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Northwest OH Legal Blog

Tuesday, July 18, 2017

Cognovit Notes Can Be Useful But Cannot Be Used For All Types of Loans

ERISA fringe benefit funds often use cognovit notes for repayment of delinquent employer fringe benefit contributions.  Cognovit notes offer certain advantages, since they permit the holder to take judgment on the delinquent balance in the event of default without engaging in protracted litigation.  The holder of the note simply files a complaint for the delinquent balance while an answer to the complaint is simultaneously filed with the court.  The answer is filed by an attorney, usually at the same law firm, confessing judgment on behalf of the delinquent payor on the note. 

Under a cognovit note, the payor authorizes any attorney in the State of Ohio to appear in court on the payor’s behalf and confess judgment.  A judgment entry for the delinquent amount is also submitted at the time of filing of the complaint.  The court enters the judgment and notifies the payor that the judgment has been entered. The action must be filed in the county where the debtor resides or where the note was signed. Strict compliance with the cognovit note statute is required to properly obtain judgment on a cognovit note.    

Cognovit notes can be a very effective way for a fringe benefit to obtain judgment on delinquent contributions.  If the signer of the note only signs on behalf of a corporation, only the corporation is liable for the judgment.  However, if the signer has also signed as an individual, the signer is also personally liable. 

However, cognovit notes have certain limitations.  They are specifically authorized under Ohio law; but Ohio law prohibits the use of cognovit notes for consumer transactions.  Ohio Revised Code Section 2323.13(E) states, “A warrant of attorney to confess judgment contained in any instrument executed on or after January 1, 1974, arising out of a consumer loan or consumer transaction, is invalid and the court shall have no jurisdiction to render a judgment based upon such a warrant.” 

In Patton v. Diemer, 35 Ohio State 3rd 68, 70 (1998), the Ohio Supreme Court observed that the statute provides the following definition of a “consumer loan”:

“Consumer Loan” means a loan to a natural person and the debt incurred is primarily for a personal, family, educational or household purpose.  The term, “Consumer Loan”, includes the creation of debt by the lender’s payment of or agreement to pay money to the debtor or to a third party for the account of the debtor; the creation of a debt by a credit to an account with the lender upon which the debtor is entitled to draw; and the forbearance of debt arising from a consumer loan.

The fact that cognovit notes cannot be employed for consumer loans is illustrated by First National Financial Services v. Stacia Ashley, issued by the Ohio 10th District Court of Appeals, which invalidated a cognovit note promissory note which arose from a consumer loan. This case involved a debt arising from a payday loan.  The court ruled that the loan in that case could not be structured as a cognovit note.  The court vacated a judgment which was issued on the cognovit note and instructed the trial court to hold an evidentiary hearing to determine whether the cognovit arose out of consumer loan.

This restriction against consumer loans means, for an example, that an educational loan for an apprentice in an apprenticeship fund cannot be made in the form of a cognovit note.  

Also, although Ohio law specifically authorizes cognovit notes, many other states do not.  If a delinquent employer resides in another state where cognovit notes are not permitted, a cognovit note cannot be utilized. 

In cases where a cognovit note is entered into but is ruled by a court to be of a type under which a cognovit note is not permitted, the loan is still valid but the payor is entitled to the usual legal defenses and the holder of the note is required to go through the usual legal process to obtain judgment. 

Cognovit notes can be very useful to fringe benefit funds in collecting delinquent employer contributions. However, the limitations and restrictions on cognovit notes should be kept in mind.


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