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CONFESSION OF JUDGEMENT BY NIHIL DICIT
11/02/88 SUSSEX TRUST COMPANY v. CLIFTON CANNING
[1] SUPERIOR COURT OF DELAWARE, SUSSEX
[2] Judgment Docket 1988, No. 112, December Term, 1987
[5] THE SUSSEX TRUST COMPANY, A CORPORATION OF THE STATE OF DELAWARE, PLAINTIFF
v.
CLIFTON CANNING CO., INC., A CORPORATION OF THE STATE OF DELAWARE, AND W. DONALD CLIFTON AND ETHEL J. CLIFTON, HIS WIFE, AND ROBERT C. CLIFTON AND PHYLLIS CLIFTON, HIS WIFE, AND JAMES V. REED, JR. AND VERA C. REED, HIS WIFE, AND ETHEL C. GRAHAM, DEFENDANTS
[6] James F. Waehler, Esquire, Tunnell & Raysor, Georgetown, Attorney for Plaintiff.
[7] J. Robert Hitchens, Esquire, Moore and Hitchens, P.a., Georgetown, John Williams, Esquire, Schmittinger and Rodriguez, Dover and Eric Howard, Esquire, Morris, Nichols, Arsht & Tunnell, Georgetown, Attorneys for the Defendants.
[8] William B. Chandler, III, Judge
[9] The opinion of the court was delivered by: Chandler
[10] MEMORANDUM OPINION
[11] Decision After Hearing Under Superior Court Civil Rule 58.1
[12] WILLIAM B. CHANDLER, III, Judge
[13] Plaintiff Sussex Trust Company ("Sussex Trust") brought this action for entry of judgment by confession *fn1 against defendant Clifton Canning Company, Inc. ("the Company") and the individual defendants W. Donald Clifton and Ethel J Clifton, his wife, Robert C. Clifton and Phyllis Clifton, his wife, James V. Reed, Jr. and Vera C. Reed, his wife, and Ethel C. Graham. The defendants objected to the entry of judgment, requesting a hearing for a judicial determination whether they had intelligently waived their right to notice and hearing before judgment. 10 Del.C. § 2306(b). A hearing was held on September 28, 1988, followed by post-hearing memoranda from counsel.
[14] I. FACTUAL BACKGROUND
[15] The Company is a closely held Delaware corporation engaged in the business of canning and marketing vegetables grown in Kent and Sussex Counties. The individual defendants are shareholders, or spouses of shareholders, in the Company. At all relevant times to this action defendant W. Donald Clifton was president, James Reed and Robert Clifton were vice-presidents and Ethel Graham was secretary and treasurer of the Company. James Reed has worked in the Company since 1950, mostly in charge of sales and plant operations. Robert Clifton has been a vice-president and field manager for the Company since 1948. Donald Clifton has been in charge of all plant operations.
[16] Over the years, the Company's financing needs have been serviced primarily by Sussex Trust, and those needs have included, among other things, borrowing to finance maintenance and replacement of equipment, to acquire a canning factory in Queen Anne, Maryland, and to have capital necessary for ordinary operating expenses.
[17] In 1986 the Company borrowed $3,036,000 from Sussex Trust so that certain outstanding loans and mortgages held by the bank could be paid off, and any remaining funds could be used for operating capital. This 1986 loan was evidenced by three promissory notes, but only one of these notes, called the Promissory Master Note ("Master Note"), is at issue in this case. The Master Note was for the principal sum of $2,500,000, the largest single loan amount ever extended by Sussex Trust to the defendants. Security for the Master Note came from two sources. *fn2 First, the Company executed a mortgage covering 8 acres of land at its Milton plant site, together with a security agreement and financing statement applicable to all of the Company's personal property, equipment and fixtures. Second, the individual defendants were required to sign as personal guarantors, under a "guarantee" clause appearing on the reverse side of the Master Note. All seven individual defendants signed and, according to the Master Note, their signatures were witnessed by David Baker, Esquire, an attorney practicing in Georgetown. On the face of the Master Note, W. Donald Clifton and Ethel Graham signed for the Company in their official capacities as president and secretary respectively. The confession by judgment provision, appearing in very small print on the reverse of the Master Note and two paragraphs above the "guarantee" clause, provides as follows:
[18] "JUDGMENT BY CONFESSION.Obligor and the undersigned guarantors, if any, hereby agree that upon the occurrence of any of the foregoing events of default, Obligee or its successors, heirs, estates or assigns, may file its action for collection hereunder in the Courts of the State of Delaware, and if the plaintiff in such action shall recover judgment in any sum, such plaintiff shall also recover as reasonable counsel fees five percentum (5%) of the amount decreed for principal and interest, which said counsel fees shall be entered, allowed and paid as a part of the decree or judgment in such action, suit or proceeding; and the Obligor and the undersigned guarantors, if any, do hereby authorize and empower any Clerk, Prothonotary, or Attorney of any Court of Record in the United States of America or elsewhere to appear for them, their successors, heirs, estates or assigns at the suit of Obligee or its successors, heirs, estates or assigns on the above obligation, as of any term or time prior or subsequent to the date hereof, and thereupon to confess judgment for the principal sum of this Note, plus interest, cost of suit and counsel fees as above provided by Non Sum Informatus, Nihil Dicit or otherwise, with stay of Execution until the day of payment; and the Obligor and the undersigned guarantors, if any, do hereby for themselves and for their successors, heirs, estates or assigns, remise, release and forever quit claim unto the Obligee, its certain attorneys, successors, heirs, estates or assigns, all and all manner of error or errors, misprisions, misentries, defects and imperfections whatever in the entering of the said judgment, or any proceeding thereof, or thereto, or anywise touching or concerning the same. Obligor and the undersigned guarantors, if any, acknowledge being advised and understanding that by virtue of the foregoing: (a) they have waived all rights to notice and hearing prior to the entry of judgment against them; (b) the entry of such a judgment would result in a lien against all of their real estate; (c) in default of payment of all or any part of the principal sum or debt the sheriff might levy against their personal and real property and, ultimately, sell the same at public auction for credit against such sum or debt; and (d) in default of such payment, in appropriate cases, the sheriff might seize some portion of their wages for credit against such sum or debt. (Emphasis added).
[19] On July 22, 1986, two days before the Master Note was executed, the Company and the individual defendants executed a letter to Sussex Trust which provided as follows:
[20] Re: $2,500,000 Master Note from Clifton Canning Co., Inc.
[21] Dear Mr. Slatcher:
[22] "We, W. Donald Clifton, President of Clifton Canning Co., Inc., and Ethel Graham, Secretary, and W. Donald Clifton, Ethel J. Clifton, Robert C. Clifton, Phyllis Clifton, Ethel C. Graham, James V. Reed, Jr. and Vera C. Reed, individually, do hereby acknowledge the following repayment terms for the above referenced note payable to The Sussex Trust Company:
[23] The $2,500.000 loan shall be a line of credit evidenced by a master note from the borrower to The Sussex Trust Company. The note shall be repayable on demand. This loan shall be reduced to a zero balance for 30 consecutive days sometime during the calendar year. This requirement can be waived upon written approval of The Sussex Trust Company. This loan will be subject to review and renewal on an annual basis. The first review, however, will be October 1, 1986."
[24] The letter was signed by all seven individual defendants, as well as W. Donald Clifton and Ethel C. Graham in their official capacities for the Company. In a contemporaneous letter to Sussex Trust Mr. Baker offered a legal opinion (the "opinion letter") that the Master Note and various subsidiary loan documents were valid and binding obligations of the Company and the individual guarantors. In the first paragraph of his opinion letter, Baker indicated that he "acted as counsel" for Clifton Canning Co., Inc. and the seven individual guarantors in connection with the $3,036,000 loan.
[25] The transaction surrounding the Master Note was completed in July 1986. In an October 1987 letter ("the demand letter") *fn3 from Harold Slatcher, a senior vice-president of Sussex Trust, Donald Clifton was advised that the 1986 loan had been classified "substandard" by federal examiners. In light of that development, the bank was informing defendant Clifton Canning Company that the Master Note loan would have to be paid in full by December 31, 1987. The letter warned Donald Clifton that "you must either sell the Queen Anne plant, or equipment, or inventory to pay off the line of credit by December 31, 1987, . . . . . . the Executive Committee will . . . begin liquidation procedures." Slatcher's demand letter ended by offering to meet with Donald Clifton, Ethel Graham, Robert Clifton and James Reed to discuss the matter further. The letter indicated that copies had been sent to these individuals, but not to the other individual defendants.
[26] II. THE CONTENTIONS
[27] At the hearing the individual defendants insisted that Sussex Trust failed to carry its burden of showing that the defendants voluntarily, knowingly and intelligently waived their due process rights to notice and a hearing. See Mazik v. Decision Making, Inc., Del. Supr., 449 A.2d 202, 204 (1982) (citing D.H. Overmeyer Co., Inc. v. Frick, 405 U.S. 174 (1972)). Furthermore, some of the defendants argue that Sussex Trust is not entitled to a judgment by confession because it failed to make a proper demand for payment of the indebtedness evidenced by the Master Note and because no default occurred as the confession clause seems to require as a predicate for its invocation.
[28] Sussex Trust contends that the surrounding circumstances and common sense show that the defendants effectively waived their notice and hearing rights and that this contention is further supported by the knowledge of Mr. Baker, their attorney, whose knowledge the bank insists must be imputed to the defendants. Finally, Sussex Trust contends a proper demand for full payment was effectively Communicated to all the defendants and that, even were that not the case, no demand was necessary anyway under the terms of the Master Note.
[29] III. THE INTELLIGENT AND KNOWING WAIVER ISSUE
[30] The defendants and Sussex Trust have enjoyed a long, and for the most part, congenial business relationship. Harold Slatcher, the bank's vice-president, testified that the defendants have been customers of Sussex Trust for over 40 years. Slatcher has been personally involved in four different loan transactions between the bank and the defendants. He also noted that over the years some of the defendants have signed over a dozen notes containing judgment by confession clauses; indeed, all of the defendants have in the past signed at least three earlier Sussex Trust notes containing confession clauses.
[31] On July 26, 1986, a settlement meeting was held on the Master Note transaction in the office of Mr. Baker. Slatcher, Mr. Waehler (the bank's attorney), Mr. Baker, Donald Clifton and Ethel Graham were present. Because the defendants had signed similar notes in the past and because Slatcher believed Baker was acting as counsel for all of the defendants, neither Slatcher nor the bank's attorney reviewed the confession clause with defendants. The settlement meeting lasted about 30 minutes, although various conversations between Slatcher, Baker and several of the defendants took place over a period of two or three days before and after the settlement meeting. As noted above, Slatcher thought Baker represented the Company as well as the individual guarantors. No mention about the individual guarantors retaining their own counsel was made at the meeting on the 26th.
[32] Baker had represented the Company since 1977 or 1978. He did not recall reviewing the Master Note in much detail at the July 26 settlement meeting, attributing this to having handled several loan transactions between the defendants and the bank. Although the defendants had time to read the provisions of the Master Note, Baker could not specifically recall any of them doing so. He did recall telephone conversations with certain of the individual defendants in which they expressed reluctance about signing as personal guarantors because they were fearful about exposing their personal assets for a debt incurred by the Company. Nevertheless, Baker was aware of the confession clause, giving it his explicit legal blessing when he provided Sussex Trust with the July opinion letter. *fn4
[33] Of the individual defendants, only Donald Clifton and Ethel Graham were present in Baker's office on July 26 for the settlement meeting. The other individual defendants, according to Baker, stopped by his office at different times where he "assumed" that he witnessed their signatures. However, he admitted he did not discuss the terms of the Master Note with any of the defendants; nor did Baker show defendants a copy of his July 1986 opinion letter, although it was "possible" that Donald Clifton and Ethel Graham had seen the letter during the July 26 settlement meeting. Baker was aware that some of the defendants were concerned about the personal guarantee. Robert and Phyllis Clifton were also upset that Sussex Trust was insisting they execute a mortgage in favor of the bank on a farm they own in Kent County as additional security for the Master Note. Baker's recollection was that Robert and Phyllis Clifton's concern in this regard was relieved when Donald Clifton agreed to post additional property as collateral for the loan.
[34] Ethel Graham, who had been secretary-treasurer of the Company since 1948 until she retired in March 1988, testified that Baker never told her that he was acting as her attorney regarding the Master Note transaction. Nor did Baker advise her of the need or opportunity to retain her own counsel. Her only contact with Baker was to have him prepare a will for her almost two years ago. She had a vague recollection of the individual guarantee provision in the Master Note, but she did not recall Baker or anyone else explaining such a provision to her in earlier loan transactions with Sussex Trust. While admitting that she had time to read all of the Master Note's terms on the settlement date, she did not do so And although she did not recall specific conversations with Baker about the personal guarantee clause, her impression was that her signature on the Master Note was in her official capacity as an officer of the Company. In her view, any remedy the bank had for default was against the Company.
[35] James Reed, Jr., was not present when the note was signed in Baker's office on July 26. His best recollection was that he signed the Master Note at the factory. No one ever explained the confession clause to him. In his mind, the Master Note was simply the consolidation of several earlier loans or notes and his signature was needed, as it was in those earlier instances, as an officer of the corporation. He denied that Baker was acting as his personal attorney in connection with the Master Note transaction. Nor had Reed seen the opinion letter by Baker before or after he signed the Master Note. Reed also denied having seen the demand letter, even though it shows a copy mailed to him.
[36] Reed admitted that although he had not read the confession of judgment clause, he had had time to read it had he chosen to do so. He also admitted that he could have asked for an attorney to represent him and that he had signed promissory notes in the past that contained similar confession of judgment clauses. His wife, Vera Reed, testified similarly.
[37] Ethel Clifton testified that she probably signed the Master Note at her dining room table. Baker was not present when she signed, and she does not recall ever hearing an explanation of the confession clause. Nor does she recall seeing the October 1987 demand letter. She admitted, nevertheless, that she would have understood her personal liability if she had read the personal guarantee provision and she would have understood the confession clause had she taken the time to read it. She was aware that Phyllis Clifton and Robert Clifton had objected to executing a mortgage for Sussex Trust and that as a consequence, she and her husband, Donald, were required to provide the bank with additional collateral.
[38] Donald Clifton is the president of the Company. He admitted that he has read confession of judgment clauses before, but has not read such clauses every time he has borrowed money from the bank. Donald Clifton understood the meaning and legal import of the confession of judgment clause. He believed that Baker was acting as counsel for the Company on July 26th, although Baker did not discuss the confession of judgment clause or the legal significance of the personal guarantee provision. While Donald Clifton understood the legal significance of the confession clause and the personal guarantee, it was his belief or "hope" that the bank would deal with the Company in its customary fashion whereby it would permit the Company at the end of a bad year to renew the note in return for making additional payments when the Company experienced a good year.
[39] Donald Clifton vaguely recalled discussing the October demand letter with all of the other shareholders of the Company. He also believed that the shareholders had had one or more Discussions with Mr. Slatcher regarding the options available to the Company.
[40] Robert Clifton did not recall when he signed the Master Note, although it probably occurred somewhere in the Company's offices. Baker did not witness his signature and, according to him, did not review the terms of the note or describe either the confession of judgment clause or the personal guarantee clause. He and his wife, Phyllis Clifton, had never been represented personally by Baker. He admitted, however, that he had a chance to read the Master Note and he could have called Baker and questioned him about it had he chosen to do so. His wife, Phyllis, testified similarly. Furthermore, she remembered calling Baker about her concern over the bank's insistence that they mortgage their Kent County farm as additional collateral for the Master Note. Her recollection is that Baker asked if she would sign the Master Note if he "threw the mortgage in the trash." She inquired what effect such action would have on the bank's rights under the Master Note. According to her, Baker indicated that the bank would first have to proceed against the Company, its eight acres of land and other physical assets. With this assurance from Baker, Phyllis Clifton signed the Master Note. However, in order to be certain that Baker carried out his promise to destroy the mortgage,Phyllis Clifton sent her son, Robert Clifton II, to Baker's office for the July 26 settlement meeting so that he could verify the destruction of the mortgage. Phyllis Clifton testified that she did not know the meaning of a judgment by confession clause and no one ever explained such a clause to her.
[41] All parties agree that the burden of showing that the defendants knowingly, voluntarily and intelligently waived their notice and hearing rights is on the plaintiff. See Superior Court Civil Rule 58.1(d)(5) and 58.2(b)(4)(II). In my opinion, the plaintiff has not demonstrated a knowing and intelligent waiver by the individual defendants Ethel J. Clifton, Robert C. Clifton, Phyllis Clifton, Vera C. Reed, James V. Reed, Jr. and Ethel C. Graham. On the other hand, I am satisfied that W. Donald Clifton, both individually and on behalf of the corporation, understood all the terms of the Master Note including the confession by judgment clause.
[42] Sussex Trust has forcefully argued that the totality of the circumstances in this case suggest that the defendants understandingly waived their rights to notice and a hearing before entry of judgment on the Master Note. Viewed in the context of the long history of financial dealings between the bank and the defendants, the existence of several earlier promissory notes between the parties which also included confession by judgment clauses, the informal and almost cavalier manner with which the defendants of their own accord treated this transaction, the involvement of Mr. Baker and the defendants' opportunity to have Mr. Baker more thoroughly review the terms of the Master Note or to retain their own attorney for that purpose, it is very easy to believe that the defendants understood the rights they were waiving.
[43] But the inquiry this Court must undertake is necessarily subjective. Each of the individual defendants testified at the hearing. Although I am struck by the casual attitude of individual debtors in connection with substantial loan transactions, I nevertheless find the defendants' testimony believable. With the exception of W. Donald Clifton, each defendant testified without contradiction that he or she did not read the judgment by confession clause before signing the Master Note, did not recall having the clause discussed with them by Baker or anyone else, and did not know when they signed the Master Note that they were waiving their rights to notice and a hearing before entry of judgment.
[44] One can perhaps understand the defendants' casual approach to this transaction when viewed in light of the history of informal financial dealings between the defendants and Sussex Trust. With the involvement of Mr. Baker over the years as the attorney for the Company it is equally understandable that the bank assumed the defendants had been made aware of the terms of the Master Note. But in whatever sense judgment by confession clauses are bargained for terms in a loan transaction, it is incumbent upon all of the bargaining parties to take the necessary steps to ensure that the terms are read and understood at the time the transaction is entered. Because I am not convinced Sussex Trust has demonstrated that the six individual defendants earlier mentioned possessed the requisite knowledge and understanding, entry of judgment as to them must be denied and they must be allowed a trial on the merits during which they will have an opportunity to present their defenses to plaintiff's claim. With regard to Clifton Canning Co., Inc. and W. Donald Clifton, individual guarantor, the totality of circumstances convinces me that they understood they were waiving their right to defend against entry of judgment by virtue of the judgment by confession clause. Accordingly, as to Clifton Canning Co., Inc., obligor, and W. Donald Clifton, personal guarantor, the tentative judgment is made permanent.
[45] IV. THE IMPUTATION OF KNOWLEDGE ISSUE
[46] Sussex Trust has argued that the knowledge of Mr. Baker regarding the judgment by confession clause should be imputed to the individual defendants. I need not reach that legal issue, however, as I am of the opinion that Mr. Baker did not represent the individual defendants in this case. All of the defendants testified that Mr. Baker did not represent them in their individual capacities. A few of the defendants had retained Mr. Baker on other matters both before and after the signing of the Master Note, but these attorney-client relationships were discrete and separate from the Master Note transaction. Mr. Baker testified at the hearing that he believed he represented Clifton Canning Co., Inc. Sussex Trust points to Mr. Baker's opinion letter in which he states he acted as counsel for the Company as well as the individual guarantors. However, the opinion letter is a form letter required by the bank for all loan transactions over $100,000. It appears very doubtful that any of the individual guarantors, except W. Donald Clifton and perhaps Ethel Graham, ever saw Mr. Baker's opinion letter. Considering the consistent testimony of the individual guarantors on this issue and the absence of any other credible evidence in the record to the contrary, I find that David W. Baker was not acting as the attorney for the individual guarantors.
[47] V. THE DEMAND ISSUE
[48] The Company challenges the bank's confession effort on the theory that a proper demand has not been made for payment of the indebtedness due under the Master Note. It also argues that the terms of the judgment by confession clause require proof of a default as defined in the "Events of Default" provision. In this case, the Company contends no default occurred so as to trigger Sussex Trust's right to enter judgment by confession.
[49] Sussex Trust counters that the Master Note is a demand note and that the October 13, 1987, letter from Slatcher to the corporation constituted a proper demand upon the corporation and the individual defendants. Even if Slatcher's October 13 letter was not a proper demand, Sussex Trust contends no demand was necessary because of the language of the note and its demand nature. Specifically, Sussex Trust notes that under the "events of default" paragraph the note is in default "upon default in payment or performance of any obligation . . . contained or referred to . . . in the letter agreement" (referring to the July 22, 1986, letter from defendants to the bank.)
[50] The Master Note is a demand note and by its terms the defendants specifically waived demand as a prerequisite to enforcement. Furthermore, under the "events of default" paragraph the defendants defaulted when they failed to make payment in full as demanded by Slatcher's October 13, 1987 letter. Failure to comply with the terms of the demand letter was an "event of default" that triggered the bank's right to seek the entry of judgment by confession. Accordingly, defendants' argument on this point is without merit.
[51] VI. CONCLUSION
[52] Judgment by confession is entered and made permanent against defendants Clifton Canning Co., Inc. and W. Donald Clifton. Entry of judgment is denied as to the other individual defendants and they will be afforded a trial on the merits and an opportunity to present their defenses to plaintiff Sussex Trust's claims. Counsel for Sussex Trust shall submit an amended affidavit for attorneys fees within 15 days from this Memorandum Opinion. Defendants shall have 10 days thereafter to file any response they deem necessary. An Order consistent herewith has been entered.
[53] ORDER
[54] For the reasons set forth in this Court's Memorandum Opinion entered in this case on this date, it is
[55] ORDERED
[56] (1) That the judgment by confession in this cause is made permanent as to defendants Clifton Canning Company, Inc. and W. Donald Clifton.
[57] (2) That the application to make the judgment by confession permanent as to defendants Ethel J. Clifton, Robert C. Clifton, Phyllis Clifton, James V. Reed, Jr., Vera C. Reed and Ethel C. Graham, is denied.
Opinion Footnotes
[58] *fn1 See 10 Del.C. § 230(c) and Superior Court Civil Rule 58.1.
[59] *fn2 A "third" source of security involved certain properties owned by the individual defendants on which Sussex Trust required mortgages to be executed in its favor.
[60] *fn3 For ease of reference, this letter shall be called the "demand letter", as that is how it has been characterized by the plaintiff in this action. However, some of the defendants forcefully argue that the language of the letter cannot reasonably be read as a demand that the defendants reduce the 1986 loan to a zero balance.
[61] *fn4 Slatcher testified that the bank requires such opinion letters in all loan transactions over $100,000.
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When a statute, code, or court holding changes tomorrow, does reality change? Does truth change? Does right and wrong change?
If so, there are no absolutes, and the only logical conclusion is that reality, truth, and right and wrong are determined arbitrarily on a daily basis by those with the most power, guns, and money, and the rest of us can choose to run, fight, or be their slaves.
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