Henry Cty. Bank v. Stimmels, Inc. , 2013 Ohio 1607 ( 2013 )

[Cite as Henry Cty. Bank v. Stimmels, Inc., 2013-Ohio-1607.]
IN THE COURT OF APPEALS OF OHIO
THIRD APPELLATE DISTRICT
HENRY COUNTY
THE HENRY COUNTY BANK,
PLAINTIFF-APPELLEE, CASE NO. 7-12-19
v.
STIMMELS, INC., ET AL., OPINION
DEFENDANTS-APPELLANTS.
Appeal from Henry County Common Pleas Court
Trial Court No. 12CV0002
Judgment Reversed and Cause Remanded
Date of Decision: April 22, 2013
APPEARANCES:
George C. Rogers for Appellants
J. Hawken Flanagan and Richard A. Fisher for Appellee
Case No. 7-12-19
PRESTON, P.J.
{¶1} Defendants-appellants, Stimmels, Inc., and Melvin and Patricia
Stimmel (“appellants”), appeal the Henry County Court of Common Pleas’
judgment entry denying their Civ.R. 60(B) motion to vacate cognovit judgment.
For the reasons that follow, we reverse.
{¶2} On January 5, 2012, plaintiff-appellee, The Henry County Bank, filed
in the Henry County Court of Common Pleas a complaint alleging that appellants
defaulted on a cognovit promissory note. (Doc. No. 1). On that same day, the
plaintiff’s attorney also filed an answer confessing judgment on behalf of the
defendants by warranty of attorney. (Doc. No. 2). The trial court granted
judgment against the defendants that same day based upon the confession of
judgment. (JE, Doc. No. 3). Notice of the judgment was sent to the defendants
that same day, as well. (Doc. Nos. 6-12).
{¶3} On February 2, 2012, the appellants filed a Civ.R. 60(B) motion to
vacate the January 5, 2012 cognovit judgment, arguing that they were not in
default of payment under the terms of the promissory note, and that the complaint
failed to state a cause of action that can be confessed by warranty of attorney
under R.C. 2323.13. (Doc. No. 14).
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{¶4} The trial court held a hearing on the motion on March 2, 2012.
Thereafter, on March 9th and 22nd, respectively, Henry County Bank and
appellants filed supplemental briefs. (Doc. Nos. 17-18).
{¶5} On August 31, 2012, the trial court denied the Civ.R. 60(B) motion
finding that appellants failed to allege a meritorious defense. (Doc. No. 19).
{¶6} On October 15, 2012, appellants filed a notice of appeal. (Doc. No.
27).1 Appellants now appeal raising two assignments of error for our review.
Assignment of Error No. I
The trial court erred in granting judgment on a cognovit note
without assertion or proof that the maker failed to pay on time
per required statutory warning. R.C. 2323.13.
{¶7} In their first assignment of error, appellants argue that the trial court
erred in granting cognovit judgment since they were not in default of payment
under the terms of the promissory note. Appellants argue that a warranty of
attorney for judgment on a cognovit promissory note under R.C. 2323.13 is
limited to default for nonpayment.
{¶8} “The cognovit is the ancient legal device by which the debtor consents
in advance to the holder’s obtaining a judgment without notice or hearing, and
possibly even with the appearance, on the debtor’s behalf, of an attorney
1
Appellants’ appeal was timely under App.R. 4(A) because the trial court failed to direct the clerk to serve
notice of the August 31, 2012 judgment entry upon the parties. Bank One v. DeVillers, 10th Dist. No.
01AP-1258, 2002-Ohio-5079, ¶ 22-23. The docket demonstrates that appellants were given copies of the
August 31, 2012 judgment entry on October 15, 2012 and filed their notice of appeal that same day.
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designated by the holder.” D.H. Overmyer Co., Inc., of Ohio v. Frick Co., 405
U.S. 174, 176-177, 92 S.Ct. 775 (1972). Cognovit judgments by warranty of
attorney under R.C. 2323.13 are not, per se, in violation of Fourteenth
Amendment due process. Id. at 187. Nevertheless, since cognovit judgments
deprive a debtor of notice and an opportunity to be heard prior to their entry,
cognovits are generally disfavored in the law. Fifth Third Bank v. Woeste Bros.
Properties, Ltd., 12th Dist. No. CA2010-06-145, 2010-Ohio-5807, ¶ 10.
Cognovits are, therefore, strictly construed against the person for whom judgment
was granted, and court proceedings must conform in every essential detail with the
statutory law governing the subject. DeVillers, 2002-Ohio-5079, at ¶ 37, citing
Lathrem v. Foreman, 168 Ohio St. 186, 188 (1958).
{¶9} R.C. 2323.12 and 2323.13 govern the trial court’s jurisdiction over
cognovits. Klosterman v. Turnkey-Ohio, L.L.C., 182 Ohio App.3d 515, 2009-
Ohio-2508, ¶ 19 (10th Dist.). R.C. 2323.12 provides, in relevant part, “[a] person
indebted, or against whom a cause of action exists, may personally appear in a
court of competent jurisdiction, and, with the assent of the creditor, or person
having such cause of action, confess judgment; whereupon judgment shall be
entered accordingly.” (Emphasis added). R.C. 2323.13, on the other hand,
provides, in relevant part:
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(A) An attorney who confesses judgment in a case, at the time of
making such confession, must produce the warrant of attorney for
making it to the court before which he makes the confession. * * *
[J]udgment may be confessed in any court in the county where the
maker or any of several makers resides or signed the warrant of
attorney.
** *
(D) A warrant of attorney to confess judgment contained in any
promissory note * * * is invalid and the courts are without authority
to render a judgment based upon such a warrant unless there appears
on the instrument evidencing the indebtedness, directly above or
below the space or spaces provided for the signatures of the makers,
or other person authorizing the confession, in such type size or
distinctive marking that it appears more clearly and conspicuously
than anything else on the document:
“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
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goods, failure on his part to comply with the agreement, or any other
cause.” (Emphasis added).
{¶10} The statutory scheme set forth in R.C. 2323.12 and 2323.13 provides
for two separate remedies for creditors to obtain judgment while avoiding a trial
on the merits. Both remedies provide for “judgments by confession,” but R.C.
2323.12 is a confession of the judgment by the debtor, him or herself, who
“personally appear[s]” before the court and admits the default. 63 Ohio
Jurisprudence 3d, Judgments, Section 250 (2013). See also Rosebrough v. Ansley,
35 Ohio St. 107 (1878), paragraph two of the syllabus (interpreting Section 377 of
the General Code, a precursor to R.C. 2323.12). R.C. 2323.13, on the other hand,
provides for a different type of “judgment by confession”—one obtained by an
attorney designated by the parties in the promissory note who confesses judgment
on behalf of the debtor. For this reason, this type of judgment by confession is
often referred to as a “judgment on warrant of attorney.” 63 Ohio Jurisprudence
3d, Judgments, Section 250 (2013). It is also known as a “cognovit judgment.”
First Natl. Bank of Pandora v. Freed, 3d Dist. No. 5-03-36, 2004-Ohio-3554, ¶ 5.
{¶11} If a debtor disputes a cognovit judgment entered against him, he may
pursue redress by filing a Civ.R. 60(B) motion for relief from judgment. Id.,citing Masters Tuxedo Charleston, Inc. v. Krainock, 7th Dist. No. 02 CA 80, 2002-
Ohio-5235, ¶ 6 and Lewandowski v. Donohue Intelligraphics, Inc., 93 Ohio
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App.3d 430, 432 (9th Dist.1994). To prevail on that motion, he must demonstrate
that: “(1) the party has a meritorious defense or claim to present if relief is
granted; (2) the party is entitled to relief under one of the grounds stated in Civ.R.
60(B)(1) through (5); and (3) the motion is made within a reasonable time[.]”
GTE Automatic Elec., Inc. v. ARC Industries, Inc., 47 Ohio St.2d 146, 150
(1976).2
{¶12} Whether to grant a Civ.R. 60(B) motion is within the trial court’s
discretion and, thus, will not be reversed absent an abuse of discretion. Strack v.
Pelton, 70 Ohio St.3d 172, 174 (1994). An abuse of discretion is more than an
error of judgment; rather, it implies that the trial court’s attitude was unreasonable,
arbitrary, or unconscionable. Blakemore v. Blakemore, 5 Ohio St.3d 217, 219
(1983).
{¶13} As an initial matter, we note that appellants’ first assignment of error
raises an issue with the propriety of the January 5, 2012 cognovit judgment, which
was a final, appealable order that appellants did not appeal. Cherol v. Sieben
Invests., 7th Dist. No. 05 MA 112, 2006-Ohio-7048, ¶ 19. The trial court’s denial
of the Civ.R. 60(B) motion is the judgment appealed. Consequently, we will
interpret appellants’ arguments in their first assignment of error as raising a
2
Several districts have modified the GTE standard in cognovit judgment cases to require only the first and
third prongs. See, e.g., Huntington Natl. Bank v. Royal Mt. Sterling Corp., 10th Dist. No. 12AP-174, 2012-
Ohio-4514, ¶ 13, citing Krainock, 2002-Ohio-5235, at ¶ 7. See also Freed, 2004-Ohio-3554, ¶ 7, fn. 2.
Since the parties tacitly concede the second and third prongs, only the first GTE prong is at issue here;
therefore, we do not need to decide whether to modify the GTE test for cognovit judgment cases here.
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possible meritorious defense under Civ.R. 60(B); to wit: a “deviation from proper
procedures in confessing judgment on the note.” Freed, 2004-Ohio-3554, at ¶ 9-
10.
{¶14} In their Civ.R. 60(B) motion, appellants asserted that they were not
in default of payment under the terms of the promissory note and attached an
affidavit averring the same to their motion. (Doc. No. 14). Appellants also
asserted that default of payment was the only proper grounds for cognovit
judgment by warranty of attorney under R.C. 2323.13 (Id.). “By definition, a
cognovit provision in a promissory note cuts off every defense, except payment,
which the maker of the note may have against enforcement of the note.”
(Emphasis added.) Advanced Clinical Mgt., Inc. v. Salem Chiropractic Ctr., Inc.,
5th Dist. No. 2003CA00108, 2004-Ohio-120, ¶ 18, citations omitted. Therefore,
the defense of payment may be raised as a meritorious defense in a Civ.R. 60(B)
motion seeking relief from a cognovit judgment. Id. Henry County Bank
stipulated at the hearing that appellants were not in default of payment. (Mar. 2,
2012 Tr. at 3). Nevertheless, the trial court concluded that appellants failed to
present a meritorious defense and denied their Civ.R. 60(B) motion. (Aug. 31,
2012 JE, Doc. No. 19). Although unclear from its one-page judgment entry, it
appears that the trial court concluded that appellants’ timely payments failed to
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establish a meritorious defense under Civ.R. 60(B) because Henry County Bank
provided evidence that appellants defaulted for a different reason.
{¶15} The question presented to this Court, therefore, is whether a cognovit
judgment under R.C. 2323.13 may be obtained for a default other than
nonpayment. If the answer to this question is “yes,” then the judgment of the trial
court must be affirmed; but, if the answer to this question is “no,” then the
judgment must be reversed. Based upon our review of statutory scheme, the
sparse case law on the subject, and the general disfavor of cognovits in the law, we
conclude that the answer to the question presented is “no.”
{¶16} Henry County Bank argues that cognovit judgments are not limited
to default of payment, citing first to R.C. 2323.12. Henry County Bank argues
that the statute provides for confession of a judgment against a “person indebted or
against whom a cause of action exists”; and therefore, the plain language of the
statute does not limit cognovit judgment to default for nonpayment. Henry
County Bank argues that R.C. 2323.13 should be read in para materia with R.C.
2323.12 to allow cognovit judgments on warrants of attorney for defaults other
than nonpayment as well. We disagree.
{¶17} This argument fails to acknowledge that the remedy afforded to the
creditor in the two statutes is different and results in two different types of
judgments by confession. 63 Ohio Jurisprudence, 3d Judgments, Section 250
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(2013). R.C. 2323.12 is limited to situations where the debtor “personally
appear[s]” before the court and confesses judgment. See Ansley, 35 Ohio St. 107,
at paragraph two of the syllabus. Under those circumstances, the General
Assembly did not limit the confession to default of nonpayment alone since the
debtor, himself, is confessing judgment. R.C. 2323.13, on the other hand,
authorizes an attorney to appear on the debtor’s behalf and confess judgment,
without providing the debtor notice or an opportunity to be heard. In order for
creditors to obtain a judgment on warrant of attorney, the General Assembly
expressly required a particular, conspicuous warning be placed in the promissory
note signed by the debtor. That warning provides, in relevant part, “[i]f 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 * * *.” This
warning, in effect, enables the debtor to voluntarily, knowingly, and intelligently
waive his due process rights to notice and an opportunity to be heard. See Frick
Co., 405 U.S. at 185-186. Since the General Assembly expressly required a
particular warning for judgments on warrant of attorney and that warning
mentions only payment, we conclude that the legislature intended for judgments
on warrant of attorney to be limited to default for nonpayment.
{¶18} Henry County Bank argues that the Court of Appeals has allowed
cognovit judgments for defaults other than nonpayment, citing Fifth Third Bank v.
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Pezzo Constr., Inc., 10th Dist. No. 11AP-251, 2011-Ohio-5064. Henry County
Bank argues that the default in that case resulted from the defendants’ failure to
“pay when due all taxes”; and the defendants’ failure to “maintain a minimum,
specified ‘Indebtedness to Tangible Net Worth’ ratio.” Id. at ¶ 4. Therefore,
Henry County Bank argues that cognovit judgments under R.C. 2323.13 are not
limited to nonpayment alone. This argument lacks merit. To begin with, this
precise issue was not presented to the Court in Pezzo. Instead, the defendants in
that case argued, in relevant part, that cognovit judgment was inappropriate since
Fifth Third Bank had full knowledge of the breaches and had waived them, or,
alternatively, that Fifth Third Bank had been compensated for their previous
breaches. Id. at ¶ 22-23. Aside from that, Pezzo did involve nonpayment under
the terms of the promissory note, albeit for taxes. So, we are not persuaded that
this case stands for the proposition that judgments on warrant of attorney
(cognovit judgment) may be for defaults unrelated to nonpayment as Henry
County Bank argues.
{¶19} Our research has failed to uncover any cases where cognovit
judgment has been granted for defaults other than nonpayment. If cognovit
judgment eliminates all defenses except payment, it follows that nonpayment is the
only reason for granting cognovit judgment in the first place. Salem Chiropractic
Ctr., Inc., 2004-Ohio-120, at ¶ 18. Aside from that, limiting cognovit judgment to
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nonpayment is consistent with the explicitly required warning in R.C. 2323.13,
which ensures that the debtor voluntarily, knowingly, and intelligently waives his
due process rights. See Frick Co., 405 U.S. at 185-186. R.C. 2323.13 is to be
strictly construed, and cognovit judgments are generally disfavored in the law;
therefore, we will not expand R.C. 2323.13’s expedited remedy beyond that
contemplated by its text. Lathrem, 168 Ohio St.3d 186, 190, syllabus; Huntington
Natl. Bank v. 199 S. Fifth St. Co., 10th Dist. No. 10AP-1082, 2011-Ohio-3707, ¶
20; Woeste Bros. Properties, Ltd., 2010-Ohio-5807, at ¶ 10.
{¶20} Limiting cognovit judgments to nonpayment is also consistent with
the expedited proceedings which precede them. By limiting such judgments to
nonpayment, it is clear to the attorney confessing judgment on behalf of the debtor
that a breach has occurred and the debt is owed. Whether a breach has occurred is
answered simply by whether or not the debtor has made timely payments under
the terms of the note—a “yes” or “no” question. In this case, appellants allegedly
breached the promissory note by “do[ing] or fail[ing] something which cause[d]
[Henry County Bank] to believe [it] will have difficulty collecting the amount
[appellants] owe [it].” (Emphasis added) (Doc. No. 1, attached). Whether
appellants breached the promissory note for this reason is much less clear than
whether appellants made timely payments. Upon review of the statutory scheme,
we cannot conclude that the General Assembly intended the expedited remedy
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afforded by R.C. 2323.13 for alleged defaults like the one in the present case—one
that, quite frankly, lacks objectivity.
{¶21} Henry County Bank argues that limiting cognovit judgments would
mean that “a borrower could destroy a lender’s security, could lose the security to
a tax foreclosure, or could even file for bankruptcy, but no cognovit judgment
would be permitted so long as timely payments were made toward the subject
promissory note.” (Appellee’s Brief at 9). While we recognize Henry County
Bank’s legitimate interest in protecting its security for the note, our decision does
not limit it from protecting its security; rather, our decision only limits the
methods by which it may do so. Nothing in our decision prevents Henry County
Bank, or any other lender, from pursuing a judgment by confession pursuant to
R.C. 2323.12 or from filing a civil action for breach of the promissory note.
While these latter remedies may be more difficult and time consuming, which is
especially concerning in commercial settings, we refuse to interpret R.C. 2323.13
to establish a remedy larger than the warning language expressly required by the
statute. To do so ignores the statutory scheme found in R.C. 2323.12 and 2323.13,
which provide for two different remedies, and flies in the face of the long-standing
principle of strictly construing the statutes.
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{¶22} Therefore, we conclude that judgment by warrant of attorney
(cognovit judgment) under R.C. 2323.13 is limited to default for nonpayment
under the terms of the instrument evidencing indebtedness.
{¶23} Since the parties stipulated that appellants were not in default for
nonpayment under the terms of the promissory note, the trial court erroneously
granted the cognovit judgment. Therefore, appellants presented meritorious
defenses of payment and a deviation from proper procedures in confessing
judgment on the note, and the trial court erred by denying their Civ.R. 60(B)
motion to vacate. Salem Chiropractic Ctr., Inc., 2004-Ohio-120, at ¶ 18; Freed,
2004-Ohio-3554, at ¶ 9-10.
{¶24} Appellants’ first assignment of error is, therefore, sustained.
Assignment of Error No. II
The trial court erred in failing to grant the defendants’ Civ.R.
60(B) motion when the evidence showed that the note holder
bank was under the mistaken impression that financial
documents relating to Napmark, LLC, were [sic] a financial
statement of Stimmels, Inc., and said bank had no basis for
declaring a default on the note.
{¶25} In their second assignment of error, appellants argue that the
financial documents upon which Henry County Bank predicated the alleged
default were for Napmark, L.L.C., a separate business owned by Melvin and
Patricia Stimmel which was not a signatory to the promissory note. Appellants
acknowledge that Napmark, L.L.C. was in financial difficulty, but they argue that
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fact is irrelevant to the bank’s security under the note because Stimmels, Inc. was
the debtor on the promissory note at issue in this case.
{¶26} Our disposition of appellants’ first assignment of error renders
appellants’ second assignment of error moot. Therefore, we decline to address this
issue further. App.R. 12(A)(1)(c).
{¶27} Having found error prejudicial to the appellants herein in the
particulars assigned and argued, we reverse the judgment of the trial court and
remand for further proceedings consistent with this opinion.
Judgment Reversed and
Cause Remanded
WILLAMOWSKI and SHAW, J.J., concur.
/jlr
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