Defective Promissory Note?

Frank Kosir, Jr., Esquire
fk@muslaw.com

Graystone Bank v Grove Estates, LP, et. al, 2012 PA Super 274, 2012 Pa. Super. LEXIS 4090 (2012)

This matter addressed the issue of whether a confession of judgment clause set forth in a promissory note was defective where the promisor’s signature did not appear on the same page of the document.  On August 29, 2008, Grove Estates LP (the “Promisor”) executed a Promissory Note (the “Note”) in the principal amount of Nine Million Five Hundred Thousand Dollars ($9,500,000) in favor Graystone Bank (the“Bank”).  The terms of the Note required the Promisor to make monthly interest payments, and to make full payment of the principal on September 1, 2010.  The Note also included a confession of judgment clause acknowledged by the Promisor.  However, due to the spacing of the document, the confession of judgment clause was located at the bottom of one page of the document, and the Promisor’s signature was located at the top of the subsequent page.  

 

The parties subsequently entered into a Change in Terms Agreement, extending the September 1, 2010 maturity date to November 5, 2010.  When the Promisor failed to make the required payment at the maturity date, the Bank confessed judgment against it in the amount of $10,650,027.74; which judgment amount included the principal balance, interest, attorney’s fees and late charges.  The Promisor immediately filed a Petition to Open and/or Strike the Confessed Judgment asserting, inter alia, that the Note was defective, as the confessed judgment clause was not located on the same page as the Promisor’s signature and that attorney’s fees asserted were excessive.  Following discovery and hearing, the trial court dismissed the petition and affirmed to validity of the confessed judgment.

 

On appeal, the Pennsylvania Commonwealth Court affirmed in part and reversed in part.  With regard to the form of the Note, the court concluded that Pennsylvania law does not require that a confession of judgment provision be located on the same page as the signature of the promisor.  Rather, the only requirements for an enforceable confessed judgment clause are that the provision be set forth in conspicuous type, and be signed or initialed by the promisor.  In this instance, there was no question that the confession of judgment clause was set forth in conspicuous type, or that the Promisor had in fact acknowledged the clause by signing its name immediately thereafter.  As such, the fact that the Promisor’s signature was located at the top of the next page of the Note was insufficient to render the confession of judgment clause unenforceable.  However, with regard to the amount of attorney’s fees set forth in the confessed judgment, the court reversed, noting that Pennsylvania law requires that fee shifting provisions be reasonable.  In this instance, the terms of the Note provided that the attorney’s fees due on confession of judgment were to equal ten percent (10%) of the outstanding principal, which amounted to more that Nine Hundred Thousand Dollars ($900,000).  As the record did not indicate whether the trial court had conducted a review to determine if the amount of attorney’s fees was reasonable in light of the costs actually incurred by the Bank in confessing judgment under the Note, the issue of attorney’s fees had to be remanded to the trial court for a determination of reasonableness and, if necessary, the modification of the attorney’s fees due.