NSR, LLC v. BURNT MILL ASSOCIATES

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-0

6501 NSR, LLC, assignee

of Susquehanna Bank,

Plaintiff-Respondent,

v.

BURNT MILL ASSOCIATES,

WOODLANE ASSOCIATES, LP,

GEORGE M. DIEMER, FIRST

PHILADELPHIA HOLDINGS, LLC,

Defendants-Appellants.

_______________________________

October 24, 2014

Before Judges Lihotz, Espinosa and Rothstadt.

On appeal from the Superior Court of New Jersey, Law Division, Burlington County, Docket No. DJ-13164-12.

Mark S. Kancher argued the cause for appellants (The Kancher Law Firm, LLC, attorneys; Mr. Kancher, on the briefs).

Francis X. Manning argued the cause for respondent (Stradley Ronon Stevens & Young, LLP, attorneys; Mr. Manning, of counsel and on the brief; Julie M. Murphy, on the brief).

PER CURIAM

Defendant First Philadelphia Holdings, LLC (FPH) incurred several commercial loan obligations to lender Susquehanna Bank,1 for the purchase and environmental remediation of property located in Philadelphia, Pennsylvania. FPH's debts were guaranteed by defendants Burnt Mill Associates (Burnt Mill), Woodlane Associates, L.P. (Woodlane), and George M. Diemer (collectively, defendants). All agreements were executed in the Commonwealth of Pennsylvania. FPH's default triggered cognovit clauses included in the notes and guarantees, allowing plaintiff to obtain a judgment against FPH and defendant guarantors in the Philadelphia County Court of Common Pleas (Pennsylvania judgment).

After defendants exhausted all rights of appeal, plaintiff filed an action to register the Pennsylvania judgment in New Jersey. Defendants challenged the enforceability of the Pennsylvania judgment, arguing confessed judgments cannot be enforced in New Jersey because they are unconstitutional and violate the clear public policy of our state. Alternatively, defendants argued they were entitled to a credit against the Pennsylvania judgment in an amount equal to the fair market value of the realty FPH provided as security.

Judge M. Patricia Richmond reviewed and rejected defendants' arguments, denying their motion. She concluded the Pennsylvania judgment was entitled to full faith and credit as defendants were afforded all process they were due. Further, she found the Law Division lacked jurisdiction to alter the amount of another state's judgment presented for registration and any question regarding the amount of the judgment rests with the originating court. We concur with Judge Richmond's legal analysis and affirm.

The facts are not disputed. Plaintiff requested judgment as permitted by a confession of judgment clause contained in the note executed by FPH on August 8, 2005.2 The clause stated

CONFESSION OF JUDGMENT. MAKER DOES HEREBY AUTHORIZE AND EMPOWER THE PROTHONOTARY, CLERK OF COURT OR ANY ATTORNEY OF ANY COURT OF RECORD OF THE COMMONWEALTH OF PENNSYLVANIA OR ELSEWHERE, AFTER AN EVENT OF DEFAULT . . . TO WAIVE ISSUANCE AND SERVICE OF PROCESS AND ALL OTHER NOTICE AND TO APPEAR FOR AND CONFESS JUDGMENT AGAINST MAKER AND IN FAVOR OF PAYEE, ITS SUCCESSOR AND ASSIGNS, AS OF ANY TERM, PAST, PRESENT OR FUTURE, WITH OR WITHOUT DECLARATION . . . .

As replicated here, the provision was bolded and in uppercase characters, distinguishing it from other provisions within the document. FPH also executed a document entitled "Explanation and Waiver of Rights Regarding Confession of Judgment," which recited the note's inclusion of the cognovit provisions and their implication, including the waiver of notice prior to the entry of judgment upon default. The document's provisions stated

1.2 Indemnitor is giving up an important right to any notice or opportunity for a hearing before the entry of this [confessed] judgment on the records of the Court;

. . . .

3. Fully and completely understanding the rights which are being given up if Indemnitor signs [this agreement] containing the confession of judgment clause, Indemnitor nevertheless freely, knowingly and voluntarily waives said rights and chooses to sign the Note.

The Mortgage granting plaintiff a security interest in FPH's realty also included a confession of judgment for possession provision. As with the Note, the Mortgage referenced the confession of judgment clause in an acknowledgment section directly preceding the borrower's signature. A consent guarantee and suretyship agreement, also containing a confession of judgment and warrant of attorney clause, along with the acknowledgement identifying the clause, appeared immediately above the guarantors' signatures.3 FPH and defendants defaulted on payment on January 1, 2011.

Plaintiff's complaint filed in the Court of Common Pleas, Philadelphia County, sought judgment for all unpaid principal, interest, penalties and permissible costs, without notice to defendants. Entered on April 6, 2011, the judgment, along with a writ of execution and other forms to contest the judgment, were served upon defendants. Defendants exercised their right to petition to open and strike the judgment. Defendants' petition was denied on October 4, 2011.4 Defendants appeal from that order was unsuccessful as the Pennsylvania Superior Court affirmed the Court of Common Pleas order denying the petition to open the judgment.

To pursue collection, plaintiff registered the Pennsylvania judgment in New Jersey. Defendants moved to vacate the judgment, arguing the Pennsylvania judgment was unconstitutionally unenforceable in New Jersey because it was entered without compliance with procedural due process. Further, defendants asserted cognovit provisions are void, as a matter of New Jersey public policy. Alternatively, if determined enforceable, defendants sought a credit against the judgment in the amount of the fair market value of the Philadelphia realty, which was security for the underlying debt.

Following review, Judge Richmond denied the motion. Attached to her April 16, 2013 order, the judge included a written tentative disposition, setting forth her findings and conclusions. Citing Tara Enterprises, Inc. v. Daribar Management Corporation, 369 N.J. Super. 45, 56 (App. Div. 2004), Judge Richmond held defendants' post-judgment notice and opportunity for a hearing satisfied due process, defeating their full faith and credit challenge. Next, Judge Richmond noted the court's jurisdictional authority was circumscribed by N.J.S.A. 2A:49A-27, limiting its role to enforcement of a properly entered foreign judgment. This appeal ensued.

Defendants renew the arguments presented to the Law Division before us. The issues on appeal require legal determinations, subject to our de novo review. In doing so, we do not defer to "'[a] trial court's interpretation of the law and the legal consequences that flow from established facts[.]'" Estate of Hanges v. Metro. Prop. & Cas. Ins. Co., 202 N.J. 369, 382 (2010) (quoting Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995)).

Whether the Pennsylvania judgment must be registered in New Jersey implicates the Full Faith and Credit clause of the United States Constitution, which mandates "[f]ull Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State." U.S. Const. art. IV, 1. Any judgment that is properly executed in a foreign state and does not violate the due process clause is entitled to full faith and credit in New Jersey. In re Triffin, 151 N.J. 510, 524 (1997). However, foreign judgments, entered without providing those protections safeguarded by the Fourteenth Amendment of the United State Constitution and the fundamental rights clause of Article 1, paragraph 1 of the New Jersey Constitution, may not be enforced. See e.g., Greenberg v. Kimmelman, 99 N.J. 552, 568 (1985) ("[A]rticle 1, paragraph 1, like the [F]ourteenth [A]mendment, seeks to protect against injustice and against the unequal treatment of those who should be treated alike. To this extent, [A]rticle 1 safeguards values like those encompassed by the principles of due process and equal protection.").

When viewed in the light of due process rights, a foreign judgment is not entitled to full faith and credit in New Jersey if a defendant demonstrates the forum state lacked personal or subject matter jurisdiction, Tara Enter., supra, 369 N.J. Super. at 56, or if a defendant was denied adequate notice and a reasonable opportunity to be heard. Sonntag Reporting Serv., Ltd. v. Ciccarelli, 374 N.J. Super. 533, 538 (App. Div. 2005). "[A]bsent such due process defenses, [] litigation pursued to judgment in a sister state is conclusive of the rights of the parties in the courts of every state as though adjudicated therein." Ibid. (citing DeGroot, Kalliel, Traint & Conklin, P.C. v. Camarota, 169 N.J. Super. 338, 343 (App. Div. 1979)). See also Arnold, White & Durkee, P.C. v. Gotcha Covered, Inc., 314 N.J. Super. 190, 201 (App. Div. 1998) (stating New Jersey courts are "obliged to recognize a foreign money judgment, unless the defendant demonstrates that the foreign jurisdiction lacked personal jurisdiction of defendant, the judgment was obtained by fraud or was entered contrary to due process").

The Commonwealth's procedure to confess judgment empowers the Prothonotary to enter judgment by confession against a defaulted debtor upon filing a complaint supported by proof of an agreement allowing a confession of judgment signed by an attorney. Pa. R. Civ. P. 2951. A creditor's attorney may sign on a defendant's behalf. Pa. R. Civ. P. 2955(b). Once judgment is entered, "[a]t least thirty days prior to the filing of . . . a writ of execution[,]" the creditor must serve the debtor with written notice of entry of judgment and provide the requisite form to petition to open or strike the judgment. Pa. R. Civ. P. 2958.1(a). See also Pa. R. Civ. P. 2956.1(c)(2). Once notice is received, relief may be sought by petition to strike or open the judgment. Pa. R. Civ. P. 2959(a). See also Pa. R. Civ. P. 2971 (stating the procedure for commencement of an action for confession of judgment for possession of real property).

Defendants attack the above procedures, arguing a foreign judgment entered without notice and the opportunity to be heard is void as unconstitutional in New Jersey. Further, defendants argue confessed judgments violate New Jersey's public policy. Although confessed judgments are viewed with "judicial distaste" in New Jersey, Ledden v. Ehnes, 22 N.J. 501, 510 (1956), constitutional and public policy challenges against their enforcement have been advanced and found legally untenable. See United Pac. Ins. Co. v. Estate of Lamanna, 181 N.J. Super. 149, 155-56 (Law Div. 1981) (citing Hazel v. Jacobs, 78 N.J.L. 459 (E&A 1910)). "New Jersey courts have long recognized foreign judgments by confession and have held that they are entitled to full faith and credit. . . . No public policy [in New Jersey] denies recognition to a foreign judgment by confession." Ibid. Rather, the law is clear: "Entry of judgment based upon a warrant to confess judgment does not, . . . necessarily offend due process, as long as the due process requirements of reasonable notice and opportunity to be heard are knowingly and voluntarily waived." Tara Enter., supra, 369 N.J. Super. at 56 (citing Lamanna, supra, 181 N.J. Super. at 156). See also D.H. Overmyer Co. v. Frick Co., 405 U.S. 174, 187, 92 S. Ct. 775, 783, 31 L. Ed. 2d 124, 135 (1972) (holding confessed judgments are "not[] per se[] violative of the Fourteenth Amendment due process" protections, as reasonable notice and opportunity to be heard could be waived).

Here, fully complying with process requirements, the notes executed by FPH and guaranteed by defendants contain very clear and prominent cognovit provisions mandating voluntary waiver of notice prior to entry of judgment. Defendants unmistakably affixed their consent to this process when they signed the waiver, the surety and all other accompanying documents.

It is well settled that a personal judgment may be rendered against one who is neither served with process in the state nor domiciled in nor a citizen of the state if he consents to jurisdiction over him. Consent may be given in advance of the controversy, and if the terms of the consent are met, the judgment is binding and entitled to full faith and credit.

[Battle v. Gen. Cellulose Co., 23 N.J. 538, 546 (1957).]

Reinforcing that the waiver was voluntary and knowledgeable, we observe FPH and the guarantors were represented by counsel and, during this arms-length transaction, were made aware of the significance of the note and of the cognovit provisions by certain terms within the documents. In exchange for the agreement, FPH and the guarantors received consideration. As Judge Richmond found, defendants were "sophisticated commercial entities who knowingly and repeatedly signed valid confessions of judgment as part of the real estate closing."

Also, once judgment was entered, the Commonwealth's procedures employ a post-judgment appeal process to challenge jurisdiction or show the invalidity of the waiver provisions, before execution is finalized against a defendant's property. Amended in 1996 to specifically cure any due process deficiency, Pa. R. Civ. P. 2958.1(a) provides, "[a] written notice . . . shall be served on the defendant at least thirty days prior to the filing of the praecipe for a writ of execution." The intent of this amendment was "to limit the necessity for hearings on issues of due process and waiver by providing the defendant with a pre-deprivation notice and opportunity for hearing on the merits." Pa. R. Civ. P. 2958.1, explanatory cmt. (1996).

Here, the Pennsylvania courts were available to defendants to challenge the enforceability of the judgment by confession, and the opportunity to vacate the judgment was exercised by defendants. During the post-judgment hearings, defendants challenged the validity of the waiver and raised other defenses. These postliminary protections fully satisfied due process requirements. Tara Enter., supra, 369 N.J. Super. at 56 (stating that "[i]n certain contexts, a post-judgment hearing may afford the requisite due process.") (citation omitted). See also D.H. Overmyer, supra, 405 U.S. at 188, 92 S. Ct. at 783, 31 L. Ed. 2d at 135 (suggesting due process requirements of notice and hearing could be satisfied if appropriate post-judgment remedies were afforded).

Next, defendants, citing Rule 4:45-1, maintain confession of judgment procedures violate New Jersey's public policy and, therefore, such judgments must not be enforced. Rule 4:45-1 provides, "[a] judgment by confession shall not be entered upon a warrant of attorney which is included in the body of a bond or other instrument for the payment of money." See Pressler & Verniero, Current N.J. Court Rules, comment 1 on R. 4:45-2 (2014) ("The practice of ex parte entry of judgment by confession has been in disrepute in this State for almost 150 years."). We conclude this argument lacks merit because it not only ignores the legal authority previously discussed addressed to the Full Faith and Credit Clause, it also misconstrues the express language of the court rule.

By its provisions, Rule 4:45-1 prohibits the use and entry of confessed judgments in New Jersey. It does not alter the procedures or process adopted and enforced in our sister states. This is a critical distinction ignored by defendants. Rule 4:451 does not affect the registration of valid judgments entered in another state.

Also, pointing to the Uniform Enforcement of Foreign Judgments Act (the "UEFJ"), N.J.S.A. 2A:49A-27, which states a foreign judgment shall be treated "in the same manner as a judgment of the Superior Court of this State," defendants contend public policy forbids the registration of cognovit judgments in New Jersey. We disagree.

The Supreme Court of the United States has recognized that "there are some limitations upon the extent to which a state may be required by the full faith and credit clause to enforce even the judgment of another state in contravention of its own statutes or policy[.]" Nevada v. Hall, 440 U.S. 410, 422, 99 S. Ct. 1182, 1189, 59 L. Ed. 2d 416, 426 (1979). This principle, however, is inapplicable as New Jersey courts fully recognize judgments entered pursuant to confession clauses, as long as pre-judgment rights are voluntarily waived and compliance with pre-judgment procedures is scrupulous.

Finally, we note under the UEFJ, defendants' claims for an offset are rejected. We repeat our holding in Sonntag

N.J.S.A. 2A:49A-27 is part of the UEFJ. This section, . . . provides that a foreign judgment docketed in New Jersey "has the same effect and is subject to the same procedures, defenses and proceedings for reopening, vacating, or staying as a judgment of the Superior Court of this State and may be enforced in the same manner." [Defendant] contends that this statute permits the reopening of a foreign judgment in order to raise any defense. However, the UEFJ was designed merely as a facilitating device and was not intended to alter any substantive rights of the parties in an action for enforcement of a foreign judgment. Therefore, the constitutional right of a judgment creditor to enforcement of the judgment in a sister state, as guaranteed by the full faith and credit clause, is not curtailed by operation of N.J.S.A. 2A:49A-27.

We conclude that, to the extent N.J.S.A. 2A:49A-27 suggests [] New Jersey courts can vacate a foreign judgment on the same grounds as a New Jersey judgment, it is inconsistent with the full faith and credit clause. However, we construe the language of N.J.S.A. 2A:49A-27 as being harmonious with the full faith and credit clause.

The focus of the UEFJ is the enforcement of judgments. Thus, it applies to defenses to the enforcement of a foreign judgment, i.e., accord, satisfaction, release, voidness, or discharge. Consistent with N.J.S.A. 2A:49A-27, the same principles and procedures are used to apply these defenses to the enforcement of New Jersey and foreign judgments. However, merit or substantive defenses, i.e., those that could have been raised prior to entry of judgment, are not addressed by N.J.S.A. 2A:49A-27. Litigants seeking to assert merit defenses, other than due process defenses, must do so in the forum state.

[Sonntag, supra, 374 N.J. Super. at 539-40 (citations and footnote omitted).]

In summation, the record before us offers no evidence defendants were denied appropriate due process defeating the registration of the judgment in this state. Moreover, any challenge to the substance of the judgment entered must be presented to the court in Pennsylvania.

Affirmed.

1 The initial lender was Patriot Bank, which was acquired by Susquehanna in 2008. Also, on May 31, 2013, following the entry of the order now challenged on appeal, Susquehanna assigned all of its rights, title and interest in, to and under the lending instrument subject to the confessed judgment, to 6501 NSR, LLC. Our April 3, 2014 order granted the motion to amend the caption, designating 6501 NSR, LLC as the plaintiff. For ease, we do not distinguish between 6501 NSR, LLC and Susquehanna, referring interchangeably to either entity as plaintiff.

2 On March 29, 2006, FPH executed loan modification agreements increasing the debt amount and extending the time of repayment.

3 These also contained confession of judgment clauses and borrowers and guarantors acknowledged the nature of the clause and, upon default, waived notice prior to entry of judgment. All documents extending repayment contained similar confession of judgment clauses.

4 We note, a writ of execution was issued and sheriff's sale of the Philadelphia realty was scheduled. FPH filed a voluntary petition in Bankruptcy, staying the sale.