In a victory for Stultz & Stephan client Sutton Bank, the Ohio Supreme Court has unanimously ruled that cognovit promissory notes are subject to Ohio’s traditional rules of contractual interpretation. That decision clarifies that courts must read cognovit language like any other term in a promissory note—a strong holding for Ohio’s lenders.
In 2018, Sutton Bank sought a cognovit judgment against Progressive Polymers and Darin Bay for defaulting on their commercial loan. The borrowers’ promissory note contained a cognovit warrant, which allowed the Bank to obtain a post-default judgment against the borrowers without notice or a hearing. The note also included a cognovit warning that explained the rights forfeited under the warrant. The trial court granted Sutton Bank judgment based on those cognovit terms. Progressive and Bay appealed.
On appeal, the borrowers argued that the note’s cognovit warning was defective, which invalidated the judgment. They claimed that because the note defined “you” to mean Sutton Bank, the warning directed itself to the Bank not the borrowers. That is, because a cognovit warning begins by stating “By signing this paper, you give up your right to notice and trial,” it was the Bank that agreed the borrowers could confess judgment against it. In a split decision with a strong dissent, the Eleventh Appellate District vacated Sutton Bank’s judgment and essentially ruled that cognovit terms aren’t subject to Ohio’s contractual-interpretation rules. Sutton Bank appealed that decision to the Ohio Supreme Court.
Last week, the Ohio Supreme Court agreed wholeheartedly with Stultz & Stephan and reinstated Sutton Bank’s cognovit judgment. Writing for all seven justices, Justice Stewart explained that the “traditional rules of contract interpretation do apply to cognovit provisions, just as they would to any other provision in any other contract.” And in adopting Stultz & Stephan’s argument, the Justice wrote that the Supreme Court agrees with Sutton Bank “that the [Eleventh District] majority’s analysis stopped short of where it should have when it applied the note’s definition of ‘you’ (referring to the lender, Sutton Bank) to the statutory warning language without considering, as it should have considered, whether the parties intended this reading.”
In the end, after applying those rules, the Ohio Supreme Court adopted Stultz & Stephan’s proposition of law by ruling that “although cognovit clauses are construed strictly against those seeking to enforce them, courts must still give effect to the clear intent of the parties when interpreting them.”
This Supreme Court opinion should be useful for those lenders that encounter lower courts that have been hesitant in recent years to enforce valid cognovit promissory notes. For in siding with Sutton Bank, the Ohio Supreme Court has sent a clear message that cognovit judgments are still powerful tools available to Ohio’s lenders, which are subject to the same rules of interpretation as any other contract.