The Ohio Supreme Court’s recent decision in Sutton Bank v. Progressive Polymers, L.L.C., Case No. 2020-Ohio-5101 (Sutton) reaffirmed the enforceability of cognovit notes in Ohio. The Court confirmed that, although cognovit notes and their terms are to be strictly construed against the party seeking to enforce them, the relevant principles of contract interpretation—in particular, discerning the intent of the parties—are still of paramount importance when analyzing the application and enforceability of cognovit notes. And for legal practitioners, Sutton serves as a not-so-subtle reminder to carefully review contracts to ensure uniform definitions so as to avoid possible litigation on such minutiae.
As a matter of background, a traditional promissory note is a legal instrument that evidences a debt owed by a borrower to a lender, whereby the parties are identified and the repayment terms for the debt is set out. A cognovit promissory note (or a cognovit note) is most easily understood as a promissory note with teeth. The power behind a cognovit note originates from a unique provision in the note called the “warrant of attorney” clause, which allows one party to enter judgment against the other. A cognovit note can also be a confession of judgment.
Unlike a lender holding a traditional promissory note, who must sue and allow the debtor to contest the debt, a lender holding a cognovit note bypasses this process, including the expenses of a litigation and a trial. The lender on a cognovit note can obtain an immediate judgment from a court against a defaulted borrower without providing any notice or an opportunity to contest the judgment. Due to the power of a cognovit note, Ohio law only allows them to be used in the commercial context. Further, the law requires that, in connection with a cognovit note, the lender must provide a statutorily-required written warning in the cognovit note to the borrower. The requisite warning is set forth at R.C. 2323.13(D), and provides as follows:
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.
For the cognovit note’s confession of judgment mechanism to be valid and enforceable by a court, the statute requires the aforementioned warning language to appear verbatim in the note.
The language of this statutory warning is of particular importance in the Sutton case. Sutton involved a loan in the amount of $500,000 that Sutton Bank made to a company named Progressive Polymers, L.L.C. and an individual member of the company (collectively, “Polymers”). The loan was secured by a cognovit note which was also entered into by Sutton Bank (as the lender) and Polymers (as the borrower).
The cognovit note in Sutton included a definitions section where, within the document, the terms “I”, “me” and “my” referred to Polymers (the borrower), and the terms “You” and “Your” referred to Sutton Bank (the lender). These defined terms were used consistently throughout the cognovit note in Sutton, with one major exception: the “Warning” section provided pursuant to R.C. 2323.13(D). Instead, in the “Warning” section of the relevant cognovit note, Sutton Bank had copied, verbatim, the required language of R.C. 2323.13(D), and thus, used the defined terms “You” and “Your” to refer to Polymers when the note’s definition section had defined “You” and “Your” to refer to Sutton Bank. Ultimately, Polymers defaulted on the loan, and Sutton Bank took judgment against Polymers for the amount due and owing. Sutton Bank received this judgment without any prior notice to Polymers or court hearing.
Thereafter, Polymers sought to vacate the judgment. Polymers argued that the cognovit note was invalid because, given the definitions om the cognovit note, the “Warning” section had to be read as being directed to Sutton Bank (the lender) and not to Polymers (the borrower), and thus, was defective. Polymers argued that, because the statutorily-required warning in the cognovit note was defective, the judgment obtained by Sutton Bank on that cognovit note was also defective. Polymers based this argument, in part, on the universally-accepted Ohio legal principle that, when interpreting the terms of a cognovit note—and due to the same’s particularly unique features as it relates to due process—the reviewing court must strictly construe the terms of the note against the party seeking its enforcement (i.e. the lender).
Following a series of decisions and appeals in the lower courts on this issue, the Sutton matter, ultimately, came before the Ohio Supreme Court for review. Notably, in its decision in Sutton, the Court rejected Polymers’ argument and determined that the cognovit note at issue was valid and enforceable, despite the inconsistency in the “Warning” section.
The Court recognized that the unique features of a cognovit note—including the warrant of attorney clause—do, in fact, require a reviewing court to strictly construe the instrument’s terms against the party seeking enforcement (in this case, Sutton Bank). However, the Court concluded that, despite the unique nature of the cognovit note, the fundamental rules of general contract interpretation still apply to its provisions.
As such, the Court gave effect to the intent of the parties, pursuant to the language used in the written agreement. And the Court held that only where that approach fails to provide the necessary insight into the agreement’s meaning should other secondary rules of contract interpretation be applied. Per the Ohio Supreme Court, those secondary rules of contract interpretation include the concept that the cognovit note and its provisions should be strictly construed against the party seeking enforcement. The Court also noted that, while rules of contract interpretation are important, they are not unbreakable, and must always yield to the clear intent of the parties.
The Ohio Supreme Court determined that the crux of the issue in Sutton was identical to that in any other case of contract interpretation—specifically, whether it was the intent of the parties, in using the terms “you” and “your” in the “Warning” section of the document, to give those terms the same definition as earlier provided at the outset of the cognovit note. The Court concluded that, with respect to the terms used in the “Warning” section, the parties clearly did not intend to apply the definition of the same as earlier used in the cognovit note. In particular, the Court found the parties intent lay with: (i) the placement of the “Warning” section in the document relative to the signature lines for Polymers; (ii) the fact that the language at issue was a verbatim recitation of the statutorily-required warning provision; and (iii) the nonsensical result from Polymers’ requested reading of the “Warning” section, in light of the other language used in the provision. Based on the foregoing, the Ohio Supreme Court found the cognovit note in Sutton to be enforceable, despite the inconsistencies in the critical “Warning” section.
To be certain, the Ohio Supreme Court’s analysis and decision in Sutton, like in many cases of contract interpretation, is highly fact specific. But the Sutton case rejects an overly technical application of contract interpretation, embraces a common sense reading of contract documents, and represents a notable development in contract law jurisprudence because it helps to further define the rules interpretation, especially in the context of the unique instrument that is the cognovit note.
Cognovit notes and contract interpretation aren’t for the faint of heart. These concepts are legally complex and can be factually complicated, so don’t go it alone, especially when KJK is here to help. For further guidance on these issues, please contact Justine Lara Konicki (jlk@kjk.com), Janet Stewart (js@kjk.com) or another member of our Litigation Team by calling 216-696-8700.
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