I get 6 calls a year from out-of-state clients, asking me to file a lawsuit to enforce a confession of judgment contained in their out-of-state loan documents.
It’s been happening so long that, for the past 7 years, I just send them a link to this post “Confessions of Judgment aren’t Valid in Tennessee: Here’s Why.”
Some background: A confession of judgment is a provision in a loan or an entirely separate loan document that grants, at the time the loan is signed, the lender an unequivocal right to take a judgment for the debt under that note in the event of a breach, sometimes without the right to notice of the suit, a hearing, or any defenses. In short, when you sign the loan documents, you also sign an agreed judgment for the unpaid debt in advance. This is a device that is sometimes used by predatory lenders–lenders “of last resort,” who serve desperate borrowers and expect the loans to go bad.
Tennessee law expressly prohibits judgments based on confessions of judgment. 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.
Couldn’t be more clear, right? Well, what happens when a New York creditor takes a judgment in New York (where it’s valid) based on a confession of judgment and asks a Tennessee court (where it’s not) to recognize it as valid and enforceable, under the Uniform Enforcement of Foreign Judgments Act?
Doesn’t the statute say “any judgment” based on a confession of judgment is “declared void”?
It’s an interesting question, and, yesterday, the Tennessee Court of Appeals issued the first opinion ever deciding this issue. The case is Capital Partners Network OT, Inc. v. TNG Contractors, LLC, et al. AL., No. M202000371COAR3CV, 2020 WL 6708232 (Tenn. Ct. App. Nov. 16, 2020).
The opinion provides a great background on defenses to the UEFJA and goes on to note that, under the Full Faith and Credit Clause of the United States Constitution, every state must respect the judgments and sovereignty of its sister states, and that a state would be “reluctant” to question another state’s judgments on public policy concerns and only after the defendant satisfies a “stern and heavy burden.”
In order to deny another state’s judgment, then, it’s got to be a really, really big deal, and the words the Court used was “repugnant to the Federal Constitution.”
When discussing a judgment based on a confession of judgment or cognovit note, the Tennessee courts will look to whether the loan document “denies the debtor due process of law.” A question is whether there was a “voluntary and knowing waiver of the fundamental due process notice and a hearing.”
In the end, the Court wrote that “a foreign money judgment resulting from a cognovit note or clause that was entered into with a knowing, voluntary waiver of the right to notice and an opportunity to be heard must enjoy full faith and credit in Tennessee.” So, a small-print provision hidden in a loan note will not satisfy this test, but a separate document that clearly and prominent states the purpose of the document and the rights being waived will suffice.
Again, to be clear, this doesn’t mean that the Tennessee court will enter a judgment based on the out-of-state confession of judgment. Tenn. Code Ann. § 25-2-101(a) doesn’t allow that.
Instead, this case says that, if a creditor has a confession of judgment and is smart, the creditor will take a judgment in the other state (where these types of judgments are allowed), and then hire a Tennessee creditors rights attorney to enroll and domesticate this foreign judgment.