Nils, LLC v. Antezana

MOYLAN, J. In early August of 2003, Gladys and Nils Antezana, through the medium of two limited liability companies, were the owners of a partially completed residence at 9212 Harrington Drive in Potomac, Maryland. Abdul Khanu purchased the property for a total purchase price of approximately $5,000,000.00. Gladys Antezana’s interest in the property was through the medium of the Gladimar, LLC, owned by her. Nils Antezana’s interest in the property was through the medium of Nils, LLC, owned by him.

Each of the LLC’s owned an equal share of the property. The mechanism by which Khanu consummated his acquisition of this property on August 7, 2003, was to purchase the two LLC’s from Gladys and Nils Antezana. Khanu initially paid to each of the sellers $1,000,000.00 in cash for their respective LLC’s. For the remainder of the purchase price, Khanu executed a promissory note to each of the sellers, each in the original amount of $1,500,000.00.

Those promissory notes were secured by twin deed-of-trust notes, one from Gladimar, LLC to Gladys Antezana and the other from Nils, LLC to Nils Antezana, each in the amount of $1,500,000.00. Nils Antezana died in July of 2004. Gladys Antezana is the personal representative of his estate. She is the appellee in this case in a dual capacity, representing herself individually and as the personal representative of Nils Antezana.

For convenience, we will refer to her as the “appellee” in the singular. The appellants are Gladimar, LLC; Nils, LLC; and Abdul Khanu. For convenience, we will sometimes refer to the appellants collectively simply as “Khanu.” The Provisions for Payment So much for the cast of characters. We turn to the subject of the arrangement for payment by Khanu to the appellee of the principal and interest owed on the two promissory notes.

Each promissory note provided that it was ⁷²² payable with interest at the rate of 6.5% per annum, payable interest only in equal monthly installments of $8,125.00 payable on the 7[th of] each and every month, the first payment due and payable on September 8, 2003. The entire balance shall be due and payable on or before February 7, 2004, but may not be paid before January 1, 2004. The notes further provided that if Khanu diligently sought replacement financing in good faith, but had not procured such financing by the original due date of February 7, 2004, “at the written request of Obligor to Holder, the due date for payment of principal shall be extended until July 31, 2004, with the rate of interest from January 1, 2004 through July 31, 2004 being increased to 7.5% and with the amount of each monthly payment of interest being increased accordingly to $9,375.” Khanu made no request, written or otherwise, to extend the due date for payment in full. The notes further provided that Khanu waived demand, presentment for payment, protest, and notice of dishonor.

Khanu agreed that the noteholder could, without notice, grant any extension or other postponement of the time of payment without in any manner releasing, lessening or affecting Khanu’s obligations under the notes. The notes define “default” as, inter alia, Khanu’s failure to pay when due any principal of or interest on the notes. Partial Defaults of Payment During the five months preceding the initial due date for full payment of February 7, 2004, Khanu made timely payments for the months of September and October of 2003 and January of 2004. The payments for November and December of 2003 were late, but Khanu remitted no payment for late charges as required by the notes.

The notes provided: If any payments are not paid within 10 days of the due date, a late charge of 5% of the then due amount shall be added to the late payment. (Emphasis supplied). Although the promissory notes were due in full on February 7, 2004, Khanu made no tender of payment on that date, nor ⁷²³ did he request that the term of the notes be extended. Notwithstanding that the notes had expressly provided that, if extended beyond February 7, 2004, the 6.5% per annum interest rate would increase to 7.5%, with the monthly installment being accordingly increased from $8,125.00 to $9,375.00, Khanu continued to make monthly payments of only $8,125.00.

In a subsequent affidavit, he gave as his excuse for the underpayments the fact that “I did not remember that the payments were supposed to go up.” The Attorneys’ Negotiations By a letter on August 19, 2004, the appellee’s attorney notified Khanu’s attorney 1) that the two notes had expired on July 31, 2004 and were still unpaid; 2) that the late charges had not been paid for six months; and 3) that the incremental monthly interest rate through August of 2004 had not been paid. The total due for late charges and unpaid interest came to $26,414.30. The letter offered Khanu the option of extending the payment period until December 31, 2004, but he declined that offer. Although having been placed on written notice of accumulated late charges and unpaid interest, Khanu made no payments on those items.

He continued to make monthly interest payments of only $8,125.00. The Confessed Judgment Notes As of November of 2004, Khanu was in the final stages of arranging refinancing of the Harrington Drive property. He intended to pay off all debts to the appellee and to have her, in turn, release the deeds of trust on the property. Settlement was to take on place December 20, 2004.

The major hitch that had to be resolved before settlement was Khanu’s 5% late fee for the non-payment of the principal that had become due on July 31, 2004, but had not been paid. It was subsequently agreed that Khanu would execute two promissory notes in the amount of $75,000.00 each in favor of the appellee. The two notes were executed on November 17, 2004. Each note contained a provision providing for confessed judgment in the event of non-payment at the time of maturity. ⁷²⁴ After maturity of this Note (whether by acceleration, declaration, extension, or otherwise), the Maker hereby authorizes any attorney designated by the Lender or any clerk of any court of record to appear for the Maker in any court of record and confess judgment against the Maker without prior hearing in favor of the Lender for and in the amount of the unpaid balance of the Principal Amount then outstanding plus interest accrued and unpaid thereon, together with costs of suit and attorneys’ fees of fifteen percent (15%) of the unpaid balance of the Principal Amount then outstanding.

(Emphasis supplied). In turning over the two promissory notes to counsel for the appellee, Khanu’s counsel articulated, in writing, the quid-proquo of the settlement of all claims between the parties. As stated in my memo to you dated November 11, 2004, by their acceptance of these two notes, your clients are acknowledging their release of Mr. Khanu, Nils, LLC, and Gladimar, LLC from any claims that they may have had for any defaults arising prior to the date hereof under (i) the Promissory Note in the principal amount of $1,500,000 dated August 7, 2003, made by Mr. Khanu to Nils Antezana and (ii) the Promissory Note in the principal amount of $1,500.000 dated August 7, 2003, made by Mr. Khanu to Gladys Antezana. (Emphasis supplied).

As of the maturity date of the notes on May 17, 2005, no payments had been made and Khanu was in clear default on the notes. A judgment by confession in favor of the appellee against Khanu was entered on each note in the Circuit Court for Montgomery County on September 12, 2005. The judgments were entered pursuant to Maryland Rule 2-611(a) Judgment by confession shall be entered by the clerk upon the filing of a complaint, the original or a photocopy of the written instrument authorizing the confession of judgment for a liquidated amount, and an affidavit specifying the amount due and stating the address of the defendant or that ⁷²⁵ the whereabouts of the defendant are unknown to the plaintiff. Pursuant to subsection (b), notice of the entry of the confessed judgments was timely sent to Khanu, who timely filed a motion to vacate pursuant to subsection (c) on October 31, 2005.

The defendant may move to open, modify, or vacate the judgment within the time prescribed for answering by sections (a) and (b) of Rule 2-321. The motion shall state the legal and factual basis for the defense to the claim. (Emphasis supplied). A hearing was conducted on Khanu’s motion to vacate the confessed judgments before Judge John Debelius on February 2, 2006.

Judge Debelius denied the motion, and Khanu has appealed from that denial. Confessed Judgment In Schlossberg v. Citizens Bank, 341 Md. 650, 655 , 672 A.2d 625 (1996), Judge Chasanow well stated the function of a judgment by confession. A confession of judgment clause in a debt instrument is a device designed to facilitate collection of a debt. It is a provision by which debtors agree to the entry of judgment against them without the benefit of a trial in the event of default on the debt instrument.

Paul V. Niemeyer and Linda M. Schuett, Maryland Rules Commentary, at 464 (2d ed.1992). As a general rule, a judgment by confession is “entitled to the same faith and credit, as any other judgment.” (Emphasis supplied). The courts, however, have been liberal in considering attacks on confessed judgments by aggrieved creditors. Because the widespread practice of including a provision authorizing a confessed judgment in promissory notes lends itself to fraud and abuse, however, this Court has made ⁷²⁶ clear that judgments by confession are to be “ ‘freely stricken out on motion to let in defenses.’ ” Id.

(emphasis supplied). The Schlossberg opinion also laid out the procedures to be followed when a motion to vacate a confessed judgment is filed. Rule 2-611 governs the procedure for confessed judgments in Maryland. Judgment by confession may be entered by the circuit court clerk upon the filing of a complaint accompanied by the original or a copy of the instrument authorizing the confessed judgment and an affidavit specifying the amount due and stating the address of the defendant.

Md. Rule 2-611(a). Upon entry of a judgment by confession, the clerk is required to notify the defendant of the entry of judgment and of the deadline for filing a motion to “open, modify or vacate” the judgment. Md. Rule 2-611(b). If the defendant so moves, the circuit court must determine whether there is a “substantial and sufficient basis for an actual controversy as to the merits of the action.” Md. Rule 2-611(d).

In other words, the court must determine whether the defendant has a potentially meritorious defense to the confessed judgment complaint. The court does not, however, decide the merits of the controversy at this stage. Maryland Rules Commentary, at 466. If the court finds that a basis for a defense exists, the rule requires the court to order that the confessed judgment be opened, modified, or vacated so that the defendant can file a responsive pleading to the plaintiffs complaint and the merits can be determined.

Md. Rule 2-611(d). Id. at 655-56 , 672 A.2d 625 (emphasis supplied). The Allocation of the Burden of Proof As the moving party on a motion to open, modify, or vacate a confessed judgment, the defendant/debtor is allocated the burden of proof. What must be proved, of course, are not the ultimate merits of the underlying obligation (the promissory note itself, for example) but only that there is a meritorious ⁷²⁷ (prima facie) defense to the execution or amount of the confessed judgment itself.

In Remsburg v. Baker, 212 Md. 465, 469 , 129 A.2d 687 (1957), the Court of Appeals spoke of both the allocation of the burden of proof and the nature of the burden of proof. Necessarily, me making the motion assumes the burden of supporting the facts alleged in it, and as to all matters not going to the merits of the controversy, such as surprise or deceit in the entry of the judgment itself, he must prove such facts by a fair preponderance of the evidence. But as to defenses going to the merits of the claim upm which the judgment rests, a different rule prevails. In such cases, if the evidence adduced in support of the motion is sufficient to persuade the fair and reasmed judgment of an ordinary man that there are substantial and sufficient grounds for an actual controversy as to the merits of the case, the defendant should be deemed to have met the burden of showing that he has a meritorious defence.

In other words, if the evidence is such that persons of ordinary judgment and prudence could honestly and fairly draw different inferences from it, one favoring the plaintiff and the other the defendant, the court should not itself decide that conflict, but should submit it to a jury. (Emphasis supplied). See also Billingsley v. Lincoln National Bank, 271 Md. 683, 689 , 320 A.2d 34 (1974); Gambo v. Bank of Maryland, 102 Md.App. 166, 185 , 648 A.2d 1105 (1994) (“In connection with a motion to vacate, the moving party has the burden of presenting evidence sufficient to support the purported defense.”); Garliss v. Key Federal Savings Bank, 97 Md.App. 96, 104 , 627 A.2d 64 (1993) (“One moving to strike a judgment by confession has the burden of presenting evidence satisfactorily supporting its purported defense.”); Shafer Brothers v. Kite, 43 Md.App. 601, 605 , 406 A.2d 673 (1979). What Is a Meritorious Defense?

A Question of Law For the Court On the issue of whether what is offered by a party seeking to open, modify, or vacate a confessed judgment ⁷²⁸ qualifies as a meritorious defense, that is a question of law for the judge. Gambo v. Bank of Maryland, 102 Md.App. at 185 , 648 A.2d 1105 (“What constitutes a meritorious defense is a question of law.”); Garliss v. Key Federal, 97 Md.App. at 104 , 627 A.2d 64 (same); Shafer Brothers v. Kite, 43 Md.App. at 606 , 406 A.2d 673 (“The issue of what can constitute a meritorious defense, assuming that the supporting facts are believed, is a question of law.”). A Meritorious Defense to What? When the caselaw speaks .of. “a meritorious defense” to a judgment by confession, what precisely is it that such a defense is contemplated as attacking or challenging?

It is not intended to be an attack on the antecedent debt or