In today’s economy, many business owners find themselves faced with the prospect of a Promissory Note coming due, often with a large balloon payment staring them in the face. Frequently, for example, an LLC or corporation that owns real estate and has multiple shareholders, thinks it probably has plenty of time before judgment is entered against the company since the foreclosure docket is extremely crowded and a foreclosure case can literally take over a year until judgment is entered. However, in most cases, the individuals who formed the LLC or corporation had to sign personal guaranties in order to obtain the loan for the company in the first place. The lenders certainly know that the foreclosure process is slow, and therefore, they have increasingly filed lawsuits requesting the court to enter judgments against the individuals that signed personal guaranties pursuant to the “confession of judgment” clause contained in most of these guaranties.

Most banks use “Laser Pro” documents to memorialize the terms and conditions of their loans with borrowers. These are standard documents that have been created and modified over time in order to withstand legal attacks. It also benefits banks because they do not have to hire an attorney to draft new documents for every loan they approve. A standard “confession of judgment” clause appears as follows:

Confession of Judgement. Borrower hereby irrevocably authorizes and empowers any attorney-at-law to appear in any court of record and to confess judgement against Borrower for the unpaid amount of this Note as evidenced by an affidavit signed by an officer of Lender setting forth the amount then due, attorney's fees plus costs of suit, and to release all errors, and waive all rights of appeal. If a copy of this Note, verified by an affidavit, shall have been filed in the proceeding, it will not be necessary to file the original as a warrant of attorney. Borrower waives the right to any stay of execution and the benefit of all exemption laws now or hereafter in effect. No single exercise of the foregoing warrant and power to confess judgement will be deemed to exhaust the power, whether or not any such exercise shall be held by any court to be invalid, voidable, or void; but the power will continue undiminished and may be exercised from time to time as Lender may elect until all amounts owing on this Note have been paid in full. Borrower hereby waives and releases any and all claims or causes of action which Borrower might have against any attorney acting under the terms of authority which Borrower has granted herein arising out of or connected with the confession of judgement hereunder.

Armed with these types of clauses, most lenders will file a foreclosure case and, at the same time, file a lawsuit against the personal guarantors pursuant to the confession of judgment clause in the guaranty. This type of lawsuit is lightning fast. A lender can file this type of lawsuit and obtain a judgment for the full amount of the Note against all guarantors literally the next day. Borrowers then typically learn of the lawsuit when they try to access their financial accounts and find them frozen due to a third party citation to discover assets being issued by counsel for the lender in an effort to pay the judgment by turning over funds in the guarantors’ checking, saving, and investment accounts.

Although these Laser Pro documents have been developed over time, there are ways to attack these types of clauses. There are also certain strategies that the lawyers at Lavelle Law can utilize to help you out of this mess if you find yourself in such a situation. The best advice I can give you is to have these documents reviewed by a lawyer prior to signing them so you know what you are getting into and how it may unfold if the loan goes into default.