What defenses are available to commercial borrowers that signed a cognovit promissory note for Ohio loans?

Confession of judgment clauses in commercial promissory notes are expressly permitted in Ohio and in some, but not all, other states. A confession of judgment is expressly authorized by Ohio Revised Code Section 2323.12.

In general, a confession of judgment clause contains the following type of language “The undersigned irrevocably authorizes any attorney to appear in any court of competent jurisdiction and confess a judgment without process in favor of the creditor for such amount as may then appear unpaid hereon, and to consent to immediate execution upon such judgment.”

The rules governing confessions of judgment and the related warrant of attorney in Ohio are covered by Ohio Revised Code 2323.13.We commonly refer to a promissory note with a confession of judgment and warrant of attorney to be a cognovit promissory note or a cognovit note. To analyze the enforceability of a cognovit note, we generally review the following items:

  • Was the cognovit note used for a consumer loan or a business loan?

The warrant of attorney and confession of judgment in a cognovit note are not applicable to a consumer loan. A consumer loan is a a debt (i) to a natural person, and (ii)  and the debt incurred is primarily for a personal, family, educational, or household purpose pursuant to Section 2323.13(E)(1). Cognovit notes for consumer loans are enforced in an ordinary civil action and have special note requirements as set forth in Section 2323.13(E).

  • Was the required warning used in the cognovit note?

Section 2323.13 requires that the following clause (1) must be used,  (2) must type size or distinctive marking that it appears more clearly and conspicuously than anything else on the document”, and (3) must appear “directly above or below the space or spaces provided for the signatures of the makers, or other person authorizing the confession”:

“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.”

  • Was the cognovit note executed in the State of Ohio or does the maker reside in the State of Ohio?

The cognovit note also has a jurisdictional requirement in Section 2323.13(A). Generally, for a cognovit confession to be enforceable, the action must be brought (1) in the jurisdiction of a municipal court if the note is executed, or the maker resides within, the jurisdiction of a municipal court, (2) where the maker resides or (3) the county where the cognovit note was executed.

  • What does it mean if one of the above mentioned items was not in compliance the Ohio law?

Generally, this means that the confession of judgment may not be granted or may be set aside upon an initial challenge. The end result means the lender will not be able to immediately execute on a judgment (such as placing a lien on assets or seizing bank accounts) and will be forced to file a traditional civil action.

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