Ohio Practical Business Law : Columbus Ohio Business Lawyer & Attorney : Teri Rasmussen : Plunkett Cooney Law Firm : Commercial Law, Creditors, Business Formation : Columbus, Central Ohio

I'm finishing up my recent series of posts on cognovit notes and judgments with a summary of the key things to know about cognovit notes and judgments in Ohio.   

     1.  Shortcut to Judgment.  Cognovit notes provide a shortcut to judgment, allowing a creditor to take a judgment immediately (and I mean within MINUTES) of the filing of the Complaint.  No advance notice to the debtor required.  For more information on how this works, visit my Cognovit Promissory Notes Explained post.

     2.   Few States Allow.  Ohio is one of only a handful of states permitting cognovit judgmentsnat all. In fact, as far as I know, they are only enforceable in OHIO, Pennsylvaina, Maryland, Virginia and Delaware.  Visit An Examination of Confession of Judgment Statutes in the Mid-Atlantic States  for a very concise and specific summary of what is required in each of these states for a valid cognovit note.  In Indiana, it's even a Class B misdemeanor (punishable by a $1,000 fine or 180 days imprisonment)  to include cognovit language in a promissory note or to try to enforce a cog taken somewhere else like, say, Ohio. Indiana Code 34-54-4-1  

     3.  Commercial Deals ONLY.  Cognovit notes are valid ONLY in commercial transactions involving businesses and are not enforceable with respect to consumer obligations.   Ohio Rev. Code 2323(E).  

>>>>>>      The rest of these points pertain ONLY with respect to Ohio cogs.  

     4.   Follow the Statute.   DO NOT VARY IN ANY WAY WHATSOEVER THE LANGUAGE OF THE STATUTORY COGNOVIT WARNING.  The cognovit warning  should appear IMMEDIATELY (and I mean WITHOUT ANYTHING IN BETWEEN)  above(preferably) or below the signature line and should look EXACTLY like this for best results:

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.   

     5.  Confession of Judgment Must Also Be included.  Do not forget to include the enabling language authorizing confession of judgment within the body of the promissory note, guaranty or other instrument.  If the enabling language is not included, the instrument will still be enforceable but will not be any good for taking a cognovit judgment.  Klosterman v. Turnkey-Ohio, L.L.C., 2009-Ohio-2508 (10th App. Dist.).   The statute does not specify the exact language to be used, but over time certain language has customarily come to be used in virtually every Ohio commercial note or guaranty.

      6.  Enforceable Where Signed or Where Maker Located. Cognovit judgments must be taken in (A) the County in which the cognovit note was signed; OR (B) the County in which the individual resides or the business has its principal office.  Ohio Rev. Code 2323.13(A)

     7.   Not Required to Use Business Courts.  At least for now, the existence of commercial law dockets/business courts does not require cognovit judgments to be taken by a judge of that docket  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)

     8.  Signing Cog Doesn't Create Attorney-Client Relationship.  No attorney client relationship is established when an Ohio attorney signs a cognovit answer on behalf of a defendant.  It is simply a ministerial act and does not subject the attorney signing the answer to any claim of unethcialconduct..  Opinion 93-3 Ohio Supreme Court Board of Commisioners on Greivancxes and Discipline,  Dibenetto v. Miller, 180 Ohio App.3d 69, 2008-Ohio-6506 (1st App. Dist.).

     9. Copies May Do.  While many Ohio courts may require or at least expect the original promissory note containing the cognovit provision to be produced, the statute does permit use of a copy.  Ohio Rev. Code 2323.13(A).  Good luck with that one - call me when you're able to get the judgment without showing the original of the note to  the judge.

       10.    Getting a Do-Over.  It does not take as much to open up a cognovit judgment thorugh a Rule 60(B) motion as it does with rexpect to other judgments.  However, you have to at least show that a meritorious defense exists, at least in theory.  Visit my previous post What It Takes to Open Up a Cog Judgment to find out more details.

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When I hear the word "indulgences", my mind immediately goes to something "sinful" and well, probably fun.  In this case, however, I'm talking about  that ubiquitous provision found in loan documents designed to allow lenders to continue to hold borrowers and gurantors liabile notwithstanding the lender's failure or inability to abide by the letter of the loan documents or to exercise all or some subset of its rights upon default in a manner saitsfactory (usually with the benefit of 20-20 hindsight) to the borrower and/or gurantor.  Does this stuff really worK?   

Suppose you have this deliquent borrower -  let's call him "B"  -- on a promissory note (though it could be any obligation) and collateral not worth enough to pay you off in full.  But then you also have this guarantor -- let's call him "G".  Somewhere along the line one of your folks messed up in that "commercial reasonable sale" thing that's supposed to happen when you repossess and liquidate collateral.  Or maybe you let a financial covenant default here and there pass for the time being.  Or perhaps you just extended the maturity date or went interest only for B for a while.  Question is whether you're still OK because you can hold G - who does have assets - liable for the obligation.

Most, if not all, bankers and their counsel would say "yes" because both the UCC and our loan docs say we can.  Which is why  Huntington National Bank v. Wallace, 2009 WL 2023891 (N.D. Ohio 2009) -- now on appeal to the Sixth Circuit and the subject of my last post -- is an important case to watch. 

In a nutshell, the Bank had allowed advances to the Borrower to fund draws on letters of credit in excess of a  "maximum amount" specified in the loan documents and the Bank was pursuing one of the guarantors,  Bank took cognovit judgment and guarantor sought relief from judgment   Federal district court held that the indulgence clause was not sufficient to preclude relief from judgment.

Initially, as a lender-oriented attorney, the case concerned me. It seemed to suggest that lenders permitting any sort of modification -- other than the most vanilla extension of time sort --would now be accepting a substantially greater risk that such forbearance would relieve any guarantor not explicitly consenting from liability. In addition, the manner in which it brushed aside the waivers contained in the “indulgence” clause as inapplicable sent a cold shiver down my spine.   And the logic of the ruling would be applicable not just to cognovit notes, but really any sort of obligation.  So, taken as a whole, if upheld by the Sixth Circuit, the decision seemed likely to convince many lenders that it simply was not in their best interests to work with delinquent borrowers.

As I've thought about it more, however, I've begun to think this decision makes more sense and is less alarming than I had first surmised.  The decision in fact makes an important distinction between the nature and extent of the obligation intended by the parties to be guaranteed on the one hand and mistakes and errors made by the lender in enforcing the guaranty on the other.  In this particular case, the guaranty was never intended to be unlimited - there was a clearly stated unambiguous cap on the amount of credit to be extended to the borrower at particular times.  In continuing to permit advances to fund letter of credit draws, the Bank exceeded this previously agreed limitation on the amount for which the guarantor had accepted responsibility for seeing was paid.

When read closely, the language itself – and certainly the concept originally underlying inclusion of such a clause – is about the consequences of the Bank’s inaction or failure to take appropriate steps to ensure the obligation guaranteed could be satisfied from sources other than the guarantor. When viewed from this perspective, the decision leaves largely intact a lender’s ability to rely on indulgence clauses with respect to events and actions occurring during the course of a workout situation.  It is only a lender’s decision to continue extending credit to the borrower beyond an explicitly agreed–upon point that becomes a problem.

Granted, the ruling is still worrisome.  In asset-based lending, a lender may unknowingly extend credit beyond the “availability” permitted pursuant to a borrowing base calculation formula.  And in the Wallace case, the Bank was obligated to honor letters of credit previously issued and really did not have the ability to refuse to make further advances.

What also makes things a bit problematic for me in this case is that the “cap” in question was only for a very short, almost temporary, period of time and was substantially less than it was at other times.  Had the events occurred but a couple of months earlier or later, the cap would not have come into play.

For me, the take-away lessons for now from this case are:

•  If at all possible, obtain guarantor consent to any modifications or waivers at the time the modifications are made or waivers given.  I already do this anyway, but now it will be even more important.
•  If a lender wants the guaranty to truly be unlimited and/or cover over-advances, the guaranty should say so very explicitly.
• Problems arising due to lack of perfection, release of collateral or other obligors, or other events and circumstances connected with an aspect of the lending relationship that do not pertain to the amount advanced are probably still within the protection of indulgence clauses.   

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How would Peanuts’ Linus manage without his trusty security blanket? Depending on the result, the Sixth Circuit reaches in a recently appealed cognovit judgment case, financial institutions such as banks and others relying on cognovit notes, and perhaps ordinary promissory notes as well, may well have to face a similar question.

Every guaranty I’ve seen has some variation of what is sometimes called an “indulgence” clause. These provisions essentially say that a guaranty remains in effect even if the Bank waives a default by the primary obligor or errs in its collection efforts. Now a federal district court, applying Ohio law, has snatched this security blanket away, saying that such a clause does not allow the lender to ignore the credit terms of a loan with impunity. 

In Huntington National Bank v. Wallace, 2009 WL 2023891 (N.D. Ohio 2009) (Case No.09CV408, Carr, J.), decided August 19, 2009, the defendant guarantor alleged he had a meritorious defense justifying vacation of the cognovit judgment taken against him. His argument was that because the Bank made a “material alteration” to the terms of his guaranty by continuing to allow advances even though the amount outstanding exceeded the prescribed “maximum amount”, his guaranty obligation was rendered invalid. 

The Bank has now appealed the case to the Sixth Circuit (Case No. 09-4172).  If upheld, the decision may have far reaching consequences beyond cognovit notes.  The district court decision suggests that the ONLY modification to an obligation that a lender may comfortably do is an extension of time unless the guarantor agrees.  It could also be taken as meaning that even if the guarntor consents, such modifications would release the guarantor of all liability

Factual Background

The underlying fact scenario is a common one. In August 2007, a company known as Bellepointe entered into a First Amended and Restated Loan and Security Agreement “Loan Agreement”) with the Bank. The Loan Agreement governed three separate obligations – a term note, a line of credit, and a “Guidance Line” involving draws on letters of credit. Michael Wallace (“Wallace”), the father of the company’s owner, executed a guaranty of Bellepointe’s indebtedness to the Bank; the son also executed a guaranty, but the case pertains only to the father’s guaranty.

The guaranty excluded any liability for the term loan indebtedness and also capped the maximum amount of liability with respect to the Line of Credit. The crux of the case focused on the proper interpretation of certain language found in the Loan Agreement and the Guidance Line cognovit note, to wit: 

Notwithstanding anything to the contrary contained herein, the maximum amount available under the Guidance Line shall be as follows:

from the date hereof through and including 11/30/07 - $865,000

12/1/07 through and including 12/31/07 - $250,000

1/1/08 and thereafter - $550,000      

These provisions obviously required a substantial reduction in the amount outstanding as of December 1, 2007. It is not altogether uncommon for lines of credit to require a substantial reduction in the amount outstanding at least once a year. 

Procedural History

Procedurally, the case is a bit complicated. Apparently there was some discussion back and forth between Wallace and the Bank concerning his liability prior to any lawsuit being filed. When those talks broke down, Wallace filed a declaratory judgment action in the Southern District of Ohio federal district court against the Bank on February 11, 2009. Two days later, the Bank took a cognovit judgment against Wallace in Lucas County Common Pleas Court. The Bank said it had no knowledge of the declaratory judgment action when it took the cognovit judgment. 

Wallace promptly removed the state court cognovit judgment action to federal district court for the Northern District of Ohio, apparently on diversity grounds that he was a resident of Florida, and sought relief from judgment. After the Northern District federal court granted the motion to vacate the cognovit judgment, the Bank appealed to the Sixth Circuit where the case is now pending. It appears likely that the Southern District declaratory judgment action will be consolidated with the pending Northern District cognovit action.

The Decision 

Wallace alleged that the Bank continued to make advances on the Guidance Line in December 2007 even though Bellepointe had failed to reduce the amount outstanding as required.  Consequently, he contended that the Bank’s actions caused a “material alteration” in the nature of his guaranty obligation, thereby relieving him of liability under his guaranty. The Bank did not dispute that the advannces exceeded the "maximum amount."  However,it countered by pointing out that its loan documents had one of those “indulgence clauses” which stated:

Guarantor hereby promises that if one or more of the Obligations are not paid promptly when due, he will pay the Obligations to Bank, irrespective of any action or lack of action on the Bank's part in connection with the acquisition, perfection, possession, enforcement or disposition of any or all Obligations....   Guarantor agrees that no extension of time, whether one or more, nor any other indulgence granted to [sic] Bank by [sic] Debtor, or to any other gurantor, or any of them, and no omission or delay on Bank's part in exercising the right against, or in taking any action to collect from or pursue Bank's remedies against Debtor or any other guarantor, or any of them, will release, discharge or modify the duties of guarantor hereunder.

In addition, the Bank insisted that it was obligated to pay the draws on outstanding letters of credit in any event and that the definition of “advances” used in the line of credit differed from the definition of “maximum amount available” for precisely this reason. It also argued that the “indulgence” provisions in Wallace’s guaranty allowed it to ignore Bellepointe’s default in any event.  

So what happened? The federal district court agreed that the provisions of the loan documents did allow the Bank to continue making advances in December 2007. However, the court also noted that “Wallace’s burden is only to allege a meritorious defense, not to prove that he will prevail.” It went on to say:

Even if Wallace had initially failed to allege sufficient facts to support his defense, he has subsequently submitted an affidavit describing the above referenced facts, Wallace alleged sufficient facts for this court to evaluate whether his defense is meritorious.

And the reason? The Court cited Toland v. Key Bank of Wyoming, 847 P.2d 540 (1993) and Frost National Bank v. Burge, 29 S.W.3d 580 (Tex. App. 2000) for the proposition that “’indulgence’ is limited to extensions of time for payment and contract terms permitting indulgences do not waive suretyship defenses.” That’s it!  Really isn’t any further analysis or discussion. 

What IS interesting and informative are the briefs of the parties filed in the federal distriuct court case.  Leaving out exhibits, but including affidavits,here they are:

• Wallace's Motion to Vacate
• Bank's Responsive Memo in Opposition
• Wallace's Reply
• Bank's Sur-reply

Now I think the district court got this wrong and I’d really have appreciated a little further analysis of the pertinent provisions in the loan documents so I could fully understand the Court’s reasoning.  However, I also think the Sixth Circuit proceedings will be rather interesting to follow in the months ahead for lender attorneys everywhere. I’ll share my thoughts about the decision in more detail in my next post. 

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Creditors love cognovit notes because of the shortcut to judgment they offer upon the default of a borrower.  However, all is not entirely lost for unfortunate judgment debtors.  Recently, a case involving a cognovit note executed in connection with an asset purchase of a business discussed in more detail what a judgment debtor must demonstrate to obtain relief from a cognovit judgment.  See Baker Motors, Inc. v. Baker Motors Towing, Inc., 2009-Ohio-3294  (8th App. Dist.).  

Standard for Vacating a Cog

It is well accepted that the 60(B) standard for relief from judgment  is not as stringent with respect to opening up a cognovit judgment as it is for other judgments in that only a meritorious defense timely asserted need be shown.  Lykins Oil Company v.  Pritchard,169 Ohio App.3d 194 (2006).; it is not necessary to demonstrate that the defense would prevail. 

To successfully assert the existence of a meritorious defense to a cognovit judgment, the judgment debtor must demonstrate it "goes to the integrity  and validity of the creation of the debt or note, the state of the underlying debt at the time of confession of judgment; or the procedure utilized in the confession of judgment on the note"  First Nat'l Bank of Pandora v.Freed,  2004-Ohio-3554 (3rd App. Dist.); First Merit Bank N.A. v. NEBS Financial Servs., Inc., 2006-Ohio-5260  (8th App. Dist.)(emphasis supplied)   (For more on this standard, visit my previous post on American College of Cognovit Lawyers Ohio Case Roundup.)

While defenses available to a maker of a cognovit note are "extremely limited", there are some meritorious defenses which would justify granting relief from jugment according to the Court of Appeals in Baker:

 The "defense of 'non-default' is certainly one. Other asserted defenses found meritorious include improper conduct in obtaining the debtor's signature  on the note; deviation  from proper procedures in confessing judgment on the note  at the time of confession of judgment.

Standard Applied 

In the Baker case, successor liability was imposed on the purchaser for certain workers compensation obligations to the State of Ohio.  The purchaser consequently stopped making payments on the cognovit note given the seller for the balance of the purchase price.  Predictably the seller then took a cognovit judgment against the purchaser who immediately moved to have the judgment vacated.  The purchaser alleged the following defenses:

• its obligations under the note were excused by the seller's breach of its warranty that the assets were free and clear of liens and adverse claims.
• it had a right to set off the workers' compensation liabilities against its liabilities under the note
• its payment obligations were suspended when it notified the seller of the liability being asserted against it 

In analyzing the case before it , the Court of Appeals first noted that a "counterclaim or setoff is not a meritorious defense to a cognovit judgment."  Why? Because, according to the Court,  it "is, in effect, a claim that would reduce or satisfy the amount due on the note."  Now to me that sounds like a meritorious defense, but then I'm not on the Court of Appeals.  And from a lender's counsel perspective, I'm sure it was the correct interpretation; it is at least consistent with similar law in replevin actions.  With this perspective, the Court of Appeals held that neither the seller's breach of its warranty of title that the assets being sold were unencumbered  nor its alleged setoff claim would qualify as a meritorious defense permiting relief from judgment on the cognovit note. 

This, however, did not mean that the plaintiff seller won.  In what I would consider a victory for a lawyer's penchant for essentially dealing with the same issue in multiple places in a document, the Court of Appeals found a meritorious defense in other remedies given the purchaser in the event of the seller's default of its obligations under the asset purchase agreement.  Tucked within the Asset Purchase Agreement was a provision which allowed the purchaser to suspend payment on the cognovit note upon giving notice to the seller of assertion of workers compensation claim against the purchaser. 

The Asset Purchase Agreement apparently gave the seller one hundred eighty days to resolve the problem with the workers compensation claims and authorized the suspension of payments  on the cognovit note during that time.  What the decision doesn't explain is whether the Asset Purchase Agreement had any provision for what would happen if the seller failed to resolve the workers compensation liability.  Nevertheless this provision was sufficient for the Court of Appeals to overturn the cognovit judgment and send it back down to the lower court.

Practical Pointer

Perhaps the best take-away from this is that it is not always duplicative to address important issues in multiple sections of documentation of transaction.   The line between setoff, counterclaim, and defense, is often very thin. So providing multiple sorts of remedies for breach may well be a good idea.

>>> For more on the basics of cognovit notes, visit my Cognovit Promissory Notes Explained post. 

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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.

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The other day, one of my attorney friends called to see if I could "sign a cog" for him, by which he meant confess judgment for the defendants by signing an Answer to the Complaint on their behalf.  Since this function is considered merely a ministerial act in Ohio and gives rise to no actual attorney-client relationship with the unfortunate defendants, I said sure and we made a date for lunch when I'll sign the pleadings. 

I've previously posted on the enforceability of cognovit promisory notes, but I thought it might be useful to step back for a moment and explain in more detail what they really are.  Ohio is one of only a handful of states that still allow the enforcement of cognovits in commercial transactions.  To the best of my knowledge, it has been decades since any jursidiction permitted cognovit provisions to be enforced in consumer transactions.  While cognovit provisions are most commonly used in promissory notes, they can also be used in guaranties, litigation settlement agreements and even contracts involving the payment of money.   

As long as the debtor does not default, there is really no practical difference between a cognovit promissory note and any other promissory note.  However, when  things go bad, they head south much faster for the borrower who signed a cognovit note.   

Language.  Cognovit notes are simply a special kind of promissory note -- with the addition of certain statutorily required language.  That extra verbage gives creditors an unusually rapid path to judgment and collection activities in the event of a default by the borrower.  In Ohio, cognovit provisions are effective ONLY if they have the language required by Ohio Rev. Code 2323.13.  Thus, the following warning - IN EXACTLY THIS LANGUAGE - must appear "in such type size or distinctive marking that it appears more clearly and conspicuously than anything else in the document" immediately above or below (customarily it will be just above) the signature of the debtor:

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 REGARDLESS 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.

To ensure compliance with the statute, this language is typically in a larger boldfaced typeface and often boxed.

In addition, an authorization to take a cognovit judgment must be contained somewhere in the body of the promissory note or other instrument of indebtedness,   Thus, generally near the end of the document, the following language (or something fairly similar) must appear:

WARRANT OF ATTORNEY

Each of the undersigned authorize any attorney at law to appear in any Court of Record in the State of Ohio or in any other state or territory of the United States after the above indebtedness becomes due, whether by acceleration or otherwise, to waive the issuing and service of process, and to confess judgment against any one or more of the undersigned in favor of the Bank for the amount then appearing due together with costs of suit, and thereupon to waive all errors and all rights of appeal and stays of execution.  No such judgment or judgments against less than all of the undersigned shall be a bar to a subsequent judgment or judgments against any one or more of the undersigned against whom judgment has not been obtained hereon; this being a joint and several warrant of attorney to confess judgment.

Execution.  To be valid, a cognovit promissory note must either be signed in Ohio or the borrower executing the cognovit must reside in Ohio at the time judgment is taken.  To ensure enforceability, virtually all creditors will require execution in Ohio, even if that means the borrower must make a plane trip.

Enforcement.  The primary value of cognovit provisions is that they provide a shortcut to judgment for the creditor.  If the debtor defaults, the creditor can file a complaint, as well as an answer on behalf of the delinquent debtor, and obtain judgment within minutes of filing the action rather than having to wait a month or more to obtain a default judgment.  Within minutes after that, bank account or wage garnishments or other post judgment action can be instituted against the now judgment debtor.  Thus it is entirely possible that the defaulting borrower's bank account will be cleaned out by the creditor before the debtor even knows judgment has been taken.  The only requirement is that the ORIGINAL of the note or other document with cognovit provisions must be produced and shown to the judge before judgment is entered. 

Traditionally, the job of taking cognovit judgments falls to the youngest lawyer in the office.  In urban populated areas like Columbus and Franklin County where I practice, taking a cog is really no big deal from the standpoint of difficulty.  You simply call one of your attorney friends and take them to lunch in exchange for their signature on the purported answer of the debtor and then head down to court with the pleadings and the original note.  Once there, you file the Complaint and then find your way to the "Duty Judge" who checks to make sure you have the original promissory note or other instrument with the cognovit provision, signs the judgment entry, and gives it back to you to be filed downstairs with the Clerk.  If you want to hit some bank accounts belonging to the defendant, you can then do that too, although I usually let the court runner take care of that in his next run because there's lots of copies involved and it takes too long.  The whole thing takes maybe an hour at most, but it does have to be a real lawyer who does the deed - no paralegals or laypeople allowed.

In more rural counties, taking a cog can sometimes be an adventure.  Often there is only one judge for the county and if he or she is in trial, well then you just have to wait for a break in the action.  In addition, I have strong and not so pleasant  memories of one judge in particular cross-examing me at length about whether our "Warning" was distinctive enough.  For a while, I was seriously concerned that he would refuse to sign my judgment entry and began wondering just how I was going to be able to spin this one and explain coming home without the judgment.  Fortunately for me, the judge did eventually sign the entry and my membership in the mythical American College of Cognovit Lawyers remained secure.         

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