank v. Tomei, 215 Ill. App. 3d 638, 640 (4th Dist. 1991).

3. 735 ILCS 5/2-1301(c).4. State Bank of Lake Zurich v. Thill, 113 Ill. 2d

294, 308 (1986). 5. Michael J. Kaufman, 9 Ill. Prac., Illinois Civil

Trial Procedure § 37:3 (2d ed. 2013).6. See Goldberg v. Schroeder, 10 Ill. App. 2d 186,

191 (1st Dist. 1956) (“…jurisdiction of the person of the defendant is acquired by the entry of his appearance under authority granted in the warrant of attorney”) (emphasis added).

7. Grundy County National Bank v. Westfall, 49 Ill. 2d 498, 500-01 (1971) (citations omitted).

Illinois law recognizes the draconian nature of confession judgments and limits their use.

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that the court cannot calculate the debt-or’s entire liability from the face of the instruments containing the power. The court needs extrinsic evidence to calcu-late the full extent of the debt and guar-anty.

The Grundy County “classic” – the overreaching guaranty. Grundy County invalidated a confession judgment based upon a guaranty that provided as fol-lows:

[T]he instrument guaranteed full and prompt payment by the defendant to plaintiff of “any and all indebtedness, li-abilities and obligations of every nature and kind of said Debtor to said Bank, and

every balance and part thereof, whether now owing or due, or which may hereaf-ter, from time to time, be owing or due, and howsoever heretofore or hereafter cre-ated or arising or evidenced to the extent of ***.” In the blank space “$50,000” had been written so that at the time the judg-ment was entered it read “to the extent of $50,000.”8 The guaranty’s scope – including fu-

ture debts not then ascertainable – de-feated its warrant of attorney because the court needed extrinsic evidence to deter-mine the nature and amount of the sub-sequent debts. The supreme court invali-dated the confession judgment, holding that “[t]he authorization was not for a fixed sum specified or one ascertainable from the instrument itself.”9

The first district has expanded on Grundy County’s rationale as follows:

However, none of the instruments indi-cates the amount of the loan that was guaranteed. In fact, the instruments state that each guarantor could be liable for the full amount of any and all loans made by Bank to Sawmill up to the guarantor’s maximum liability. Thus, it is evident from the instruments that an initial loan could be completely paid off, other loans made, and the guarantors would still be liable for any amounts left unpaid on those other loans. Merely because the instruments state the maximum liability of each guar-antor does not render the power to confess

judgment valid since at any given time the extent of liability could only be shown by evidence independent from the face of the instruments.10

As the italicized text reflects, the court expressed concern about its inability to determine the amount of the indebted-ness from the face of the guaranty.

Now compare the language of our hypothetical guaranty, which defines the “Indebtedness” as

all of the principal amount outstanding from time to time and at any one or more times, accrued unpaid interest thereon and all collection costs and legal expenses related thereto permitted by law, attor-neys’ fees, arising from any and all debts,

liabilities and obligations of every nature or form, now ex-isting or hereafter existing or acquired, that Borrower indi-vidually or collectively or inter-changeably with others, owes or will owe Lender. “Indebted-ness” includes, without limi-tation, loans, advances, debts, overdraft indebtedness, credit card indebtedness, lease obli-gations, liabilities and obliga-tions under any interest rate

protection agreements or foreign currency exchange agreements or commodity price protection agreements, other obligations, and liabilities of Borrower, and any pres-ent or future judgments against Borrower, future advances, loans or transactions that renew, extend, modify, refinance, consoli-date or substitute these debts, liabilities and obligations.…It covers amounts not due at the time

of the loan and substitute future trans-actions. Our guaranty is indistinguish-able from those in Grundy County and Mount Prospect. Proving the amount of the guarantor’s liability requires extrin-sic evidence.

Variable interest. The “indebtedness” in a loan has three parts: (1) principal, (2) interest, and (3) fees allowed by the loan documents. If the court cannot cal-culate any single component without ex-trinsic evidence, it arguably cannot prop-erly enter a confession judgment.

One common problem in confession judgment cases arises from the use of variable or “floating” interest rates in business loans. A floating rate is defined as a “[r]ate of interest that is not fixed but which varies depending upon the ex-isting rate in the money market.”11 Most floating rates set the interest rate at some percentage over the prime rate or LIBOR (the London Interbank Offered Rate). These rates fluctuate. To find the rate on

any given date, a party must consult an outside index.

In our hypothetical case, the note sets the interest rate at 1 percent over the Wall Street Journal prime rate. Moreover, the “confession-of-judgment” clause in the note reads as follows in relevant part:

Borrower hereby irrevocably authorizes and empowers any attorney-at-law to ap-pear in any court of record and to confess judgment against Borrower for the unpaid amount of this Note as evidenced by an af-fidavit signed by an officer of Lender set-ting forth the amount then due, attorneys’ fees plus costs of suit, and to release all er-rors, and waive all rights of appeal.…To calculate interest, a bank officer

must furnish an affidavit with that calcu-lation, which requires the officer to refer-ence the Wall Street Journal Index.

The confession-of-judgment provi-sion in our scenario fails for two rea-sons. First, a bank officer’s affidavit is “testimony outside of the written docu-ments” containing the warrant of attor-ney, which Grundy County prohibits, raising a public policy argument.12 Sec-ond, one cannot calculate the interest simply by looking at the note; it requires reference to the Wall Street Journal – which is extrinsic to the note. The debtor should argue that the interest rates dur-ing the loan’s term probably did not exist on the date of the loan. The same argu-ments apply to the guaranty.

Although the “variable interest rate” argument appears untested by any appel-late court, I have used it with some suc-cess at the trial court level. Some judges apply Grundy County strictly and invali-date confession-of-judgment clauses in variable rate notes. Others hold that the language of the confession-of-judgment clause lets the lender look outside the note to determine the interest rate, and reject the public policy-based argument.

Voidness for failure to comply strictly with the power of attorney

As discussed above, the Grundy County court states that “[t]he power to confess a judgment must be clearly given and strictly pursued, and a departure from the authority conferred will render the confessed judgment void.”13 If the lender does not comply strictly with the

The typical way to defend confession judgments is to

attack them as void.

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8. Id. at 501 (emphasis added).9. Id. at 503.10. Mount Prospect State Bank v. Forestry Recycling

Sawmill, 93 Ill. App. 3d 448, 456 (1st Dist. 1980) (emphasis added).

11. Black’s Law Dictionary 576 (5th ed. 1979). 12. Grundy County National Bank, 49 Ill. 2d at 501.13. Id.

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authority conferred, the debtor should argue that the non-compliance invali-dates the confession judgment.

In our example, the bank’s lawyer made a huge mistake. The “confession-of-judgment” clauses in the note and guaranty require a bank officer to sub-mit a signed affidavit attesting to the amount due and owing. However, the bank’s lawyer attached an unsigned pay-off letter.

The debtors should attack the con-fession judgment as void for failing to submit the bank officer’s “affidavit” re-quired by the confession-of-judgment clauses. In Illinois, an affidavit is a dec-laration, on oath, in writing, sworn to by a party before some person who has authority under the law to administer oaths.14 An affidavit must be sworn to, and statements in a writing not sworn to before an authorized person cannot be considered affidavits. In Roth v. Illi-nois Farmers Insurance Co., the Illinois Supreme Court held that “[a]n affidavit that is not sworn is a nullity.”15

Do confession judgments violate the Rules of Professional Conduct?

You may also wonder how the bank’s lawyer could sign a confession-of-judg-ment on behalf of the developer and guarantor without creating a conflict of interest. The “confession of judgment” clause identifies her as the attorney for the developer and guarantor, and says she is appearing for them. Good ques-tion – but it may surprise you that prior Illinois law lets creditors’ lawyers sign

confessions-of-judgment for debtors. A 1971 first district case even scoffed at ar-guments to the contrary,16 as did a 1982 federal case.17

The 2010 Rules of Professional Con-duct arguably changed the law, so that plaintiffs’ lawyers may no longer confess judgment against defendants in the same case. Rules 1.7(a)(1) and 1.7(b)(3) ad-dress “concurrent conflicts of interest.” Rule 1.7(a)(1) prohibits a lawyer from representing one client against another in the same case.18 While Rule 1.7(b) lists exceptions for situations where the lawyer obtains informed consents from conflicted clients, Rule 1.7(b)(3) abso-lutely forbids the concurrent representa-tion of one client against another within the same litigation.19

The Comments to Rule 1.7 include a section entitled “Prohibited Representa-tions,” which explains that Illinois law-yers should not disregard the Rule 1.7(b)(3) ban against concurrent representa-tions of one client against another within the same litigation, and that the client’s consent to such a conflict does not mat-ter. Neither Rule 1.7 nor its Comments make an exception for confession-of-judgment cases. Although no Illinois Ap-pellate Court has addressed this precise issue, I recently made this argument suc-cessfully at the trial court level.

In our hypothetical scenario, the bank’s lawyer concurrently signed the complaint for the bank, and the confes-sion-of-judgment as the debtors’ lawyer. Given the plain language of Rule 1.7 and its Comments, the debtors should move to disqualify her.

If the bank responds with older cases,

the debtors should reply that Rule 1.7 vi-tiated the older contrary law. If the bank characterizes the actions of an “attorney-in-fact” as something other than an at-torney action, the debtors should reply that only a lawyer may appear in court for a client; if the bank’s lawyer did not appear for the debtors’ in that capacity, the court never had personal jurisdiction.

If the court disqualifies the bank’s lawyer, the debtors should attack the confession-of-judgment as invalid and argue that it never gave the court per-sonal jurisdiction, rendering the judg-ment void. The bank lawyer’s conflict of interest may also eliminate any right to legal fees for work under that conflict20 and require the court to vacate the judg-ment and reduce it.

Conclusion

A large adverse judgment can prove disastrous, and the judgment debtor’s lawyer faces formidable hurdles. Al-though this article does not address how to attack the underlying debt, these strat-egies may help confession judgment debt-ors free up frozen assets, and let them defend these cases on the merits more ef-fectively. ■__________

14. Roth v. Illinois Farmers Insurance Co., 202 Ill. 2d 490, 493 (2002).

15. Id. at 497. 16. Gecht v. Suson, 3 Ill. App. 3d 183, 188 (1st Dist.

1971).17. Citibank, N.A. v. Bearcat Tire, A.G., 550 F. Supp.

148, 150-51 (N.D. Ill. 1982).18. Ill. Rs. Prof’l Conduct R. 1.7(a)(1) (2010).19. Ill. Rs. Prof’l Conduct R. 1.7(b) (2010).20. Strong v. International Investment Union, 183 Ill.

97, 102 (1899); In re Marriage of Newton, 2011 IL App (1st) 090683, ¶ 41.

Reprinted with permission of the Illinois Bar Journal, Vol. 102 #10, October 2014.

Copyright by the Illinois State Bar Association.www.isba.org