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Barclays American/Business Credit Inc. v. Otterstrom

filed: July 18, 1988.

BARCLAYS AMERICAN/BUSINESS CREDIT, INC.
v.
JAN G. OTTERSTROM, APPELLANT



On Appeal from the United States District Court for the District of Delaware, Civil No. 86-291.

Seitz, Sloviter, And Hutchinson, Circuit Judges.

Author: Seitz

Opinion OF THE COURT

SEITZ, Circuit Judge.

Appellant Jan G. Otterstrom appeals from the order of the district court denying his objections to the entry of judgment against him and his objections to the issuance of a writ of execution on that judgment. District court jurisdiction was based on diversity of citizenship. We have jurisdiction pursuant to 28 U.S.C. § 1291 (1982).

I.

On December 30, 1983, Otterstrom, an attorney in the state of Washington, agreed to invest in HCU Partnership ("HCU"), a Delaware limited partnership involved In acquiring and leasing hydrocarbon conversion processing equipment. Otterstrom made his decision after receiving a telephone solicitation in the state of Washington. Otterstrom signed several documents in connection with his investment, including a subscription agreement and a note to HCU in the amount of $90,000, dated as of December 30, 1983. The subscription agreement contained the disclosure that the partnership units were not being registered under the Securities Act of 1933 nor the laws of any state. The note contained a confession of judgment provision that "authorize[d] and empower[ed] the prothonotary or clerk or any attorney of any court of record to appear for and to confess and enter a judgment" against Otterstrom.*fn1 Otterstrom also consented in the note to be sued in any court of competent jurisdiction in Delaware or Connecticut and to the in personam jurisdiction of such courts.

In February 1984, pursuant to a loan agreement, Otterstrom's note (among others) was assigned by HCU to Barclays American/Business Credit, Inc. ("Barclays"), a Connecticut corporation, as collateral for a loan. In October 1985, Barclays notified the HCU limited partners and investors of a default by HCU under the loan agreement.

Barclays subsequently initiated this action to confess judgment in the United States District Court for the District of Delaware. The court applied Rule 7.2 of the Local Rules of Civil Practice, which establishes the procedures for entering and executing judgment in diversity cases on a debt where the debtor has confessed judgment.*fn2 After receipt of notice of the action, Otterstrom filed an objection to the entry of judgment and, in advance of the scheduled hearing, also objected to the execution on the judgment. The hearings on both issues were consolidated by stipulation of the parties.

The district court first held a hearing on Otterstrom's objection to the entry of judgment. The issue at this hearing was limited to the question of whether Otterstrom knowingly and voluntarily waived his right to a hearing prior to the entry of judgment. The court ruled that he had so waived his rights and therefore entered judgment in favor of Barclays on the note.

Pursuant to the local rule, the district court proceeded to examine defenses to execution on the judgment asserted by Otterstrom. Under Local Rule 7.2(H)(3)(c), "the debtor may raise any appropriate defenses." Noting that the local rule is based on the Delaware statute, which limits the defenses that the debtor may raise to those "of which he had no knowledge at the time he signed the instrument containing the warrant of attorney to confess judgment or which arose subsequent to the signing of such instrument," Del. Code Ann. tit. 10, § 2306(j) (1975), the court concluded that the "appropriate defenses" provided by the local rule were subject to those statutory limitations.

Otterstrom contended that the confession of judgment provision in the note was invalid.*fn3 He asserted that the securities transaction was illegal under Washington state law because the securities were not registered nor were they subject to any applicable exemption. See Wash. Rev. Code §§ 21.20.140-320. Arguing that Washington courts would not enforce a contract stemming from such an unlawful transaction, Otterstrom contended that the district court should have held the confession of judgment provision to be void. Thus, asserting that Washington courts would leave the parties in the position in which it found them, he argued that he was not obligated to fulfill his obligation; under the note.

The district court, however, noting that the absence of registration was disclosed in the subscription agreement that Otterstrom signed, held that Otterstrom had knowledge of this defense when he signed the note.*fn4 Therefore, the court concluded that, even if this defense were valid, it was waived under the Delaware statutory framework. The district court entered an ...


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