Billingsley v. Lincoln National Bank

⁶⁸⁴ Levine, J., delivered the opinion of the Court. This appeal is from an order of the Circuit Court for Montgomery County (Cahoon J.) denying appellants’ motion to vacate a judgment by confession entered against them in the sum of $45,272.81 plus attorney fees in the amount of $6,795.92 and court costs. No evidence was presented at the hearing on the motion, the parties confining themselves to argument by counsel and the subsequent filing of memoranda. The instrument out of which this dispute arises is a promissory note executed by “Hasco Corporation” at Philadelphia, Pennsylvania on June 12, 1970, which authorized the confession and entry of judgment against the maker in favor of appellee at any time after it became due.

The note contained the usual panoply of waivers, frequently found in such instruments, which we need not recite here. Appellants signed the note as endorsers, and also expressly guaranteed payment and submitted to the authorization for confession of judgment. Following a default by the maker and an unsuccessful demand for payment upon appellants, appellee filed this suit. The grounds relied upon by appellants for attacking the judgment below are contained in their motion to vacate.

There, appellants took the position — with the concurrence of appellee — that the substantive law of Pennsylvania applied to this case. On that premise, appellants challenged the Pennsylvania procedure as an unconstitutional denial of procedural due process under the Fourteenth Amendment. The remaining points raised below were of a substantive nature, viz: That the note did not comply with Pennsylvania law in that the amount due was not clear from the face of the instrument, and the subject note was intended as collateral for the payment of another note; therefore, until it was ascertained whether collection of the latter was effected, appellants were not liable under their obligation. In denying appellants’ motion, the trial judge merely “concluded that there has not been established substantial and sufficient grounds for an actual controversy as to the merits of the case.” ⁶⁸⁵ In something of a volte-face, rather than challenging the Pennsylvania law, appellants now question the constitutionality of Maryland Rule 645 which governs the procedure to be followed in this state where judgments by confession are entered. 1 They also maintain that the trial court should have conducted a hearing “to determine whether appellants knowingly and intelligently waived their rights to notice.” 2 (1) In attacking the constitutionality of Rule 645, appellants contend that it violates the Due Process Clause of the Fourteenth Amendment because it permits attachment and execution of property before notice.” 3 Actually, this marks ⁶⁸⁶ the second constitutional assault on Rule 645 to reach this Court in less than three years, the first having been mounted in Meyer v. Gyro Transp.

Systems, 263 Md. 518, 533 , 283 A. 2d 608 (1971). In that relatively brief interval, much has transpired in regard to the law applicable to cognovit provisions. In Meyer , we held that the rule affords procedural due process, since notice and an opportunity to be heard are therein provided. We specifically noted that the rule complies with Mullane v. Central Hanover Tr.

Co., 339 U. S. ⁶⁸⁷ 306, 314, 70 S. Ct. 652 , 94 L. Ed. 865 (1950) in which the Supreme Court had stated: “ ‘An elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections, (citations omitted).’ ” 263 Md. at 533-34 . It is readily apparent, however, that Meyer does not answer the questions presented by appellants. The argument here, as in so many recently decided cases arising in the consumer-credit field, is that a taking of property results when attachment and execution of property are permitted immediately upon the filing of the action; furthermore, even if there is no attachment or execution, the judgment immediately becomes a lien upon real estate which, however temporary, is itself a denial because it interferes with the use and enjoyment of the property. And, it is maintained, when this deprivation occurs before the debtor even has been served, let alone afforded an opportunity to be heard, the deprivation assumes unconstitutional dimensions.

Fortunately, we are not required to chart a new course in dealing with this important contention, since the Supreme Court has recently addressed itself to the very issues presented here. In D. H. Overmyer v. Frick Co., 405 U. S. 174 , 92 S. Ct. 775 , 31 L. Ed. 2d 124 (1972), the Court was confronted with a constitutional challenge to a cognovit note provision in the context of the Ohio statute regulating confession of judgment. There, as in this case, the contention was made that such a provision, whereby the debtor in advance of default waives service of process and authorizes the entry of judgment, offends current notions of Fourteenth Amendment Due Process. The Court, however, declined to hold that a cognovit clause is per se violative of the Constitution, but made it abundantly clear that such provisions could fail to meet constitutional standards if the facts of a given case ⁶⁸⁸ compelled that result.

To that end, the Court undertook an examination of the facts presented there and concluded: “.. . The facts of this case, as we observed above, are important, and those facts amply demonstrate that a cognovit provision may well serve a proper and useful purpose in the commercial world and at the same time not be vulnerable to constitutional attack.” 405 U. S. at 187-88 . In a companion case decided the same day, Swarb v. Lennox, 405 U. S. 191 , 92 S. Ct. 767 , 31 L. Ed. 2d 138 (1972), the Court also considered the cognovit clause within the framework of the Pennsylvania procedure, but despite basic differences between Pennsylvania and Ohio law — to which we shall allude below — declined to declare the Pennsylvania statute and rules facially unconstitutional. Concurring in Overmyer, Justice Douglas took particular care to observe that the Ohio procedure presented only a “minimal obstacle” to a debtor seeking to vacate a confessed judgment on the basis of a valid defense to a suit on such a note.

It is of no little significance that the Ohio procedure — which there withstood scrutiny — bears a striking resemblance to that prescribed by Rule 645. As Justice Douglas noted, “[In Ohio a] confessed judgment may be opened if the debtor poses a jury question, that is, if his evidence would have been sufficient to prevent a directed verdict against him.” 405 U. S. at 189-90. As we have indicated, the procedure found in Rule 645 is virtually a carbon copy of the Ohio statutory scheme. Section d of Rule 645 expressly provides that: ⁶⁸⁹ Section d, which was added to Rule 645 on June 1, 1972, is nothing more than a restatement of our prior decisions in this area, Shreffler v. Haight, 264 Md. 439 , 287 A. 2d 20 (1972); Katski v. Boehm, 249 Md. 568, 577 , 241 A. 2d 129, 134 (1968); Stankovich v. Lehman, 230 Md. 426, 432 , 187 A. 2d 309, 313 (1963).

In Shreffler , decided shortly before the addition of section d, we quoted with approval from Katski and Stankovich in saying: ⁶⁸⁸ “.. . If the evidence presented at the hearing establishes that there are substantial and sufficient grounds for an actual controversy as to the merits of the case, the court shall order the judgment by confession vacated, opened or modified with leave to the defendant to file a pleading and the case shall stand for trial....” ⁶⁸⁹ “ ‘To be successful in moving to strike a judgment by confession, one must adduce evidence in support of his motion sufficient to persuade the fair and reasoned judgment of an ordinary man that there are substantial and sufficient grounds for an actual controversy as to the merits of the case. If he does so, he is deemed to have met the burden of showing he has a meritorious defense, without the necessity of showing he will eventually prevail. This is to say that if the evidence is such that persons of ordinary judgment and prudence could fairly draw different inferences from it, the controversy should not be decided as a matter of law but instead should be submitted to a trier of fact.

If a meritorious defense is made out (by affidavits or testimony, Johnson v. Phillips, supra, 143 Md. 16 , 122 A. 7 ) the Court should liberally exercise its equitable jurisdiction over judgments entered by confession and, on application of a defendant who prima facie shows such defense, vacate the judgment to permit a trial on the merits. Cropper v. Graves, 216 Md. 229 , 139 A. 2d 721 ; Remsburg v. Baker, 212 Md. 465, 470 , 129 A. 2d 687 ; Keiner v. Commerce Trust Co., 154 Md. 366, 370-371 , 141 A. 121 .’ ” 264 Md. at 444 (emphasis added). Thus, it readily may be seen that, in effect, under the Maryland procedure, as in Ohio, a “confessed judgment may be opened if the debtor poses a jury question, that is, if his evidence would have been sufficient to prevent a directed verdict against him.” Hence, Maryland debtors, like their counterparts in Ohio, are given every opportunity after ⁶⁹⁰ judgment to present any defenses which they may have and, in doing so, are merely required to meet a standard that “is a minimal obstacle.” As Justice Douglas further noted, the procedure shared by Ohio and Maryland stands in marked contrast to the Pennsylvania system where, in order to vacate a confessed judgment, “a borrower must prove his defense by the preponderance of the evidence rather than by merely mustering enough evidence to present a jury question. Once the judgment is vacated, moreover, he must again prevail by that standard at a subsequent trial.” 405 U. S. at 190. “In effect, the Pennsylvania confessed debtor is required to win two consecutive trials, not simply one.” Id.

If,