03.02.2012 Confession of Judgment Provisions Poised to Become More “Bank Friendly”
It appears changes are on the way that will make it a little easier for banks and other creditors to confess judgment against defaulting debtors. A recent bill, passed by both the House of Delegates and the Senate, seeks to amend §8.01-435 of the Virginia Code to allow for a substitute attorney-in-fact to confess judgment against a defaulting debtor.
The Virginia Code currently requires all confession of judgment provisions to specifically identify the person or persons named as attorney-in-fact to confess judgment. Only those so named have authority to appear before the clerk and confess judgment against the debtor. Frequently, an officer of the lending bank is identified in the loan documents to perform this role.
Over the last several years, as loan defaults have been on the rise, banks increasingly have sought to exercise their rights to confess judgment. Problems have arisen when the bank officer listed as the attorney-in-fact was either not available or, worse, no longer with the bank. Unlike a trustee under a deed of trust, there is no provision in the Virginia Code that allows a bank to substitute a replacement attorney-in-fact. Under the current Virginia Code, if the attorney-in-fact named in a confession of judgment provision is no longer available, then, in essence, the confession of judgment provision becomes unenforceable.
With the passage of House Bill 648, this appears to be changing. If the bill is signed by the Governor and becomes effective, banks and other creditors will be able to replace the attorney-in-fact listed in a confession of judgment provision simply by filing a substitution instrument with the clerk’s office of the county or city where judgment is to be confessed. The replacement attorney-in-fact will have the same authority to confess judgment as the original attorney-in-fact. Going forward, confession of judgment provisions will need to include language notifying the debtor that the creditor has the right to replace the attorney-in-fact. If no notice language is included, then the proposed amendment requires the creditor to provide the debtor with notice of the replacement attorney-in-fact within ten days of filing the substitution instrument.
Interestingly, the language of the proposed amendment only grants the power to substitute an attorney-in-fact to the “payee, obligee, or person otherwise entitled to payment under any note or bond” (emphasis added). It is unclear whether the courts will interpret this provision to cover confession of judgment provisions in guaranties, letters of credit, and other loan documents.
Pending approval by Governor McDonnell, the amendment to the confession of judgment statute should go into effect on July 1, 2012.
For more information about this topic, please contact Ryan C. Kenrick, 804.420.6394 or email@example.com, or any member of the firm’s Financial Services & Real Estate Team.