Banking Law Blog

Ohio Cognovit Statute Facing New Challenge

May 23, 2017 by Steven D. Shandor

In 2016, Ohio House Bill 291 was introduced in an attempt to modify the state's “confession of judgment provisions” contained in cognovit promissory notes. That bill would have dramatically changed how and when a lender would take judgment on a defaulted commercial loan when the loan documents contained a valid confession of judgment provision. A detailed examination of that bill may be found here.

Although House Bill 291 was not voted on or approved by the Ohio House, with the new year a new challenge to Ohio’s cognovit provisions has arisen. Ohio House Bill 67, introduced by Representative Ron Young of District 61 in February of 2017, would prohibit a creditor from obtaining a confession of judgment from a debtor unless the confession of judgment was entered into in connection with the settlement of a dispute. The only other permissible confessions of judgment would be if the document were executed in another state where a confession of judgment is enforceable. The bill would also create the criminal offense of “illegally obtaining a confession of judgment,” a first degree misdemeanor. The bill would eliminate all other forms of confession of judgment.

House Bill 67, therefore, outlaws the use of the confession of judgment in the State of Ohio, except in cases where the cognovit provision is entered into as part of a settlement agreement. Cognovit provisions executed lawfully in other states may be enforced in Ohio, but commercial lenders in Ohio will no longer have the option to include a confession of judgment in their commercial loan documents. Furthermore, what would constitute a “settlement” under the new proposed statute is unclear. Whether the settlement must be one resulting from litigation or whether it may be a settlement arising out of a forbearance agreement is currently ambiguous.

As of February 21, 2017, the bill has been referred to the Financial Institutions, Housing, and Urban Development Committee in the Ohio House of Representatives. Day Ketterer will continue to track H.B. 67 and advise clients as the bill progresses.

The content of this blog is for informational purposes only and is not intended as legal advice for any purpose. This blog is not intended to present an exhaustive summary of all applicable laws, or to take the place of legal advice.  If you have any questions regarding the law, please contact us for assistance.