A recent decision from the Maryland Court of Appeals provided somewhat surprising new guidance on the permissibility of confessed judgment clauses in consumer contracts. In Goshen Run Homeowners Association, Inc. v. Cisneros, the Court concluded that Maryland’s Consumer Protection Act (the “Maryland CPA”) prohibits all confessed judgment clauses in all consumer contracts.
In the underlying case, a homeowner failed to timely pay assessments to her HOA. The parties agreed to a deferred repayment plan that included a promissory note. The notable term of that promissory note included a confessed judgment clause. Upon the homeowner’s subsequent default under the deferred repayment plan, the HOA attempted to confess judgment in the District Court of Maryland for Montgomery County.
The parties’ dispute eventually reached the Maryland Court of Appeals. There, the HOA attempted to argue that assessments are not “consumer debt” under the Maryland CPA and, more notably, that the CPA does not prohibit the use of all confessed judgments in consumer contracts. To that end, the HOA argued that only a subset of confessed judgments — where a consumer waives the right to assert a legal defense to an action — would be precluded under the Maryland CPA.
The Court of Appeals soundly rejected these positions. Reasoning that the Maryland CPA prohibits all trade practices that are unfair, abusive or deceptive in the collection of consumer debts, the Court reminded industry participants that the non-exclusive list of deceptive practices in this context includes the use of a consumer contract containing a confessed judgment clause that waives the consumer’s right to assert a legal defense to an action.
The Court then addressed the HOA’s argument that a certain subset of confessed judgment clauses might remain permissible under the Maryland CPA if a consumer does not waive the right to assert a legal defense to an action. After examining the plain language of the Maryland CPA, specifically Md. Code, Commercial Law § 13-301(12), the Court determined that the Maryland CPA prohibits all confessed judgment clauses in consumer transactions. The Court reasoned, in so ruling, that the inherent nature of a confessed judgment requires the waiver of certain defenses — including jurisdiction, service, and venue — that are fundamental to a consumer’s due process rights.
As a result, consumer lenders operating in Maryland must now ensure that they do not seek to confess consumer judgments. Per the Court, the Maryland CPA is now ready to prohibit “all confessed judgment clauses in consumer contracts” — without regard for the content of any particular confessed judgment clause. It is unclear whether this ruling is retroactive in nature, but it is critical that consumer lenders ensure that their portfolio of Maryland contracts do not include confessed judgment clauses, and that such clauses are not used on a going-forward basis. Perhaps the saving grace of the Court of Appeals’ decision is that the Court explicitly permitted the creditor to bring suit on the same note that contained the defective confessed judgment clause, meaning that consumer attorneys should not be able to seek to invalidate instruments merely because they contain dormant confessed judgment clauses.