Opinion
N22J-00660
08-17-2022
R. JACOB BERGMANN,Plaintiff, v. SH PARENT, INC. and SURTERRA HOLDINGS, INC.,Defendant.
Jesse Noa, Esquire (counsel for Defendants) Carson Bartlett, Esquire (counsel for Defendants) Samuel Hirzel, II, Esquire (counsel for Plaintiff) Gillian Andrews, Esquire (counsel for Plaintiff)
Jesse Noa, Esquire (counsel for Defendants)
Carson Bartlett, Esquire (counsel for Defendants)
Samuel Hirzel, II, Esquire (counsel for Plaintiff)
Gillian Andrews, Esquire (counsel for Plaintiff)
As this is a non-case dispositive matter, an Order is issued pursuant to Superior Court Civil Rule 132(a)(3)(i).
Martin B. O'Connor Commissioner
On March 1, 2022, R. Jacob Bergmann ("Plaintiff") filed a Notice of Entry of Judgment with the New Castle County Prothonotary seeking to confess judgment against SH Parent, Inc. and Surterra, Inc. (the "Defendants") arising out of a January 1, 2021 Negotiable Subordinated Promissory Note ("Note") executed between the parties. For the reasons that follow, confession of judgment is ENTERED against Defendants.
DI 10, Ex. A, Negotiable Subordinated Promissory Note, p. 1-8.
BACKGROUND
This litigation arose after the resolution of an appraisal action filed in 2019 by Plaintiff in the Delaware Court of Chancery. As part of the settlement of that litigation, the parties executed a Note requiring Defendants to pay Plaintiff a sum of money semi-annually until December 31, 2024, when the balance of the obligation would be due and payable. Defendant completed the first installment payment on June 30, 2021 but failed to make any subsequent payments. As a result, on January 3, 2022, Plaintiff provided Defendants written notice of default. On March 1, 2022, Plaintiff filed with the Prothonotary a Notice of Entry of Judgment (the "Complaint"), seeking to confess judgment in accord with paragraph 15 of the Note, the confession of judgment provision.
R. Jake Bergmann v. Surterra Holdings, Inc., C. A. No. 2019-0828-PAF. On July 6, 2021, the Court of Chancery dismissed the appraisal litigation with prejudice.
DI 1.
On March 25, 2022, the Court held a hearing on Plaintiff's Motion. Pursuant to Superior Court Rule of Civil Procedure 58.1(g)(3), Defendants exercised their right to a hearing for the Court to decide whether Defendants knowingly and voluntarily waived their rights to a hearing prior to the entry of confession of judgment.
See Super. Ct. Civ. R. 58.1(g)(3).
The Note's confession of judgment provision became operative if Defendants committed conduct constituting an "Event of Default." Plaintiff contends
DI 10, Ex. A, p. 1-2, § 3.
Defendants were in default of their obligations under the Note because they failed "to pay when due any principal, interest or other amount required to be made hereunder or under that certain Settlement Agreement and Release entered into as of January 29, 2021 by and among the [Defendants] and [Plaintiff] (as amended, restated, supplemented or otherwise modified from time to time, the 'Settlement Agreement') within ten (10) days of its due date." Defendants have not challenged Plaintiff's claim of default.
DI 10, Ex. A, p. 5-6, § 5(a).
On April 25, 2022, Defendants filed an Objection to Plaintiff's Complaint To Commence Confessed Judgment Proceedings. Plaintiff's Response to Defendants Objection to Commence Confessed Judgment Proceedings was received by the Court on May 5, 2022, and on June 9, 2022, Defendant filed a Reply In Support of Objection To Confessed Judgment Proceedings. On July 22, 2022, the Court held a hearing on Defendant's objection to the Complaint.
DI 10.
DI 13.
DI 15.
PARTIES' CONTENTIONS
Defendant raised several arguments in opposition to Plaintiff's Motion to confess judgment. Defendant argues that the Plaintiff's attempt to confess judgment is contrary to the terms of the Note, and therefore the Note is void. Defendant also claims there are "errors" in the proposed Order for confession of judgment because the proposed order does not explicitly identify "conditions precedent to the judgment" i.e., that Plaintiff's indebtedness is subordinate to the interest of other "Senior Indebtedness" expressly incorporated in the Note. Defendant argues that Plaintiff's remedies are contingent on and subordinated to the satisfaction of other terms in the agreement - specifically payment in full of certain Senior Indebtedness identified in the Note. As a result, the existence of "errors" in the judgment "negate any contention that Defendant waived notice and a hearing to the judgment submitted to the Court." Finally, Defendant argues Plaintiff's Complaint fails because he did not submit to the Court "the original document authorizing the confession of judgment. . ." as required by Superior Court Civil Rule 58.1.
Rule 58.1 provides, in pertinent part:
Judgments by confession as authorized by 10 Del. C. § 2306 shall be entered by the Prothonotary provided that before entering such judgment the following procedure is followed: (a) The plaintiff shall lodge with the Prothonotary:
(2) The original document authorizing confession of judgment together with a completely legible photocopy for the Prothonotary and each debtor against whom judgment is entered. Super. Ct. Civ. R. 58.1(a)(2).
Plaintiff responds that the language of the Note is clear, and judgment should be entered. Plaintiff concedes that, per the terms of the Note, its rights and remedies are subordinate to the rights and remedies of the holders of Senior Indebtedness, but the Note allows Plaintiff to "seek a consent judgment as described in § 15 [the Confession of Judgment provision]." Plaintiff also points out § 3 of the Note only limits Plaintiff's right to recover until all Senior Indebtedness is satisfied. It does not affect Plaintiff's right to obtain a judgment by confession. The term "subordinate" in § 3 only refers to the priority or class of his indebtedness in relation to other debt holders.
DI 10, Ex. A, p. 4, § 6.
DI 10, Ex. A, p. 1-2, § 3.
Plaintiff asserts Defendants have knowingly and voluntarily waived their rights to notice and a hearing, and Defendant corporations are "sophisticated business entities and had the assistance of counsel in negotiating and agreeing to the terms of the Note before executing it." Defendants received a benefit by entering into the Note (including the confession of judgment provision), because Plaintiff's decided to forego his appraisal claims in the Court of Chancery litigation. Finally, Plaintiff claims the terms of the confession of judgment in § 15 of the Note are "set forth . . . in the most conspicuous manner."
DI 13, p. 14.
See R. Jake Bergmann v. Surterra Holdings, Inc., C. A. No. 2019-0828-PAF.
DI 13, p. 16.
Plaintiff further contends to the extent Defendants' claim there are procedural errors in Plaintiff's attempt to confess judgment, or that the Note includes defects or imperfections, Defendant released Plaintiff from any harm arising therefrom by the Note's express language. Furthermore, Plaintiff asserts failing to submit an original of the Note as part of the Complaint is not fatal to its request for confession of judgment, because the confession of judgment enabling statute, 10 Del. C. § 2306(d), only requires Plaintiff to provide "a copy of the document authorizing the confession of judgment." Plaintiff points out the express terms of the note provide Defendant waived "all procedural defenses in connection with entry of confessed judgment." And, on August 11, 2022, Plaintiff submitted to the Court the "original" Note.
DI 10, Ex. A, p. 6-7, § 15.
Id., citing 10 Del. C. §2306(d).
DI 13, p. 18.
Finally, Plaintiff requests the Defendant to pay "actually occurred costs, expenses, and fees (including court costs and reasonable attorneys' fees) incurred by Holder in enforcing and collecting [the] Note."
DI 10, Ex. A, p. 3-4, § 6.
DISCUSSION
Superior Court Civil Rule 58.1 allows a litigant to obtain a judgment by confession. The rule, among other things, requires a plaintiff to submit an "original" of the contract, note or other instrument authorizing the confessed judgment, and plaintiff shall provide a notice letter to potential debtors, informing the debtor that if they object to the entry of judgment by confession, the debtor can request a hearing for the Court to determine if "the debtor has effectively waived debtor's rights to notice and a hearing prior to the entry of judgment." At the hearing, the plaintiff is required to demonstrate that the debtor "effectively waived debtor's right to notice and a hearing prior to the entry of judgment against the debtor." If, after the hearing, judgment is entered against a debtor, and the Plaintiff commences execution proceedings against debtor's assets, the debtor can object to execution. The Court will then schedule a hearing where the debtor may raise defenses to execution.
Super. Ct. Civ. R. 58.1(d)(5).
Super. Ct. Civ. R. 58.1(g)(3). Additionally, Delaware law provides a debtor a statutory right to a hearing to determine if the debtor waived their right to notice and a hearing. Specifically, 10 Del. C. § 2306(b) confers upon a debtor the statutory right to a "judicial determination as to whether the defendant-obligor understandably waived his or her right to notice and an opportunity to be heard prior to the entry of final judgment against him or her."
Super. Ct. Civ. R. 58.1(j).
Super. Ct. Civ. R. 58.1(h)(3)(III).
For a waiver to be knowing and voluntary, it must be "an intentional relinquishment, or abandonment of a known right or privilege." In considering whether the debtor knowingly and voluntarily waived its right to notice and a hearing, the Court is directed to consider the following, non-exhaustive list of factors:
RBS Citizens, N.A. v. Caldera Mgmt., Inc., 2009 WL 3011209 at *3 (D.Del. Sept. 16, 2009)(citing Pellaton v. Bank of New York, 592 A.2d 473, 476 (Del. 1991)).
(1) the defendant's business sophistication and experience with similar documents; (2) whether the defendant consulted with an attorney; (3) whether all bargaining parties took the necessary steps to ensure that the terms of the agreement were read and understood at the time the transaction was entered; and (4) whether defendant had the opportunity and time to review the document containing the confession of judgment.
Customer's Bank v. Zimmerman, 2013 WL 6920558 at *3 (Del.Super. Nov. 22, 2013), quoting RBS Citizens, N.A. v. Caldera Mgmt., Inc., 2009 WL 3011209 (D.Del. Sept. 16, 2009) (internal citations omitted). This Court identified additional factors in determining if a party knowingly and voluntarily waived its rights to notice and a hearing: whether there was a quid pro quo in exchange for the confession of judgment provision; the location of the confession of judgment provision in the agreement itself, and whether it "was placed in a deceptive manner or obscured;" whether the provision is placed in the documents as to be completely beyond defendant's contemplation of its purpose and separated from other provisions of the agreement; whether there was unfair surprise in incorporating the provision; and whether the provision was placed with special attention (i.e., underlined or in bold letters). Preferred Fin. Svcs, Inc., v. A & R Bail Bonds, LLC, 2018 WL 587023 (Del. Super. Jan 26, 2018).
Finally, the knowing, voluntary and intelligent waiver by debtor should be established by the time of the execution of the contract, agreement, or note containing the confession of judgment provision. Claims, objections and potential defenses which do not address waiver and are raised by the debtor are beyond the scope of a Rule 58.1(b) hearing.
See Zimmerman, 2013 WL 6920558 at *4 (Plaintiff established a knowing, voluntary and intelligent waiver by defendants "prior to execution of the Forbearance Agreement.")
Preferred Fin. Svcs, 2018 WL 587023 at *2. "Rule 58.1(g)(3) provides that if a debtor objects to an entry of confessed judgment, the Court shall hold a hearing at which "the burden shall be on the plaintiff to prove that the debtor effectively waived debtor's right to notice and a hearing prior to the entry of judgment against debtor. . . [P]rior to the issuance of a first writ of execution upon a confessed judgment, the debtor may object to said execution, and the Court shall hold another hearing at which the "debtor may raise any appropriate defenses." Id., citing Harrington Raceway, Inc. v. Vautrin, 2001 WL 1456873 at *3 (Del.Super. August 31, 2001), also see 10 Del. C. § 2306.
FINDINGS OF FACT
Plaintiff has met its burden in establishing a knowing, intelligent and voluntary waiver by Defendants prior to execution of the Note. At the hearing, Plaintiff exclusively relied upon the terms of the Note and the Confession of Judgment Affidavit to establish a knowing and voluntary waiver. The eight-page, single spaced Note, titled "Negotiable Subordinated Promissory Note," provides the following in the capitalized confession of judgment provision:
DI 10, Ex. A, Confession of Judgment Affidavit, ¶ 5.
BORROWER CONFIRMS TO HOLDER THAT (I) BORROWER IS A LEGAL ENTITY AND THAT ITS PRINCIPALS ARE KNOWLEDGEABLE IN BUSINESS MATTERS; (II) THE TERMS OF THIS NOTE, INCLUDING THE FOREGOING WARRANT OF
ATTORNEY TO CONFESS JUDGMENT, HAVE BEEN NEGOTIATED AND AGREED UPON IN A COMMERCIAL CONTEXT; AND (III) BORROWER HAS FULLY REVIEWED THE AFORESAID WARRANT OF ATTORNEY TO CONFESS JUDGMENT WITH ITS OWN COUNSEL AND IS KNOWINGLY AND VOLUNTARILY WAIVING CERTAIN RIGHTS IT WOULD OTHERWISE POSSESS, INCLUDING BUT NOT LIMITED TO, THE RIGHT TO ANY NOTICE OR HEARING PRIOR TO THE ENTRY OF JUDGMENT BY HOLDER PURSUANT TO THE AFORESAID WARRANT OF ATTORNEY.
DI 10, Ex. A, Note, § 15 (All caps in original).
The Note was executed on January 29, 2021 by James Whitcomb, Chief Development Officer of both Defendant entities, and Plaintiff R. Jacob Bergmann. Mr. Whitcomb also executed, on the same day, a Confession of Judgment Affidavit, wherein he acknowledged the Defendants executed and delivered to Plaintiff a promissory note, and Mr. Whitcomb authorized, consistent with the terms of the Note, "any attorney or attorneys or the prothonotary or the clerk of any court of record in the State of Delaware, or elsewhere to enter judgment against each of the [Defendants] in the principal amount of [XXXXX], plus all accrued interest thereon, together with any applicable fees and costs and expenses, including attorney's fees, as provided in the Note."
DI 10, Ex. A, Confession of Judgment Affidavit, ¶ 5.
Plaintiff has demonstrated, by a preponderance of the evidence, that Defendants waived their right to notice and a hearing on or before January 29, 2021. First, both the Note and Confession of Judgment Affidavit reflect
Super. Ct. Civ. R. 58.1(g)(3).
Defendants are "sophisticated business entities knowledgeable in business matters;" they were represented by experienced counsel throughout the negotiation of the Note; and the Warrant of Attorney to Confess Judgment was negotiated and agreed upon in a commercial context.
DI 10, Ex. A, p. 6, § 15. The parties to the Note also titled it a "Negotiable Subordinated Promissory Note," indicating that the Note was negotiated between the parties, and the Note evidenced a financial obligation subordinate to some other financial interest, here the "senior Indebtedness" noted therein. Id. at Ex. A, p. 1.
Second, the Note provides that the Defendants "fully reviewed the Aforesaid Warrant of Attorney to Confess Judgment with its own counsel and [were] knowingly and voluntarily waiving certain rights [they] would otherwise possess, including but not limited to, the right to any notice or a hearing prior to the entry of judgment by Holder."
DI 10, Ex. A, p. 6-7, § 15.
Third, the Confession of Judgment Affidavit provides the "Note is governed by Delaware law and was made in respect of a settlement agreement entered into by and among the [Defendants] and [Plaintiff] with respect to an action captioned Bergmann v. Surterra Holdings, Inc., C. A. No. 2019-0828 PAF." As a result, the Note, including the Confession of Judgment provision, served as a quid pro quo for the voluntary dismissal of the pending Court of Chancery appraisal litigation.
DI 10, Ex. A, Confession of Judgment Affidavit, ¶ 7.
Fourth, the Confession of Judgment provision was conspicuously included in the Note IN ALL CAPS, placed with special attention in a clear manner in relation to the other Note provisions. The standalone Confession of Judgment provision was not incorporated into another provision of the agreement or obscured by other terms or conditions. It was the last paragraph of the Note, prominently displayed, and occupied the majority of page 6, and was the only content on page 7.
DI 10, Ex. A, p. 6-7, § 15.
Fifth, the Confession of Judgment provision was supported by a Confession of Judgment Affidavit ("Affidavit"), executed by James Whitcomb, the same individual who executed the Note on Defendants' behalf. The Affidavit explicitly authorized "any attorney or attorneys or the prothonotary or clerk of any court of record in the State of Delaware . . . to enter judgment against each of the Companies in the principal amount of up to [$XXXX.XX] plus all accrued interest thereon, together with any applicable fees and costs and expenses, including attorney's fees, as provided in the Note."
DI 10, Ex. A, Confession of Judgment Affidavit, ¶ 5.
Finally, there was no unfair surprise in the inclusion of the Confession of Judgment provision. The Confession of Judgment provision is supported by a separate, notarized document, the Confession of Judgment Affidavit, executed the same day as the Note.
Defendants have not challenged the Zimmerman or Preferred Financial Services factors applied infra in their objection to the entry of judgment by confession, i.e., whether a party knowingly and voluntarily waived its rights to notice and a hearing, prior to the execution of the Note. Defendants' claims attacking the validity of the waiver of notice and a hearing because Plaintiff's proposed Order for judgment by confession does not acknowledge the subordinate nature of the debt are premature.
2013 WL 6920558 at *3.
2018 WL 587023 at *3-4.
Zimmerman, 2013 WL 6920558.
DI 10, Ex. C.
To the extend Defendant has argued claims/defenses as they relate to the knowing and voluntary waiver issue, those defenses, in that context, are rejected. Defendant's arguments rely upon conduct which occurred after the Note was executed on January 29, 2021 and have no impact on whether Defendants executed a knowing, voluntary and intelligent waiver.
Finally, although Defendant's final argument sits in the category of claims and defenses beyond the scope of the issue before the Court, i.e., whether there was a knowing, intelligent and voluntary waiver, Defendants have asserted Plaintiff's failure to (initially) provide the Court "the original executed Note" as required by Superior Court Civil Rule 58.1(a)(2) precludes entry of confessed judgment. Given the nature of this claim, it is appropriate for additional discussion.
Rule 58.1(a)(2) requires a party seeking to confess judgment to produce to the Court "The original document authorizing the confession of judgment." Defendant argues, without citing to precedent, that failure to strictly comply with the rule, which allows a party to "wield the oppressive power" of a confessed judgment, precludes confession of judgment. Not so.
Super. Ct. Civ. R. 58.1(a)(2) (emphasis added).
DI 10, p. 8. Plaintiff contends Defendants released him from "all procedural errors, defects and imperfections whatsoever in entering judgment by confession as aforesaid or in issuing any process or instituting any proceedings thereto." See DI 10, Ex. A, p. 6, § 15.
It is worth noting from the outset that the Rule requires Plaintiff submit the "original document" containing the confession of judgment provision, and the Superior Court docket reflects the Court received the original Note on August 11, 2022 at 11:29 AM. Although there is scant authority on the subject, it appears Rule 58.1 requires a plaintiff to produce the original note for two basic reasons. First, confessed judgments carry tremendous power, terminating litigation in favor of one party over another due to substantive or technical non-compliance with an agreement as entered. Under the circumstances, the Plaintiff who stands to benefit from a confessed judgment should produce the original note, contract, or other agreement to the Court.
Second, and perhaps more importantly, given the finality of a confessed judgment, the Court, if it chooses to do so, is provided an opportunity to review the original document to ensure the parties are relying upon a fully executed version of the agreement which does not evidence tampering, fabrication or some other fraud.
After personally reviewing the Note submitted by Plaintiff on August 11, 2022, I am satisfied that Plaintiff submitted to the Court the "original" Note. I also conclude that, under these circumstances, Plaintiff's belated filing of the original note cures any defect in Plaintiff's initial filing (which was not in strict compliance with Rule 58.1(a)(2)). Defendants have not denied the existence of the Note, nor have they suggested the copy of the Note Plaintiff submitted on March 1, 2022 was either fake, fraudulent, or misrepresented the agreement between the parties. Defendants' objection to the entry of confession of judgment due to Plaintiff's failure to submit the original note is moot, as the original has been received and docketed by the Court.
Defendant's release of Plaintiff from all procedural errors, defects and imperfections whatsoever" provides an additional, independent basis to deny Defendant's claim. See DI 10, EX. A, p. 6, § 15.
CONCLUSION
Based upon the totality of the circumstances, Plaintiff has established Defendants voluntarily, knowingly, and intelligently waived their right to notice and a hearing prior to the entry of judgment. Accordingly, the Prothonotary shall ENTER JUDGMENT against Defendants in the principal balance owed, plus interest that has accrued since December 31, 2021.
Plaintiff's request for interest, court costs and attorney's fees are GRANTED. With regard to Plaintiff's request for attorney's fees and costs, although Delaware follows the American Rule, where each side covers their litigation costs, the Note expressly provides the Defendants shall pay Plaintiff "the entire principal balance of this note, all accrued interest and all other amounts due under this note together with all costs of suit and any attorney's fees. . .." Defendant did not object to the request for attorney's fees, but did raise an objection to the cost and fees requested because Plaintiff failed to substantiate his request for fees and costs. Plaintiff's counsel shall substantiate the request for attorney's fees and costs, by affidavit, to the Court on or before Friday, August 26, 2022. Defendants will have until Wednesday, August 31, 2022, to object to Plaintiff's request for interest, attorney's fees, and court costs.
See generally Transched Systems Ltd. v. Versyss Transit Solutions, LLC et al., 2012 WL 1415466 at *1 (Del.Super. Mar. 29, 2012); Note, p. 6, § 15.
DI 15, p. 11.
IT IS SO ORDERED, this 17th day of August, 2022.