July 2013 – Creditors Rights 101

Confessions of Judgment aren’t Valid in Tennessee: Here’s Why

All kinds of search terms lead visitors to this site. I routinely look at them, because it’s a great insight into what creditor rights issues people want to learn about. (And, sometimes, it’s pretty funny.)

A common query is whether confessions of judgments are valid in Tennessee. Frankly, after nearly 15 years of practice in Tennessee, I’ve never dealt with a confession of judgment, so, as a practical matter, I don’t think they are valid in Tennessee. But, recently, I actually came across the answer.

As background, a confession of judgment is a contract provision (or a stand-alone contract) in which one party agrees on the front-end of a transaction to let the other party enter a judgment against him if the deal goes bad. You agree, in advance and before any default or dispute arises, that the other party can get a judgment, even without a lawsuit pending and despite any legitimate defenses that may ultimately exist.

You can imagine why a creditor would include such a provision in their contracts.

Tennessee doesn’t allow such provisions. Tenn. Code Ann. § 25-2-101(a) says:

Any power of attorney or authority to confess judgment which is given before an action is instituted and before the service of process in such action, is declared void; and any judgment based on such power of attorney or authority is likewise declared void.

But, an agreement to allow a judgment may be allowed after a lawsuit is filed and after the party is served (when, it would be assumed, the party has received due process of the law and the issues are defined). § 25-2-101(b) says:

This section shall not affect any power of attorney or authority given after an action is instituted and after the service of process in such action.

So, even though Confessions of Judgment are not valid in Tennessee at the time of the contract, such provisions will be enforceable after the filing of the lawsuit, such as in a forbearance or settlement agreement.

Sworn Accounts Under Tennessee Law: Why, When, and How?

Sometimes, a creditor’s lawyer will file an action against a borrower as a “sworn account.” These are basically lawsuits on steroids, but they aren’t as common as you’d expect.

This device is allowed by Tenn. Code Ann. § 24-5-107, titled “Sworn accounts; denials,” which states that an action that is filed “with the affidavit of the plaintiff or its agent to its correctness…is conclusive against the party sought to be charged, unless that party on oath denies the account…” There’s an exception under § 24-5-107(b), that allows a court to accept an oral denial of the sworn account.

The reason behind sworn accounts is to make the debt collection process easier, especially on debts where there is no dispute. It shifts the burden of denial to the defending party.

Some courts treat these like a “procedural trap;” faced with a properly authenticated and sworn account, the defendant who doesn’t present a proper sworn response will automatically lose. One Court has said: “[t]he statute is quite clear that in the absence of a sworn denial the plaintiff is entitled to judgment on the sworn account.”

But, when a sworn denial is filed, the burden shifts back to the plaintiff to support his claims with actual evidence at the trial, i.e. the sworn account becomes a moot point.

So, when and why would you proceed on a sworn account?

Primarily, I file them when I’m before courts that don’t have a “free continuance” Local Rule, like Davidson County. That way, if I show up and have my witness with me at court, I’ve got some proof of my claims with a sworn account.

Some lawyers file them hoping to set the procedural trap, hoping the other side will neglect to file a “Sworn” Answer, but that seems sneaky (but, it’s supported by the caselaw).

Other than the extra step involved (preparing and filing an Affidavit), there’s not any downside to proceeding with a Sworn Account.

New Opinion Analyzes Common Defenses to Domestication of Foreign Judgments in Tennessee

A good rule of thumb in Tennessee is that a valid foreign judgment will be enforceable here, provided the plaintiffs comply with the procedural requirements of Tennessee Code Annotated § 26-6-101, et seq.

A new Tennessee Court of Appeals opinion, in Bancorpsouth Bank v. David J. Johnson, et. al. (July 16, 2013), examined both the general law, as well as the potential defenses to domestication. This is a good case to know, since it reviews all aspects of the foreign judgment enrollment process.

First, it presents the three “standard” defenses to domestication:

a forum state may decline to accord full faith and credit to the judgment or public act of another state if it is (1) void due to a lack of personal or subject matter jurisdiction, (2) based upon fraud, or (3) “where enforcement of the judgment would violate the public policy of the forum state.” … Tennessee courts have recognized and adopted all three of these exceptions. … (citations omitted)

These defenses aren’t easy to establish, and the Court notes “a party who seeks to show that a foreign judgment should not be enforced in Tennessee must meet a ‘stern and heavy‘ burden.”

Most attacks on a foreign judgment are under Defense No. 1 (that the judgment is void); this new case is interesting in that is that the Court provides a good analysis of Defense Nos. 2 and 3 (which no other case that I’ve seen has done).

Defense No. 2, Fraud: “[T]o deny full faith and credit on the basis of fraud, there must be allegations of extrinsic fraud, that is, fraud that is collateral to questions which were either determined or which could have been determined in the underlying action. Extrinsic fraud is contrasted with intrinsic fraud, which pertains to an issue involved in the underlying action or where the acts allegedly constituting fraud were or could have been litigated…”

“‘[E]xtrinsic fraud ‘consists of conduct that is extrinsic or collateral to the issues examined and determined in the action,’. . . while intrinsic fraud is fraud within the subject matter of the litigation, such as forged documents produced at trial or perjury by a witness.”

An example of extrinsic fraud is a party lying to the other party about the court date or committing some fraud regarding the litigation (something beyond the allegations of the lawsuit). Intrinsic fraud would be some fraud related to or contained in the allegations of the lawsuit, such as a fraudulent signature on the note at issue.

Defense No. 3, Public Policy: “Under the public-policy exception to full faith and credit, “Tennessee courts are not obligated to give full faith and credit to any judgment of a state which we hold to be violative of Tennessee’s public policy or the Federal Constitution.”

This is rare, however: “The principle of giving full faith and credit to the judgments of sister states will “almost invariably” outweigh the interest of an individual state; the public-policy exception to full faith and credit is applied only on ‘extremely rare occasions.'”

While the Court doesn’t provide examples, the Defendants’ argument is illustrative. Here, they argued that the foreclosure that resulted in the deficiency balance at issue in the lawsuit was improper, and it was an issue that Tennessee has a defense for, under Tenn. Code Ann. § 35-5-118.

The Court saw this as an improper attempt to re-litigate potential defenses under the underlying judgment, not some public policy that rendered the out-of-state judgment unenforceable.

Most cases cite the three major defenses, and this new opinion is significant because it provides helpful analysis of what constitutes those defenses.