5 January 2021
/ Andrew C. Voorhees
The Supreme Court of Ohio Upholds the Validity of Statutory Language in Cognovit Notes
The Supreme Court of Ohio recently delivered some good news to commercial creditors that utilize cognovits promissory notes to help secure performance of repayment obligations. In Sutton Bank v. Progressive Polymers, LLC et al., 2020 Ohio 5101, the court reversed a decision from the Eleventh District Court of Appeals and held that a cognovits note provision was not defective when the creditor used the required statutory warning language which displayed the clear intent of the parties.
While due process arguments against confession of judgment clauses have limited their widespread use, there are some states that allow them. Ohio Revised Code § 2323.12 allows for judgments by confession and states:
A person indebted, or against whom a cause of action exists, may personally appear in a court of competent jurisdiction, and, with the assent of the creditor, or person having such cause of action, confess judgment; whereupon judgment shall be entered accordingly. The debt or cause of action shall be briefly stated in the judgment, or in a writing to be filed as pleadings in other actions.
Such judgment shall authorize the same proceedings for its enforcement as judgments rendered in actions regularly brought and prosecuted. The confession shall operate as a release of errors.
Before a judgment by confession can be held to be valid and enforceable, there must be compliance with strict statutory requirements. Ohio Revised Code § 2323.13 outlines these requirements. As for the clause itself, Ohio law requires that the following language, called a warrant of attorney, appear in the contract or instrument:
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.
Ohio Revised Code § 2323.12(D).
Not only must the warrant language appear, but the statutory language must appear “above or below the space or spaces provided for the signature of the makers, in such type or size or distinctive marking that it appears more clearly and conspicuously than anything else on the document.” This is to avoid contracts where the warrant of attorney is buried within boilerplate or other fine print.
In Sutton, the debtor obtained a loan from the bank via promissory note that contained the required warning language of 2323.13(D). The debtors subsequently defaulted on the note and the bank obtained a judgment by confession. The debtors sought to vacate the judgment, which was denied and ultimately gave rise to the appeal in the Eleventh District Court of Appeals.
The debtors’ argument on appeal was that the statutory warning language included in the note was defective in that it failed to put the debtors on notice of the rights they were waiving. In support, the debtors argued that the terms “You” and “Your” were defined earlier in the note as referring to the bank. Since those same words were used in the statutory warning, the debtors argued that the language could only have been directed to the bank.
While the Ohio Supreme Court noted that cognovits notes are to be “strictly constructed against the party seeking enforcement”, traditional rules of contract interpretation apply to cognovit provisions and words will be given their ordinary meaning unless a different intention is clearly expressed. In focusing on the intent of the parties, the court concluded that the terms “You” and “Your” in the statutory warning language clearly meant the signed of the note (the debtors in this case). The court also reasoned that for the statutory language to apply to the bank in this instance would be an absurd result. The court held that the statutory warning language coupled with the placement of the signature line left no doubt that the notice was directed to the debtors.
Cognovit notes provide a valuable tool of enforcement for lenders in that it provides some form of predictability and lessens the costs of court action. Cognovit notes have been under attack recently due to the allegations of abuse occurring in other states despite the strict statutory safeguards in place. Cognovit provisions are still permitted in only a handful of states, and only in commercial matters. The Ohio Supreme Court’s ruling in Sutton is a win for Ohio lenders that utilize cognovits notes in that there is a measure of security that the use of required statutory language in the note will affirm its validity.
This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.
Not only must the warrant language appear, but the statutory language must appear “above or below the space or spaces provided for the signature of the makers, in such type or size or distinctive marking that it appears more clearly and conspicuously than anything else on the document.” This is to avoid contracts where the warrant of attorney is buried within boilerplate or other fine print.
In Sutton, the debtor obtained a loan from the bank via promissory note that contained the required warning language of 2323.13(D). The debtors subsequently defaulted on the note and the bank obtained a judgment by confession. The debtors sought to vacate the judgment, which was denied and ultimately gave rise to the appeal in the Eleventh District Court of Appeals.
The debtors’ argument on appeal was that the statutory warning language included in the note was defective in that it failed to put the debtors on notice of the rights they were waiving. In support, the debtors argued that the terms “You” and “Your” were defined earlier in the note as referring to the bank. Since those same words were used in the statutory warning, the debtors argued that the language could only have been directed to the bank.
While the Ohio Supreme Court noted that cognovits notes are to be “strictly constructed against the party seeking enforcement”, traditional rules of contract interpretation apply to cognovit provisions and words will be given their ordinary meaning unless a different intention is clearly expressed. In focusing on the intent of the parties, the court concluded that the terms “You” and “Your” in the statutory warning language clearly meant the signed of the note (the debtors in this case). The court also reasoned that for the statutory language to apply to the bank in this instance would be an absurd result. The court held that the statutory warning language coupled with the placement of the signature line left no doubt that the notice was directed to the debtors.
Cognovit notes provide a valuable tool of enforcement for lenders in that it provides some form of predictability and lessens the costs of court action. Cognovit notes have been under attack recently due to the allegations of abuse occurring in other states despite the strict statutory safeguards in place. Cognovit provisions are still permitted in only a handful of states, and only in commercial matters. The Ohio Supreme Court’s ruling in Sutton is a win for Ohio lenders that utilize cognovits notes in that there is a measure of security that the use of required statutory language in the note will affirm its validity.
This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.
