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

One of the questions I get asked a lot by my bank and creditor clients is "how long?"  How long til we can get the property back?  And those on the unfortunate receiving end of a foreclosure have the same sort of question - how long til I have to move out? - for different reasons.  Of course the answer is that it depends on so many different things and varies considerably from one county to the nextand one case to the next.  But that's not really the sort of answer anyone can run a bank on or make personal decisions with.  So here are some slightly more specific FAQ  

     1.     How long can I stay in my home if it is in foreclosure? 

If your residence is in foreclosure, it still belongs to you until the time it is sold at sheriff's sale and a confirmation entry is entered by the Court.  So, in plain language, the house is still yours until it is sold at sheriff's sale.  At that time, title to the property passes to the successful purcahser at the Sherriff's sale.  However, it will typically be at least a few more weeks (maybe even two or three months) as a practical matter before the confirmation entry is entered by the Court and the successful purchaser at the sheriff's sale receives the deed.  Because foreclosures are taking so long, in "real life", we are probably talking a year or more.

Double-edged sword is that you ARE still the owner as far as taking care of property......  Soooo,,. if you were thinking about just walking away from the whole mess because you're so far underwater equity-wise, it may not be quite that simple.  For a brief summary of the consequenses ogf this approach, visit Connie Carr's post entitled Mortgage Debt: The Consequences of Walking Away over at the Ohio Real Estate Blog.

     2.      How long will the foreclosure take? 

Talk about impossible questions to answer!  I like to start with the absolute MINIMUMS as far as time periods required if everything went exactly perfectly and there were absolutely positively no delays whatsoever.   Here's what has to happen to at least get to the point of getting a Decree in Foreclosure.  

• Defendants must actually be "served" with the foreclosure Complaint, i.e. they must either actually receive a copy of the Complaint or be deemed served through "publication by service" which means that it's been advertised in those tiny print LEGAL NOTICES part of a local newspaper.  Figure probably a week or two if no problems arise.
• Once "served", under Ohio law, a defendant has twenty-eight (28) days to respond to the Complaint.  So, OK, figure another month here.
• If the defendant does not respond after being served, the plaintiff lender can seek a "default" judgment.  To do this, the plaintiff lender must file a Motion for Default with the Court and wait for the Court to enter the Default Judgment.  This is obviously a HUGE wild card.  Some judges may enter judgment right away while others may just let things sit on their desk for months.  And there's really not all that much the plaintiff lender can do to move things along.  Let's just pencil in a couple of months here as being a not unreasonable period of time for this to happen, but with the understanding that this might well be much longer.
• If, on the other hand, a defendant does respond by filing an Answer to the foreclosure Complaint or there are other complications, the plaintiff lender will need to file a Motion for Summary Judgment.  A Motion for Summary Judgment is similar to a Motion for Default Judgment, but will need to address any arguments brought up by any defendants.  In addition, an Affidavit by an officer of the plaintiff lender will probably also be included setting forth the amount owed and explaining other relevant facts.  Once the Motion for Summary Judgment is filed, defendants have fourteen (14) days to respond and customarily, the plaintiff lender will have an additional seven (7) days to file a responsive Reply.  Here again, it's up to the judge as to when a decree in foreclosure will be entered and there really isn't that much a lender can do to hurry things up.  So, OK, figure 2-6 months here (although I will tell you that I currently have at least one case in which the Motion for Summary Judgment has been pending for more than a year)    

So, to recap, to get from the point the foreclosure Complaint is filed to actually having a judgment Decree in Foreclosure, it's going to be AT LEAST 3 1/2 months or so, and THAT IS SUPER OPTIMISTIC!!!  More likely, you are really looking at six to seven months or more and even that assumes that everything goes perfectly.  My anecdotal expereince is whether commercial or residential, a year or more is NOT an unusual amount of time for a foreclosure to take right now just to get to judgment, even if there is no spirited defense.

     3.     So the case FINALLY has reached that Judgment Decree in Foreclosure stage!  NOW how long til it finally gets auctioned at Sheriff's sale? 

Short answer: one heckuva lot longer than you might expect.  Again, I like to go with what i know to be the MINIMUM periods of time required and work out from there.  Here's what has to happen at this point:

• First off, under Ohio law, the property MUST be appraised by appraisers working for sheriff's office.  This is because, under Ohio law, the opening bid  at sheriff's sale for the proerty MUST be at least TWO-THIRDS of this appraised value.  How long this takes will depend A LOT on what county the case is in.  However, in general, let's figure about a month here.        
• Once the appraisal is done, the Sheriff's Office must set the date on which the property will be offered for sale.  This is where, as a practical matter, things really SLOOOW down.  As a practical matter, this is taking MONTHS right now.  By way of example, Franklin County currently already has sheriff's sales already scheduled through March.  In other words, right now, this step is taking 3 months or more.
• Once the sale date is set, it must be advertised for at least three consecutive weeks.  If there is a silver lining anywhere, it's here where the advertising can take place during the waiting period between the time the sale is set and when it actually occurs.  Also, unlike some surrounding states such as indiana, typically most Ohio counties have sales on a weekly basis.    
• If the sale is cancelled for any reason,even if it was something like a blizzard, the property must be readvertised.  There is no such thing as "postponing" a shriff's sale without the necessity of having to readvertise the property.  However, a new appraisal is not required.

So, to recap here, we're probably talking 3-4 months AT BEST!!!!

    4.     The Sheriff's sale has happened!!!! When do I get $$$?  When do I get the property??? 

OK, here the "good news" is that in Ohio - unlike certain other states -- the "equity of redemption" ends when the hammer falls at sheriff's sale and the Confirmation Entry gets entered by the Court.   The exact process will probably vary from one county to the next.  (On its website, the Franklin County, Ohio Sheriff's Office has helpfully posted an overall summary of its procedures following sale as well as an even  more specific  "What You need to Know as a Potential Third-Party Purchaser"  For other counties, visit the Buckeye State Sheriffs' Association website.)  In general, here's the process: 

• Once the sheriff's sale is over, the confirmation entry is to be submitted within 30 days after the sale,
• Once the Order of Confirmation has been entered, the plaintiff's attorney is to submit the deed to the Sheriff's Office within seven (7) days thereafter
• The successful bidder generally has thirty (30) days following entry of the Order of Confirmation to pay the purchase price to the Sheriff's office, although the precise amount of time will be set forth in the Order of Sale.
• The Sheriff is supposed to record the deed within fourteen (14) days of payment, but that doesn't always happen.  Once the deed is recorded, it will be sent to the successful bidder. 
• The proceeds will be distributed as described in the order of Confirmation after the purchase price has been paid in.

So you're looking at another two or three months here.

     5.     Can I get control of the property sooner by getting a receiver appointed and how long will that take?

Yes, maybe. Appointment of receiver generally only makes sense in the context of commercial properties.  Most  commercial mortgages provide for the appointment of a receiver and especially if there are defaults other than  nonpayment, appointment of a receiver should not be especially difficult.  It is possible in certain cases to obtain appointment  of a receiver on an expedited basis, but the timing and the identity of the individual appointed is still a matter of discretion with the court.  Once the receiver is appointed, the receiver can collect the rents,  handle maintenance issues, and interface with tenants.  However, in non-emergency situations, it is sometimes difficult to obtain a quick hearing date on the Motion to appoint a receiver.  

    6.     What about a "deed in lieu"?  Can that speed things up?

Yes, it can.  However, a "deed in lieu" in which the borrower conveys the property over to the lender, usually in exchange for a release or limitation of liability, only really works if (A) the borrower wants to to do this; and (B) there are no other liens on the property.  If those two criteria are met, a deed in lieu (DIL in the biz) can happen very quickly, perhaps even in a month or less.    

     7.     So the bottom line is.....?

Any way you look at it, foreclosure in Ohio is a long process for either residential or commercial property.  Think at least a year before the property is auctioned at Sheriff's sale and another couple of months before it's finalluy done.  In a commercial foreclosure, getting a receiver appointed early in the case can make the long wait far more palatable to the foreclosing lender as it gives the lender control over the income being produced by the property.

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Franklin County Common Pleas Court has finally joined the courts of other large Ohio counties, and more than a few smaller counties (including Delaware County),  by making pleadings FILED on or after December 1, 2006 available on-line in PDF form.  The key here is FILED, 

In new cases filed on or after December 1, 2009, ALL pleadings will be available on-line.  Incases already pending on December 1, 2009, pleadings already filed will not be available on-line, although dockets showing their filing will continue to be available just as they have been,  However, NEW  pleadings filed in these older case WILL BE available on-line as they are filed, 

Pleadings filed in Tenth Appellate District/Franklin  County Court of Appeals on or after December 1, 2009 will aso be available on-line according to news reports in Business First.  Judges of the juvenile, domestic, and probate divisions of Franklin County Common Pleas Court have elected not to make records in those cases available on-line - probably a good thing given the nature of those sorts of cases. There are also plans to go back and add pleadings already filed to those on-line. 

No additional software or passwords are necessary.  Nor is there any additional charge to view pleadings.  Once on the Franklin County Common Pleas Clerk of Court's website, cases may be searched just as they have been.  When the desired case is located and the docket sheet displayed, a PDF icon will appear to the right of those pleadings available on-line.  Click the icon to view the pleading which can then be downloaded and/or printed, 

Cuyahoga County (Cleveland), Hamilton County (Cincinnati), and Montgomery County (Dayton) have already had pleadings available on-line for quite a while.  In fact, Montgomery County intends to begin requiring electronic filing of pleadings in 2010; this may be available in Franklin County sometime in 2011. 

It's amazing how happy small things ike this can make me.   

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Because getting a judgment and actually getting paid on the judgment are two very different things, it may be worthwhile to "think outside the box" when it comes to finding ways to collect.  If a judgment debtor has patents or other intellectual property, has money coming to them through a bequest under a will, or owns other intangible property, a creditor's bill  may just be the creative solution.

In Ohio, a creditor’s bill action may be used to reach assets of a judgment debtor that might not otherwise be difficult to subject to judgment liens, executions, or garnishment. In re Estate of Mason, 109 Ohio St.3d 532, 849 N.E.2d 998, 2005-Ohio-3256.  It is authorized by Ohio Rev. Code §2333.01 which states in its entirety: 

Equitable and certain other assets

When a judgment debtor does not have sufficient personal or real property subject to levy on execution to satisfy the judgment, any equitable interest which he has in real estate as mortgagor, mortgagee, or otherwise, or any interest he has in a banking, turnpike, bridge, or other joint-stock company, or in a money contract, claim, or chose in action, due or to become due to him, or in a judgment or order, or money, goods, or effects which he has in the possession of any person or body politic or corporate, shall be subject to the payment of the judgment by action.

 Essentially, a creditor’s bill allows a creditor to reach more intangible property interests of the debtor not amenable to garnishment or attachment. Among other sorts of interests, this includes:

• Interests of heirs and legatees. In re Estate of Mason, 109 Ohio St.3d 532, 849 N.E.2d 998, 2005-Ohio-3256.
• Patents in which creditor does not have a security interest. Olive Branch Holdings, L.L.C. v. Smith Technology Dev., L.L.C. , 181 Ohio App.3d 479, 909 N.E.2d 671 (10^th App. Dist. 2009)
• Fees to be received by attorney for legal services provided. Huntington Center Associates v. Schwartz, Warren & Ramirez, 2000 WL 1376524 (10^th App. Dist.).
• Breach of contract claim. Lakeshore Motor Freight Co. v. Glenway Ind., 2 Ohio App.3d 8, 440 N.E.2d 567 (1^st App. Dist. 1981).

So how does one put this sort of remedy in motion?  First, it is important to understand that judgment on the underlying claim must have been obtained.  Then the judgment creditor must file a new lawsuit against the judgment debtor and any third party holding the intagible property owned by the judgment debtor.

The creditor's bill complaint must state that the debtor does not have sufficient personal or real assets subject to execution and levy to satisfy the creditor's outstanding judgment.  This is more than a technicality.  To be successful, a creditor must in fact present evidence of the debtor's insufficient assets and this must be something more than counsel's recitation of facts such as the debtor no longer being in business and conclusory statements.   Graybar Electric Co., Inc. v. Keller Electric Co., Inc., 113 Ohio App.3d 172, 680 N.E.2d 687 (9^th App. Dist. 1996).  Thus, for best results, it may be wise to take a judgment debtor examination or attempt garnishment before filing this sort of action. 

Once the creditor's bill case is filed, the creditor then obtains a lien on the intangible property sought and will have priority over other judgment creditors who have not pursued collection of their judgment in this way.

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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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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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If you have an ownership interest in an LLC or partnership and are having financial difficulties or if someone owes you money and you are concerned about getting paid back, then you want to know about "charging orders".  A charging order is a way for creditors to get to dividends, distributions, or other payments that would otherwise be paid to a person owing the creditor money.

The first thing to know about charging orders is that they don't come into play until AFTER the creditor has obtained a judgment.  In essence, a  charging order “charges” .the judgment debtor’s membership or partnership interest with the payment of the unsatisfied judgment previously obtained by the creditor.  It allows judgment creditors of a partner or LLC member that permits the creditor to receive the profits and distributions otherwise due to the judgment debtor partner or LLC member.  

Because Ohio has recently adopted the Revised Uniform Partnership Act, Ohio Rev. Code §1775.27 which governed charging orders with respect to partnerships has been replaced by Ohio Rev. Code §1776.50 .   Charging orders may also be obtained against members of a limited liability company organized in Ohio and are governed by Ohio Rev. Code §1705.19 which is much less detailed:

To obtain a charging order, the creditor need only file a motion in the case where the judgment was obtained and obtain the appropriate Order.  It is also advisable to include an Affidavit along with the Motion setting forth the amount of the judgment and the equity interest to be charged. Larson v. Larson, 2000 WL 1566522 (11^th App. Dist. 2000).  Ohio, unlike many states, does not make a charging order an exclusive remedy so the creditor may still pursue other remedies against the judgment debtor.

Once the charging order has been obtained, the creditor should specifically notify in writing the partnership and partners or the LLC and its members, as applicable.  The notice should inform them that no further payments should be made to the judgment debtor. The creditor may also proceed with a foreclosure sale of the equity interest and the charging order itself should contain language authorizing the creditor to do so.    

Charging orders are powerful weapons for creditors because if the creditor does foreclose on the partnership or membership interest, the purchaser will be entitled to the judgment debtor’s share of profits and distributions indefinitely, thus potentially resulting in a windfall to such a purchaser.

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Now that the calender has rolled over to 2009, everyone should also be aware that the permissible rate of interest on judgments obtained in Ohio has changed as well.  For new judgments obtained in Ohio courts in 2009 for tort claims or with respect to contracts (including promissory notes and trade accounts) that do not otherwise specify an interest rate, the new rate of interest is ONLY 5%.  This is the lowest it's been since 2005 and quite a drop from the 8% applicable in 2007 and 2008.  For a more detailed explanation of how this number is determined and calculated, visit my previous post "Determining Interest on Ohio Judgments".

Judgments obtained prior to 2009 can continue to accrue interest at the rate specified in the applicable judgment entry.  However, new judgments obtained in 2009 will only accrue interest at 5% even if the permissible rate goes back up in subsequent years.      

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