Catherine Brennan is a partner at Hudson Cook LLP. She advises consumer and commercial lenders, including marketplace lenders, and merchant cash advance companies on the laws applicable to their businesses. She also advises investment firms seeking to invest in these businesses. E-mail her at cbrennan@hudco.comArticles by Catherine Brennan, Esq.
Ohio Considers Regulation of Confessions of Judgment
March 20, 2016
In a commercial lending context, courts and legislatures have generally assumed that the parties to the agreement have relatively equal bargaining power. Because of this understanding – that a business borrower is more sophisticated than a consumer borrower – regulation has been more “hands off” with regard to the terms commercial loans may contain. One such clause frequently found in commercial loan agreements is a confession of judgment clause, also called a cognovit judgment. A confession of judgment is written authorization by the borrower directing the entry of a judgment against him in the event he defaults on payment. A confession of judgment clause in a loan agreement permits the creditor on default to appear in court and confer judgment against the borrower.
Interestingly, Ohio is now considering legislation to regulate the use of the confession of judgment in a commercial loan agreement. House Bill 291 would require attorneys for creditors to include in a petition for confession of judgment the borrower’s last known address so that the borrower can be advised of the creditor’s decision to execute on the confession of judgment. Such notice gives the borrower the opportunity to dispute the execution on the confession of judgment clause. It would further provide that a confession of judgment be made “only for nonpayment of principal and interest under the terms of an instrument evidencing indebtedness,” which would eliminate the ability to obtain other damages. It also bans the use of the clause for something other than a nonmonetary default, which some Ohio courts have allowed. For example, in Fifth Third Bank v. Pezzo Construction, an Ohio appellate court allowed execution on a confession of judgment where the borrower failed to pay all taxes when due as required by the loan agreement. Another court rejected such use of confessions of judgment in Henry County Bank v. Stimmels, Inc. House Bill 291, if adopted, would make clear that only payment defaults can result on a confession of judgment.
House Bill 291 is not yet scheduled for a hearing.
