Schlossberg v. Citizens Bank of Maryland

CHASANOW, Judge. This case comes to us from the United States Court of Appeals for the Fourth Circuit, pursuant to the Maryland Uniform Certification of Questions of Law Act, Maryland Code (1974, 1995 Repl.Yol.), Courts & Judicial Proceedings Article, §§ 12-601 through 12-609 and Maryland Rule 8-305. We are called on to decide whether a circuit court order “opening” a confessed judgment pursuant to Md.Rule 2-611(d) affects the status of the judgment lien derived from that ⁶⁵³ confessed judgment. We hold that opening a confessed judgment does not affect the judgment lien.

I. The material facts in this appeal are not disputed. The parties have adopted the following statement of facts from the opinion of the United States Bankruptcy Court for the District of Maryland: “On March 22, 1991 Citizens Bank [of Maryland] obtained confessed judgments against [G. David Broyles and Emily E. Broyles,] [d]ebtors in the Circuit Court for Prince George’s County, Maryland in the amount of $859,928.88, including attorneys fees, based on their guarantees of certain corporate debts. Citizens Bank recorded the confessed judgments in the Circuit Court for Worcester County, Maryland on or before April 11,1991. [The Broyles] owned, as tenants by the entirety, a condominium unit in Ocean City, which is located in Worcester County. * * * After the confessed judgments were recorded in Worcester County, [the Broyles] were served on April 29, 1991 with notices of the entry of judgments by confession, as required by Maryland Rule 2-611(b). By timely motion, [the Broyles] moved to vacate the confessed judgments pursuant to Maryland Rule 2—611(c).

The Circuit Court for Prince George’s County denied [the] motion to vacate, and [the Broyles] appealed. On April 10, 1992, the Court of Special Appeals of Maryland entered its opinion reversing and remanding. EMI Excavation [] v. Citizens Bank[], 91 Md.App. 340 , 604 A.2d 518 [, cert. denied, 327 Md. 523 , 610 A.2d 796 ] (1992). On remand, the Circuit Court for Prince George’s County, entered the following order on November 12, 1992, dated November 4,1992[:] ‘ORDERED, that the confessed judgments entered against the Defendants herein be, and hereby are opened so that there can be a hearing on the merits of the ⁶⁵⁴ Plaintiffs claims and the Defendants’ defenses.

(Emphasis supplied.)’ During the pendency of the appeal, [the Broyles] had filed petitions for relief under Chapter 7 of the Bankruptcy Code. [ 11 U.S.C. § 101 et seq.] G. David Broyles filed a petition on January 7,1992, and Emily E. Broyles filed a petition on April 20, 1992. The two cases were substantively consolidated in August, 1992.” After the filing of the Broyles’ bankruptcy petitions, Citizens Bank sought to proceed with its confessed judgment action against the Broyles in the circuit court in order to execute upon its judgment lien. The bank moved in the Bankruptcy Court for relief from the automatic stay imposed by 11 U.S.C. § 362 (1994) of the Bankruptcy Code. 1 The Broyles and the bankruptcy trustee, Roger Schlossberg (Trustee), opposed the motion for relief from the automatic stay. The Broyles and the Trustee argued that Citizens Bank’s judgment lien on the Ocean City condominium was no longer enforceable because the circuit court had opened the judgment by its order of November 12, 1992.

The Bankruptcy Court ruled in favor of Citizens Bank and ordered that the stay be lifted to allow litigation on the confessed judgment action to proceed. In re Broyles, 161 B.R. 149 (Bkrtcy.D.Md. 1993). Following appellate review and affirmance in the United States District Court for the District of Maryland, the Trustee appealed to the United States Court of Appeals for the Fourth Circuit. After hearing oral arguments in the case, the Fourth Circuit certified the following question to this Court: “Pursuant to Maryland Rule 2-611(d), what is the effect on the lien status of a confessed judgment when the state court ‘opens’ the judgment for a hearing on the merits without ⁶⁵⁵ affirmatively stating that the judgment lien is preserved.

Subsumed within this question the [C]ourt may consider: (1) whether pursuant to Maryland Rule 2-611(d) the order of the Circuit Court for Prince George’s County in which the court ‘opened’ the confessed judgment in favor of Citizens Bank destroys or affects the priority status of the prepetition lien of the confessed judgment; (2) whether the prepetition lien status was preserved or destroyed or affected in any other manner pending the state court’s disposition of the matter; and, (3) whether the state court’s order must include explanatory language or precautionary conditions to preserve the lien status of the confessed judgment.” A. 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.” Keiner v. Commerce Trust Co., 154 Md. 366, 370 , 141 A. 121, 122 (1927).

A confessed judgment operates as a lien against the real property of the defendant located in the county where the judgment is entered. Maryland Rules Commentary, at 466. 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 clear that judgments by confession are to be “ ‘freely stricken out on motion to let in defenses.’ ” Keiner, 154 Md. at 370 , 141 A. at 123 (citation omitted). 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 ⁶⁵⁶ 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). B. In the instant case, Citizens Bank obtained confessed judgments against the Broyles in the Circuit Court for Prince George’s County for $859,928.88 on March 22, 1991. Citizens Bank then recorded the confessed judgments in the Circuit Court for Worcester County, where the Broyles owned their condominium.

By recording the judgments in Worcester County, the bank obtained a lien on the condominium. See Md.Rule 2-621(b) (“[A] money judgment that is recorded and indexed pursuant to Rule 2-623(a) constitutes a lien ... in the amount of the judgment ... on the defendant’s interest in land located in the county of recording.”); see also Md.Code (1974, 1995 Repl.Vol.), Courts & Judicial Proceedings Art., § ll-402(c); Md.Rule 2-628(a). On November 12,