The Chronic Challenge of Cognovits in Ohio
Former U.S. Supreme Court Justice Louis Brandeis called states “laboratories of democracy” because they were places where citizens could “try novel social and economic experiments without risk to the rest of the country.”
Some states experiment to their advantage. They enact laws that make it easier to conduct business within their borders. Good public and economic policy can create thousands of jobs and make a community a better place to live and work.
But a particular policy can also work against the state. We see that in Ohio with the persistent and chronic use of cognovit notes.
Ohio is one of just a few states in the country that still allow the use and enforcement of cognovit notes, which include a “confession of judgment.” Borrowers in commercial transactions in our state are generally required to sign a cognovit note in order to obtain a loan, and that gives the lender tremendous power.
Under current state law, the lender can go to a court without any notice and immediately obtain judgment for any “default,” such as forgetting to send the lender a timely financial statement or some other accounting document that the lender requires, even if the borrower is making regular payments. The borrower may not even know that a judgment is being sought.
The lender hires a separate lawyer who “confesses judgment” against the borrower – again with no notice to the borrower. The court then notifies the borrower that the judgement has been rendered. The borrower could then lose the property along with any benefit of principal and interest payments made to date.
Also, if the property value decreases below a certain amount stated in the loan documents – something that is sometimes beyond the borrower’s control and can happen anytime there is an economic slowdown – the lender can obtain judgment with a cognovit note. Again, it does not matter whether the borrower is current on the loan. If the property is underwater for any reason, the lender may be able to obtain an immediate judgment against a borrower without any notice by using a cognovit note.
It is worth noting that the Ohio General Assembly recognizes the fundamental problems inherent in this procedure. That is why Ohio law prohibits the use of cognovits notes in consumer transactions.
Certain legislators have also tried to amend the practice for commercial loans. In 2016, state Reps. Ron Young and Jonathan Dever sponsored H.B. 291 to attempt to reform the use of cognovit notes. That bill, if enacted, would have required the creditor’s attorney “to give a defendant notice of monetary default and potential legal action at least 30 days before filing a petition for judgment by confession” and would have required the court “to provide the defendant notice of judgment and an opportunity for a hearing.”
Those protections would have moved Ohio toward a fairer playing field and encouraged more investment in Ohio. However, the bill failed to become law.
Throughout most of the country, this practice has been abolished. Indiana, for example, makes it a criminal offense to use cognovit notes for consumer loans and commercial loan transactions.
In 2019, the antiquated process of requiring and enforcing cognovits notes is unnecessary and can be harmful to economic development. We don’t need to call this a crime, but something needs to be done. The legislature should eliminate (or limit) cognovit notes in commercial transactions, which would make Ohio a more attractive place to invest and a fairer place to conduct business.
Michael Sikora III is Managing Partner at Sikora Law in Ohio.
It does not matter whether the borrower is current on the loan. If the property is underwater for any reason, the lender may be able to obtain an immediate judgment against a borrower without any notice by using a cognovit note.