Cognovit Note Perils

Many business people do not realize that when they get a business loan from a bank, the bank usually insists on taking a personal guarantee.  Often, the bank insists that the personal guarantee be tied to the signing of a cognovit note. This is a special type of promissory note or IOU in which it is agreed that the signer waives most defense and prior notices. In the event that the bank declares default, cognovits notes allows the bank to take personal judgment against the business person almost immediately without having to give notice or wait the customary 28 days for answer or defense. In a suit on a cognovit note, the business person is not given any opportunity to get any notice or make any answer before judgment is taken. However, the Judge deciding Henry v Stimmels 2013-Ohio-1607, reminds that cognovit notes can be challenged on the grounds of neglect, newly discovered evidence or fraud. Moreover, cognovit judgments can only be based on payment default and not any other type of contract breach. As part of obtaining a cognovit judgment, the bank must also attach a copy of the note or make it available for the court's inspection. The bank must also allege that the judgment is sought for non-payment. WHAT HAPPENED: In this case the breach alleged was non-payment of real estate tax and a drop in the guarantor’s net worth. The court said that since non-payment of money to the bank was the only basis on which a congnovit judgment could be taken, if the bank wanted to take legal action, it could not use the cognovits terms. Instead, legal action would have to follow the normal course involved with serving summons with complaint and allowing 28 days for an answer or defense.