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Banking & Finance Law Report

Ohio Law on Cognovit Judgments and Relief Under Civ R. 60(B)

Posted in Collection and Foreclosure, Commercial Law, Commercial Loans and Leases

In K One Limited Partnership v. Salh Khan, et al., 10th Dist. No. 13AP-830, 2014 Ohio 2079, the Tenth District Court of Appeals for Franklin County, Ohio reexamined the limited meritorious defenses available to obtain relief from a cognovit judgment under Civ. R. 60(B) and held that such defenses are restricted “to the integrity and validity of the creation of the debt or note, the state of the underlying debt at the time of confession of judgment, or the procedure utilized in the confession of judgment on the note.”

Defendants-Appellants executed a cognovit guaranty containing warrant of attorney language (“Guaranty”) to guarantee payment of a related-company’s revolving cognovit promissory note (“Note”) in favor of Plaintiff-Appellee. The parties and others were involved in numerous business ventures when they entered into the Guaranty and Note. When the Note subsequently went unpaid, Plaintiff-Appellee brought a cognovit action to confess judgment against Defendants-Appellants on the Guaranty, and the trial court entered cognovit judgment in favor of Plaintiff-Appellee. Defendants-Appellants timely filed a motion for relief from judgment under Civ. R. 60(B) admitting they executed the Guaranty but alleging as defenses that Plaintiff-Appellee and related individuals and entities had acted fraudulently toward them in this and other transactions and intentionally misled them into executing the Guaranty. They also alleged they had legal and equitable claims relating to these and other business transactions pending against these parties in another jurisdiction. The 60(B) motion did not allege payment, partial payment or defects in the Guaranty or Note as defenses, and the trial court denied their motion for relief from judgment. Defendants-Appellants then appealed to the Tenth District Court of Appeals (“Appeals Court”).

The Appeals Court upheld the cognovit judgment, finding that Plaintiff-Appellee followed the proper procedures to confess judgment – “confessing attorney signs answer confessing judgment, the answer is filed, and the warrant is produced in court through the plaintiff’s attorney” and that it was entitled to cognovit judgment against Defendants-Appellants because “the holder of a cognovit note that is in default ‘obtains a judgment without a trial of possible defenses that the signers of the note might otherwise assert *** because, under a cognovit note, the debtor consents in advance to the holder obtaining a judgment without notice or hearing’ ” citing Huntington Natl. Bank v. G.J.P. Properties, LLC, 10th Dist. No. 12AP-1008, 2014-Ohio-124, ¶ 13, quoting Huntington Natl. Bank v. Royal Mt. Sterling Corp., 10th Dist. No. 12AP-174, 2012-Ohio-4514, ¶ 11. In upholding the cognovit judgment, the Appeals Court found that the Defendants-Appellants did not raise meritorious defenses going “to the integrity and validity of the creation of the debt or note, the state of the underlying debt at the time of confession of judgment, or the procedure utilized in the confession of judgment on the note.” Jacobs v. Acacia Chattanooga Vehicle Auction, Inc., S.D. Ohio No. 2:10-CV-912, (December 21, 2011, quoting Freed at ¶ 10.

In its holding, the Appeals Court indicated that the Defendants-Appellants could bring their claims against the Plaintiff-Appellee in a separate action (although a cognovit judgment defendant can file a counterclaim in the cognovit action if any portion of the underlying complaint remains open, i.e., the cognovit judgment does not dispose of the entire case).

The Appeals Court also examined a moving party’s Civ. R. 60(B) burden under the GTE Automatic Elec., Inc. v. ARC Industries, Inc. standard – (1) it has a meritorious claim or defense if relief is granted; (2) it is entitled to relief under one of the grounds stated in Civ. R. 60(B)(1) through (5); and it filed the motion within a reasonable time, and when relying on a ground for relief set forth in Civ. R. 60(B)(1), (2), or (3), it filed the motion not more than one year after judgment. The moving party must meet all three elements to prevail on a motion for relief from judgment; the motion will fail if any one of the requirements is not met. Strack v. Pelton, 70 OhioSt.3d 172, 174 (1994).

The Appeals Court found that although Civ. R. 60(B) is the proper vehicle to seek to vacate a cognovit judgment, the GTE standard is modified when contesting a cognovit judgment to permit a moving party to prevail by simply alleging a meritorious defense and timely filing the motion. Fifth Third Bank v. Jarrell, 10 Dist. No. 04AP-358, 2005-Ohio-1260. The Appeals Court held that Ohio courts consider a limited number of meritorious defenses when weighing motions to vacate cognovit judgments: payment and partial payment of the obligation and other defenses to the integrity and validity of the note, such as “ ‘ improper conduct in obtaining the debtor’s signature on the note; deviation from proper procedures in confessing judgment on the note; and miscalculation of the amount remaining due on the note at the time of confession of judgment.’ ” Market Ready Real Estate Servs., Inc. v. Weber, 10 Dist. No. 12AP-803, 2013-Ohio-4879, ¶ 9, quoting First Natl. Bank of Pandora v. Freed, 3rd Dist. No. 5-03-36, 2004-Ohio-3554. The Appeals Court stated that a moving party may obtain relief from a cognovit judgment under the modified GTE standard if it can “allege operative facts with enough specificity to allow the trial court to decide whether a meritorious defenses exists,” citing to Advanced Clinical Mgt., Inc. v. Salem Chiropractic Ctr., Inc., Stark County App. No. 2003CA00108, 2004-Ohio-120 ¶ 15.