August 28, 2013
In Midwest Financial Acceptance Corporation v. Lopez, the Superior Court of Pennsylvania held that the venue provisions in the Pennsylvania Rules of Civil Procedure do not automatically apply to confessed judgment proceedings. In so holding, the Court resolved a split of authority among Pennsylvania’s trial courts.
In Midwest, the defendant borrowers signed a promissory note in connection with a commercial loan that contained a standard confession of judgment clause:
BORROWER HEREBY IRREVOCABLY AUTHORIZES AND EMPOWERS ANY ATTORNEY OR THE PROTHONOTARY OR CLERK OF ANY COURT IN THE COMMONWEALTH OF PENNSYLVANIA, OR ELSEWHERE, TO APPEAR AT ANY TIME FOR BORROWER AFTER A DEFAULT UNDER THIS NOTE, AND . . . CONFESS OR ENTER JUDGMENT AGAINST BORROWER.
When the borrowers defaulted on the loan, Midwest confessed judgment against them in the Allegheny County Court of Common Pleas, and then transferred the judgment to Centre County.
The borrowers filed a petition to strike the judgment in the Centre County Court of Common Pleas. Although they did not raise the issue in their petition, at oral argument the borrowers claimed that Midwest confessed judgment in the improper venue. The trial court agreed, holding that: (i) a judgment only can be confessed in a county in which venue would be proper under Pennsylvania Rule of Civil Procedure 1006, and (ii) Allegheny County was not a proper venue for Midwest’s confession of judgment proceeding under Rule 1006. Therefore, the trial court struck the confessed judgment.
On appeal, Superior Court reversed. The court first noted that, pursuant to Rule of Civil Procedure 1001, the venue provisions in Rule 1006 apply only to “civil actions,” which are defined as actions in assumpsit (contract), trespass (injury to person or property) and equity, as well as all other forms of action “which incorporate these rules by reference.” Confessions of judgment, the Court explained, are not “civil actions” within the meaning of Rule 1001 because: (a) confessions of judgment do not fall into one of the three enumerated categories of civil actions; (b) the Rules of Civil Procedure that govern confessions of judgment do not incorporate the venue rules; and (c) confessions of judgment “differ significantly both procedurally and substantively from the civil actions subject to the general venue rules.” Therefore, the court concluded:
[U]nless otherwise specified in the agreement, the general venue terms of Rule 1006 do not automatically apply to the initial filing of a judgment of confession, and cannot be used to strike an otherwise lawful confession of judgment that has been entered in strict compliance with a valid [confession of judgment clause].
The court also noted that, although the confession of judgment clause “[was] not a forum selection clause in the traditional sense,” it nonetheless authorized Midwest to confess judgment in Allegheny County. According to the court, by agreeing that “any attorney or the Prothonotary or Clerk of any court in the Commonwealth of Pennsylvania” could confess judgment against them in the event of default, the borrowers acknowledged that venue was proper in any county in Pennsylvania.
In addition, the court pointed out that the trial court deviated from the well-established rule that, on a petition to strike a confessed judgment, a court only may investigate whether any defects or irregularities in the confession appear on the face of the complaint and the exhibits attached to it. The court explained that the trial court’s reliance on factual allegations by the borrowers that were not in the complaint – such as the borrower’s allegation that they could not have been served in Allegheny County – was improper on a petition to strike. A debtor that wishes to dispute facts underlying a confession of judgment must do so by filing a petition to open the judgment, which is a different remedy, governed by different rules, than a petition to strike.
By limiting its holding to petitions to strike confessed judgments, the court did not say whether debtors can raise the venue provisions of Rule 1006 in a petition to open a confessed judgment. However, logic dictates that the holding in Midwest should apply equally in the context of a petition to open. The court held that confessions of judgment are not “civil actions” and, therefore, that Rule 1006 does not apply to them. It cannot be that a debtor can convert a proceeding that was not a “civil action” when initiated into one simply by filing a petition to open. Out of an abundance of caution, though, lenders may want to consider including explicit forum selection clauses that specify the courts in which the lender may confess judgment to reduce the risk of litigation on this issue.