Beware Of "Pocket" Judgments In Settlement Negotiations

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In settlements, we often request that the debtor enter into an agreed judgment, perhaps with a simultaneous forbearance agreement outlining a payment plan. Debtors are often reluctant to sign these and typically ask that the agreed judgment be held, and not submitted to the judge for signature, unless and until a default has occurred. Sometimes referred to as a “pocket" judgment, these are never a good idea from the creditor’s perspective.

An agreed judgment must be “agreed” at the time the judge signs it. So, if the debtor misses a payment, and the agreed judgment is then submitted to the court, all the debtor has to do is object to the entry and it is no longer “Agreed."

There are also jurisdictional concerns as to whether the court can retain plenary power to enter an agreed judgment if the case was dismissed at the time of settlement.

In University General Hospital, LP v. Siemens Medical Solutions USA, Inc., a debtor recently won an appeal on that very issue. No. 01-12-00174-CV, 2013 Tex. App. LEXIS ____ (Tex. App.--Houston [1st Dist.] February 28, 2013, no pet. history). The court of appeals declared a $5.5 million judgment void because the trial court no longer had the plenary power to sign the agreed judgment that the creditor submitted after the debtor allegedly defaulted under the settlement agreement.

Bottom line: If you are the creditor, never agree to a pocket judgment.

 


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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