The Use of Cognovit Notes in Ohio

Historically, the use of cognovit notes was prevalent in Ohio. The use of this type of promissory note allowed the creditor to obtain a judgment against the debtor without the need to file legal proceedings. Based upon the terms of such a note, the creditor merely obtained the signature of any attorney who confessed judgment against the debtor for the amount owed - no lawsuit, no court proceedings and no need for presentation of evidence.

Identifying the perceived dangers in such a note, the legislature passed O.R.C. 2323.13. Entitled “Warrant of attorney to confess,” the statute sets forth certain restrictions in the use of a cognovit note.

First and foremost, a cognovit note can not be used for any transaction arising out of a “consumer loan” or “consumer transaction.” These terms are defined in the code as follows:

“(1) 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.”

“(2) Consumer transaction means a sale, lease, assignment, award by chance, or other transfer of an item of goods, a service, franchise, or an intangible, to an individual for purposes that are primarily personal, family, educational, or household.”

Additionally, any note containing a confession of judgment feature (a cognovit note) must contain the following verbiage:

"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."

This language must be in “...such type size or distinctive marking that it appears more clearly and conspicuously than anything else on the document...”

Case law has also restricted the use of cognovit notes. In a recent Pickway County case, Onda v. Johnson, 2009 Ohio 4727, the court found that the use of a cognovit note will be strictly construed not only as to the requirements of ORC 2323.13 but as to the provisions on Ohio’s Uniform Commercial Code, ORC 1301.01 et seq. The court wrote, “...[if] the cognovit note is facially insufficient, the trial court lacked subject matter jurisdiction and its judgment on the note is void ab inito.” In other words, if the terms of the note fail to meet the requirements of a promissory note as required by 1301.01, et seq., the note will be void.

While, cognovit notes are still valid for commercial transactions, it is incumbent upon the maker of the note to ensure that the note strictly complies with the edicts of ORC 2323.13 and 1301.01, et seq.