Developments in Cognovit Notes and Judgments
Over the last few months, Ohio appellate courts have handed down several interesting decisions regarding cognovit notes and judgments -- including one currently on appeal in the Sixth Circuit, Huntington National Bank v. Wallace, on which I'll be doing a separate post. So for the next few posts, I'll be focusing on some of these
For those wanting just the practice pointers coming out of the cases discussed in this post:
- It's OK to continue to have your bank's logo on the front page of a cognovit note, at least in the Tenth Appellate District here in Central Ohio
- Best practice is to box and bold the cognovit warning in PRECISELY the same language as that found in the statute and NOT ADD ANYTHING! If you feel compelled to include additional language, at least do it in addition to and in a smaller type face than the warning.
- Don't worry about having to take cogs in commercial dockets/business courts if available.
- Make sure you can show where a cognovit note is executed and get a good address at least at the time of execution.
Of Logos and Extra Language. If you've always wondered exactly how magic the look and language of the cogonovit wanring on promissory notes really is, read Huntington National Bank v. Burda, 2009-Ohio-1752 (10th App. Dist April 14, 2009). (Hat tip to a Creditor Rights and Bankruptpcy E-Alert sent out by another firm in town for biring the case to my attention) As readers of my previous posts on cognovit notes know, valid cognovit notes require the appearance of certain language "in such type size or distinctive marking that it appears more clearly and conspicuously than anything else on the document" Ohio Rev. Code 2323.13
Many banks like to put their logo at the top of the first page of their promissory notes. And because it's generally larger than any text, I suppose it's not especially surprising that someone would eventually try to allege that the presence of such a logo rendered a cognovit note unenforceable as a cognovit note. That's exactly what happened in Huntington National Bank v. Burda. In addition, the Court addressed the issue of whether the addition of additional language to the cognovit WARNING block rendered it invalid.
The cognovit warning in question looked something like this:
NOTICE: FOR THIS NOTICE “YOU” MEANS THE BORROWER AND “CREDITOR” AND “HIS” MEANS LENDER.
WARNING – BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME, A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU RGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE.
In rejecting the borrower's claims that the warning was insufficient, the Court of Appeals noted that "[i]n creating a warning that appears more clearly and conspicuously than anything else, a drafter of a cognovit note may employ multiple methods - capitalization, italicayion, underlining, bolding, framing the warning with borders or a distinctive type face" and that "a drafter need not go so far as to use 'flashing neon light.'" In this particular case, the court determined that "in combination, the use of bolding, capitalization, type size, and a black box make the warning the most clear and conspicuous part of the promissory notes."
With respect to the argument that the prominence of the Sky Bank logo made the warning invalid, the court concluded "the warning is more clear and conspicuous, particularly because it - unlike the words "Sky Banl" -- is enclosed in a box with thick black margins,"
As far as the additional sentence in the warning, because it was set off from the statutory warning, it did not vitiate the warning. The Court of Appeals did note that courts of appeal in Ohio's Fifth and Seventh Appellate Districts had vacated cognovit judgments where note did not include a "verbatum recitation of the statutory warning", the Court held that this situation was more like that faced by Ohio's Eighth Appellate District in Olmsted Lumber Co. v. Palmetto Homes, Inc., Case No. 41802 (June 12, 1980) with the language being "mere surplusage" As the Court of Appeals saw it:
Although included in the black box with the warning, the additional sentence is separated from the warning by a space and the use of smaller, regular (not bold) type. Because the additional sentneceis not incorporated into the warning, it does not modify the warning,
Role of Commercial Dockets/Business Courts. Whenever a new wrinkle is added, there's always a transition period in which the outside limits are tested. In the recent case of GLIC Real Estate Holding, L.L.C. v. 2014 Baltimore-Reynoldsburg Road, L.L.C., 906 N.E.2d 517, 2009-Ohio-2129 (Common Pleas-Franklin Cty), the Court was asked to decide whether a cognovit judgment requires that the case be first assigned to the new commercial docket being tried in several parts of the State of Ohio and that judgment only be rendered by a commetical docket judge rather than than the usual duty judge procedure.
As I've explained the process before, the Court of Appeals noted:
As is customary with cognovit note cases, the judgment [in this case] was entered by another judge of this court serving that week as the court's duty judge. The duty-judge responsibility rotates week-by-week through all judges in the court. For many years, cognovit note cases have routinely been routed to the duty judge serving when the case is filed.
Apparently, challenging a cognovit judgment on the basis it should have been entered by a commerical docket judge has caught the fancy of other defendants as well:
Since it was created in January 2009, arguments have been raised in several cases that the assignment of cases to the commercial docket is a jurisdictional requirement. This, it is argued, rulings may only be made in cases otherwise meeting the criteria for the commercial docket by one of the two judges in Franklin County specifically assigned to the docket by nthe Chief Justice of the Supreme Court of Ohio.
No doubt gladdening the hearts of creditors' attorneys such as myself throughout the state, the Court rejected this argument, saying
While the judgment challenged in the case was not rendered by a commercial docket judge, that fact has no jurisdictional significance. The temporary rules of superintendence do not demand that commercial cases only be decided by a commercial judge, failing which they are void or voidable. Instead, those rules are concerned with case-assignment and case-management procedures. They do not -- indeed could not -- alter the jurisdiction of the court.
Location, Location, Location - Jursdiction for a Cog Judgment. We all know that cognovits are disfavored so it should really not come as not too much of a surprise that it really does matter where the promissory note was executed and where the makers reside/have their principal office when the judgment is taken.
In Pheils v. Glass City Sales, LLC, 2009-Ohio-4623 (3rd App. Dist.). the plaintiff attempted to take a cognovit judgment against the defendant company in Seneca County, alleging that the company's ownership of real property in that county was sufficient to give the court jurisdiction. The Court of Appeals disagreed, saying "The fact that Glass City Sales purchased the property [in Seneca County] and its name was placed on the deed using the property's address does not, without more, prove that it conducted business from the site." Apparenlty, there was also an affidavit by one of the individual defendants to the effect that the defendant company never did business in Seenca County.
There are several things I don't like about this case. The defendant company's Articles of Organization were apparently incomplete in that they did not include an address for the LLC. While i suppose the creditor should have done a better job of getting an address at the time the note was executed, it doesn't seem unreasonable to me that the ownership of property in the county suggests some level of business being conducted. It also seems like it would have been a whole lot easier just to depose the individual defendants as to where the defendant company's place of business was.
Instead what we wind up with is a case underscoring the importance of having a cognovit note at least stating the county in which it is being executed to eliminate this sort of problem.
Copies or Originals? Finally, while these are not exactly recent decisions, I did discover a couple of decisions indicating that, contrary to what I've always taken as an article of faith, at least some courts in Ohio may be willing to allow a cognovit judgment to be taken without the necessity of producing the original promissory note. Ohio Courts of Appeal for the Sixth and Seventh District Courts of Appeal have ruled that producing merely a copy of the note containing the cognovit provisions is enough. Masters Tuxedo-Charleston, Inc. v. Krainock, 2002-Ohio-5235 (7th App. Dist.); Fogg v. Frieser, 562 N.E.2d 937, 55 Ohio App.3d 139 (6th App. Dist. 1988).
It's true that Ohio Rev. Code section 2323.13 states "[t]he original or a copy of the warrant shall be filed with the clerk." So, technically I suppose these courts are correct. However, practical custom still seems to be that most judges most places still like to see the originals.
