Recent Court of Special Appeals Case Provides a Lesson on the Enforceability of Contract Provisions

Author: Anne E. Braucher Date: 04/07/2011

Categories: Corporate and Business Law

Ordinarily, the written terms of a contract control what the parties can and cannot do. That, of course, is the reason parties execute contracts. A recent Maryland Court of Special Appeals case, Cappell v. Riaso, LLC, shows why that may not always be the case.

Parties to commercial promissory notes often agree to confessed judgment provisions – provisions which state that, in the event of a breach, the maker of the promissory note will consent to entry of a money judgment against it. This type of provision typically ensures that the judgment will be entered against the breaching party without delay. Based upon the decision in the Cappell case, however, it is clear that this type of consensual provision can be voided if jurisdictional requirements are not met. Before you and your customers execute another promissory note, read on.

Lenan and Pauline Cappell owned 50% of Hope 7 Monroe Street Limited Partnership (“Monroe Street”). As part of a transaction in which Riaso, LLP (“Riaso”) loaned $1,600,000 to Monroe Street, Riaso required the Cappells to personally guaranty repayment of the loan. The guarantees contained a confessed judgment provision that allowed Riaso to obtain a judgment against the Cappells anywhere in the United States, if Monroe Street failed to repay the loan.

After Monroe Street defaulted, Riaso obtained a confessed judgment against the Cappells for the balance due on the loan in the Montgomery County Circuit Court. The Cappells then filed a motion asking the Circuit Court to vacate the judgment because it did not have personal jurisdiction over them. The Cappells were residents of the District of Columbia and they executed the guarantees in Virginia. In fact, their only contact with Maryland was ownership of a single unimproved piece of real estate that was not connected in any way to the loan transaction. Even though the parties contractually agreed that the Cappells would consent to judgment against them, the Circuit Court could not enforce the provision without also having personal jurisdiction over the defendants. Riaso opposed the motion, arguing that the Circuit Court had personal jurisdiction over the Cappells because they owned a piece of unimproved land in Montgomery County. The Circuit Court denied the request to vacate the judgment, and the Cappells appealed.

After considering the facts surrounding the loan and guarantees, the Court of Special Appeals reversed the lower court and vacated the judgment against the Cappells. The Court applied constitutional principles of due process that require a defendant to have sufficient “minimum contacts” with the state in which it is being sued. In this case, the Cappells’ ownership of unimproved land in Montgomery County was deemed insufficient to give the Montgomery County Circuit Court personal jurisdiction.

This case highlights the need for clients to have their attorney review their contracts and agreements. A lawyer can discuss with you how to draft provisions to ensure that they are enforceable given legal concepts such as due process and personal jurisdiction. Even if you have been successfully using an existing contract for years, it only takes one lawsuit like the Cappells’ to show you where the problems lie and, by that time, it may be too late. Don’t leave the enforceability of your contracts to chance.