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PROBLEM 13.7
Anna Conda rents a house from Phoebe O’Phidio. Anna keeps a pet snake in a cage in the house. Although the snake is not venomous or harmful, it is large and evil-looking and could be mistaken for a deadly viper. Phoebe does not know that Anna has the snake. Anna is aware that Phoebe would be very upset if she did know because this is not only a violation of a clause in the lease that forbids pets on the premises, but also because Phoebe had mentioned to Anna that she suffers from ophidiophobia—an intense and irrational fear of snakes. Last week, Phoebe decided to move back into her house and gave Anna the required one month’s notice to terminate the lease. Anna does not wish to leave the house. She asked Phoebe to come over to the house to discuss the termination notice and Phoebe obliged. After Phoebe came into the living room, Anna brought the caged snake into the room and locked the door. She told Phoebe that unless she agreed to withdraw the termination notice and give her a two-year lease, Anna would open the cage door and Phoebe could “negotiate further with my friend here.” Phoebe had no idea if the snake was dangerous, and neither asked nor cared. She screamed, “I agree—just keep that cage door closed!” The parties immediately signed a lease that Anna had prepared, rescinding the termination notice, eliminating the no-pets clause, and granting Anna a two-year lease on the house at the rent that Anna was currently paying. Because residential rents had been rising, this rent is about 20 percent lower than what Phoebe could obtain on the market.
Immediately after she left the house and escaped the snake, Phoebe sought to rescind the new lease entered into with Anna. Is she able to argue that she entered into the lease under duress, as defined in Restatement, Second §§175 and 176?
p. 471The next case, Germantown Manufacturing Co. v. Rawlinson, involves a petition to open a confessed judgment. A brief explanation of this procedure may help you to understand the procedural posture of the case: Normally, if a creditor wishes to enforce a claim after the debtor fails to pay the debt on the due date, the creditor must commence suit and obtain judgment. If the debtor defends the suit, the creditor may have to go through the whole process of trial before getting its judgment. If the debtor does not defend the suit, the creditor can obtain judgment by default. Sometimes a creditor may seek to truncate this process by having the debtor sign a document (either at the time that the debt is incurred or after the debtor has defaulted) in which the debtor acknowledges owing the debt and appoints the creditor (or the creditor’s attorney) as her agent to confess to the judgment on her behalf. This document is called a “confession of judgment” or a “warrant of attorney.” It is, in effect, a waiver of the right to defend the suit and an authorization to the creditor to obtain judgment by default. Because this remedy can have harsh effects and can be abused by a creditor, the law provides the debtor with several safeguards.13 One of these is the right to apply to court after the judgment for its opening (reversal) so the debtor can defend the case. To obtain this relief the debtor must show that she acted promptly in seeking to open the judgment and must produce evidence of a meritorious defense, such as would require submission of the issue to a jury. The question involved in Germantown Manufacturing is whether the debtor has sufficiently shown a meritorious defense to permit her to open the judgment and defend the suit.
Apart from covering the issue of duress, Germantown Manufacturing illustrates the point that improper bargaining may permit analysis under more than one policing doctrine.
GERMANTOWN MANUFACTURING CO. v. RAWLINSON
341 Pa. Super. 42, 491 A.2d 138 (1985) Pennsylvania Superior Court
CAVANAUGH, Judge.
. . . Robert G. Rawlinson was employed by The Germantown Manufacturing Company in Marple Township as its assistant controller. Over a period of twenty-one months, Mr. Rawlinson embezzled $327,011.22 from the company. On Friday, May 21, 1982, the company discovered the misappropriation. Mr. Rawlinson admitted his wrongdoing to the company controller, p. 472Mr. Harry Dinkel, and was fired. However, Mr. Rawlinson did not tell his wife about either the misappropriation of the company monies or the loss of his job until the following Monday, May 24, 1982. Sometime between Friday and Monday, Mrs. Joan Rawlinson, Robert’s wife, answered a phone call for her husband from a Mr. Peter Kulaski who identified himself as an insurance adjuster. On Monday, May 24, 1982, she answered a second call for her husband from Mr. Kulaski. Sensing that something was amiss, she summoned her husband to the phone but stayed on an extension and overheard Mr. Kulaski say, “Have you told your wife yet?” At this, she hung up the phone, and when her husband had finished his conversation she demanded to know what was going on. Mr. Rawlinson told his wife that he had lost his job because he had taken about $20,000.00 from the company. He also asked his wife if she wanted a divorce. Mrs. Rawlinson testified that upon hearing all of this, her “whole world fell apart.” She also testified that because she had suffered a miscarriage in late April, she was already tired and depressed when she learned of her husband’s malefactions.
The following day, Tuesday, Mrs. Rawlinson spoke by phone with Mr. Kulaski, who was a representative of the company’s insurer, and learned that he was coming to the house “to discuss documents.” He did not tell her he would attempt to have her co-sign two judgment notes. Nor did he tell her the amount her husband had misappropriated. Mr. Kulaski arrived later that day and spent thirty to forty-five minutes with Mr. and Mrs. Rawlinson. Mrs. Rawlinson apparently succeeded in keeping her two young children from knowing the purpose of the meeting.
The purpose of the meeting, from Mr. Kulaski’s perspective, was to have Mr. and Mrs. Rawlinson sign two judgment notes. The first note was for $160,000.00—the amount Mr. Rawlinson admitted having taken. The second was for “any and all amounts in excess of One hundred and sixty thousand dollars ($160,000) which are determined by Affidavit of the President of Germantown Manufacturing Company, which Affidavit, when presented with this Note, shall constitute sufficient proof of a sum certain for the purpose of the Confession of Judgment contained herein.” Both notes authorized any attorney to confess judgment in favor of Germantown Manufacturing against the Rawlinsons. Mrs. Rawlinson was surprised to see her name on the documents. She asked Mr. Kulaski if she and her husband would need an attorney. Mr. Kulaski calmly stated that if the Rawlinsons dealt in good faith and continued to cooperate, there would be no need for an attorney. Kulaski also stated that his principal was not interested in a criminal prosecution as long as Mr. and Mrs. Rawlinson cooperated. Mrs. Rawlinson understood this to mean that if she signed the notes her husband would not go to jail.
Mrs. Rawlinson had never before seen a judgment note, and while she read them as best she could, she was crying for part of the time that she read them and believed that she was signing only one note for a total of $160,000.00. Mr. Kulaski told the Rawlinsons that since they had readily available assets totaling $160,000.00, the judgment was, in effect, already taken care of. She signed because she knew her husband had a check for $150,000.00 and the p. 473remaining $10,000.00 could be obtained without difficulty. . . . [Germantown Manufacturing thereafter calculated the amount owing on the second note as $212,113.21. It obtained judgment by confession on the first note for $160,000.00 and on the second for $212,113.21.] The first note has been satisfied. Mrs. Rawlinson’s obligation as to it is not at issue. The only issue before us is whether the lower court abused its discretion in opening judgment on the second note.14 . . . [The court notes that a confession of judgment is a drastic remedy in which the debtor gives up her right to defend the creditor’s claim. The law therefore insists on proof that the note was executed voluntarily and consciously. Where the debtor petitions the court to open a confessed judgment, the court’s decision on whether to open the judgment and allow the case to go to a jury is within the court’s equitable discretion. The petitioner must bring the petition promptly and must sufficiently demonstrate a meritorious defense. In deciding whether the defense is meritorious, the court must view the alleged facts in the light most favorable to the petitioner. The trial court’s decision will not be reversed on appeal absent a clear and manifest abuse of discretion.]
In analyzing the judgment notes in question, we are to be guided by the rules which apply to other written contracts. The lower court found that appellee, Joan Rawlinson, presented . . . [the meritorious defenses of fraud and duress], which permitted it to exercise its equitable discretion and open judgment. . . . [W]e affirm the judgment of the lower court. . . .
[The court first addresses the defenses of fraud and misrepresentation and finds that the trial court did not abuse its discretion in finding sufficient evidence of these defenses to constitute a meritorious defense. Viewing the evidence in the light most favorable to Mrs. Rawlinson, Kulaski fraudulently misrepresented to her that her liability was only $160,000, whereas the second note made her liable for an unspecified further amount, which ultimately increased her debt to a total of over $372,000.00. Kulaski knew or should have known that he had deceived her. However, even if Kulaski did not deliberately make the misrepresentation with knowledge that it was untrue, it was still material in that it was likely to have induced a reasonable person to make the contract.] Mrs. Rawlinson testified that she would not have signed had she known the terms of the second note. Thus, the representation may be said to have induced her to sign. . . .
[Although Mrs. Rawlinson did not raise it, and the trial court did not address it, there may also be a meritorious defense based on fraud in the factum.] A typical example of this involves a surreptitious substitution of one document for another, and the innocent party signing it without knowledge or a reasonable opportunity to know the character and essential terms of the substituted document. Here Mrs. Rawlinson believed she was signing one document with a maximum liability of $160,000. . . .
p. 474[We also agree with the trial court that] . . . appellee presented sufficient evidence of duress to constitute a meritorious defense and thus render the contract voidable. Pennsylvania appellate courts have given scant attention of late to this defense as applied to the situation now confronting us.15 . . . [Restatement, Second §§175(1) and 176(l)(b) make it clear that it is improper to threaten criminal prosecution to induce an embezzler or his relative to undertake to repay. This is the improper use of the criminal process for private benefit. The threat is not made less improper merely because the prosecution would be well founded. In fact, the likelihood that it will result in imprisonment increases the coercive power of the threat.]
In the instant case, appellant took the unsolicited liberty of including Mrs. Rawlinson’s name on the judgment notes and did not even tell her it was doing so until minutes before she was asked to sign them. Mrs. Rawlinson had already been in a weakened mental state as the result of a recent miscarriage, and was visibly upset during the meeting, having learned of her husband’s malefactions. At the meeting, she was told that if she cooperated, she would have no need for legal counsel. She understood this to mean that if she signed the notes, her husband would not go to jail. She had no reasonable alternative but to sign. That Germantown Manufacturing was ready to carry out its threat is evidenced by . . . [a letter from Germantown’s attorney to the attorney subsequently retained by Mrs. Rawlinson in which he gave notice that unless the efforts to attack the judgments were withdrawn, he would present the evidence of the embezzlement to the prosecutor].
Appellee’s admission that Mr. Rawlinson actually took the funds does not harm and may even strengthen her defense of duress as “it may be easier to show that the threat actually induced assent in the case of guilt.” Restatement (Second) of Contracts §176 comment c. Moreover, the fact that Mr. Kulaski did not threaten “imminent” arrest should be of no concern in the present analysis. Nor should it matter if the threat of prosecution was not expressly stated. “[T]he bargain is just as illegal when the agreement is implied as when it is express.” 6A A. Corbin, Corbin on Contracts §1421 (1962). It is an affront to our judicial sensibilities that one person’s ability to seek another’s prosecution can be bartered and sold the same as commodities in the market place. It is even more repugnant when the foul stench of oppression pervades the transaction.
It is clear beyond peradventure that the “choice” available to Mrs. Rawlinson exuded impermissible coercion. We note that appellee’s status as spouse to the p. 475alleged embezzler, though not argued as such by appellee, lends credence to our finding of duress in the instant case. Mrs. Rawlinson signed the documents presented her believing that her cooperation was necessary to keep her husband from going to jail. We dare not lend our judicial imprimatur to a transaction which holds the institution of the family in such lowly regard. . . . The only alternative for a reasonable party in the position of Mrs. Rawlinson was to refuse to sign and thus place an almost assuredly unbearable stress on her marriage and on the tranquility of the Rawlinson household. This is the epitome of duress. . . . For these reasons, we affirm the lower court’s order opening the judgment.16
■ QUESTIONS
(1) In dealing with the issue of fraud, the court identified two possible meritorious fraud defenses that Mrs. Rawlinson could raise: fraud in the inducement and fraud in the factum.
1.What fact was misrepresented?
2.Was the misrepresentation an affirmative statement or by nondisclosure?
3.Based on our discussion of fraud in Section B, do you agree with the court that these defenses are meritorious?
(2)The court also says that the misrepresentation was material in that it would have caused a reasonable person to make the contract. To support this, the court alludes to Mrs. Rawlinson’s testimony that she would not have signed had she known the terms of the second note.
1.Do you think that the court adequately justifies this conclusion?
2.Did the court overlook something about the significance of this testimony? In thinking about this question, ask yourself if it was wise for Mrs. Rawlinson to make this assertion, and what impact it might have on her defense of duress.
(3)The court leaves us in no doubt about its feelings for Germantown Manufacturing and its agent, Mr. Kulaski (“ . . . an affront to our judicial sensibilities . . . ,” “ . . . foul stench of oppression . . . ”) and its sympathy for Mrs. Rawlinson, who had endured a miscarriage, followed by the discovery that her husband was a crook and a liar, and then an encounter with Mr. Kulaski and his judgment notes. Would it have made a difference to the court’s analysis and resolution of the duress defense if Mrs. Rawlinson had not suffered a miscarriage in the prior month, she had a tough, self-reliant p. 476personality, and her husband had told her about his embezzlement and firing on Friday, May 21?
(4)Assume that the facts are as set out in the case except that before she signed the note, Mrs. Rawlinson excused herself from the room and called her attorney. After she told her attorney of the circumstances and read the judgment note to him, the attorney explained what a confession of judgment was and said, “Well, you had better sign it; otherwise they will prosecute your husband. Courts hate those notes, so we will probably be able to get it nullified by challenging it if they try to collect on it.” How do you think this might affect the outcome of the case? Do you think that the attorney’s advice was good and helpful?
(5)Is the court’s concern about the policy of protecting the marriage relationship and the contract’s impact on the Rawlinsons’ marriage justified and relevant?
(6)Say that it was not Mrs. Rawlinson but rather Mr. Rawlinson who was seeking to open the confessed judgment that he had signed so that he could raise the defense of duress. Could he show a meritorious defense of duress?
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