News and practical information from our attorneys.
A cognovit clause in a promissory note authorizes the lender to have entered a confession of judgment by the borrower upon the occurrence of an event of default under the promissory note without notice to the borrower. An example of such a clause is as follows:
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 GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE.
The advantage of allowing and enforcing cognovit provisions is that it greatly expedites and streamlines the litigation process as the borrower does not have an opportunity to challenge the lender’s collection action. Consequently, several States do allow cognovit notes, including Ohio and Pennsylvania.
However, such provisions raise legitimate concerns about due process, and accordingly a number of States prohibit the enforcement of cognovit provisions. Indiana is one such State, as Indiana Code § 34-54-4-1 provides:
A person who knowingly:
(1) procures another to:
(A) execute as maker; or
(B) endorse or assign;
a cognovit note;
(2) being the payee, endorsee, or assignee of the cognovit note, retains possession of the cognovit note; or
(3) attempts to recover upon or enforce within Indiana a judgment obtained in any other jurisdiction based upon a cognovit note;
Commits a Class B misdemeanor.
In Jaehnen v. Booker, 806 N.E.2d 31 (Ind.App. 2004), the Indiana Court of Appeals reviewed all of the prior Indiana case law regarding cognovit notes and determined that “the evil to be avoided is the lack of due process.” Consequently, a note containing a cognovit clause is enforceable in Indiana so long as the lender does not rely upon such clause. Id., at 36. In such an instance, the lender can effectively sever the cognovit clause while relying on the rest of the enforceable negotiable instrument. Id., at 35. This is true regardless of whether the note was executed in Indiana or another State. Id., at 36.
The location of execution of a cognovit note is relevant for determining whether Indiana will give a foreign judgment full faith and credit. If a cognovit note was executed in Indiana and a judgment is entered in Ohio based on the cognovit provision, Indiana will not recognize the foreign judgment. On the other hand, if the cognovit note was executed in Ohio and a judgment is entered in Ohio, then Indiana will give full faith and credit to the Ohio judgment. See, Cox v. First National Bank of Woodlawn, 426 N.E.2d 426, 430 (Ind.App. 1981).
Indiana law recognizes two types of liens that can be asserted by an attorney to recover amounts owed for unpaid services. The first type of lien is provided by Indiana Code § 33-43-4-1, which provides:
An attorney practicing law in a court of record in Indiana may hold a lien for the attorney’s fees on a judgment rendered in favor of a person employing the attorney to obtain the judgment.
This statutory lien only applies in situations where a judgment has been rendered in favor of the client. Therefore, it will rarely be available to counsel that is representing a defendant in litigation. In order to assert such a lien, the attorney must file a notice of the lien including the amount owed with the trial court within sixty (60) days of the date the judgment has been rendered. See, Indiana Code § 33-43-4-2.
In addition to the attorneys’ lien provided by statute, Indiana courts also recognize that attorneys’ have an equitable right to retain possession of a client’s documents, money, or other property which comes into the hands of the attorney professionally until the attorney’s fees are paid. This lien exists as long as the attorney retains possession of the client’s property. The situation in which this equitable lien will be most effective is when the attorney receives funds for his client, such as proceeds from a settlement. When the attorney only has his client’s file, the effectiveness of such a lien depends on the value to the client of the retained file.
In a recent case decided by the Indiana Court of Appeals, the judges unanimously agreed that a 10 day break in employment with a prior employer started the running of the non-compete agreement between that employer and its employee, despite the fact that same employee was rehired by that same employer 10 days later.
At the time of the employee’s original hire, he was asked to sign a non-compete agreement, which he did. He was subsequently fired. Ten days later his employer offered to revoke the termination and allow him to return to his prior position. The employee returned to his position but the employer did not ask the employee to sign a new non-compete agreement. Approximately 2 ½ years later, the employee left that employment and immediately began working for his former’s employer’s competitor.
The employer filed a lawsuit seeking to enforce the non-compete agreement that the employee signed at the time of his original hire. The employer argued that because the termination was “revoked”, and the employee rehired, the non-compete agreement signed when the employee was originally hired should still remain in full force and effect.
The Indiana Court of Appeals rejected the employer’s argument and ruled in favor of the employee. The Court noted certain principles related to non-compete provisions, which we have previously discussed here. Included among these are the fact that covenants not to compete are in restraint of trade and are not favored by the law; they are strictly construed against employers and are enforced only if reasonable; and those covenants must be reasonable with respect to legitimate protectable interest of the employer.
The Court of Appeals held:
Mindful that non-compete agreements are disfavored by law and strictly construed against the employer, we conclude there is no issue of material fact [Employee] was indeed separated from [Employer] on October 16, 2009, which marked the starting point of the two year restrictive period of the non-compete agreement. Absent the execution of a new non-compete agreement on October 26, 2009 or a written extension of the prior non-compete agreement, the employee’s restrictive period ended on or about October 16, 2011. Therefore, at the time of entering into an employment relationship with [Competitor] in May of 2012, [Employee] was no longer bound by the provisions of the non-compete agreement.
The obvious lesson here for employers is that a re-hired employee needs to sign a new non-compete agreement, or at least some sort of document acknowledging that the previous non-compete agreement has been extended to fill any gap in employment. Indiana courts will enforce contracts according to their plain, ordinary, and clear terms. Therefore, it is a worthwhile exercise to put together written contracts, signed by all necessary parties, to accurately document what the parties’ intent is with respect to their agreements, including non-compete and other types of agreements.
[the law at issue] was enunciated in a time when men drove a cart and horse and life proceeded more slowly, but they are difficult to apply to an era where messages can be sent at the speed of light and goods can be purchased by the push of a button. Although it is frequently feasible to pour new wine into old bottles, here, the old rule – albeit still valid – simply cannot keep up with the modern advances in technology.
In light of Indiana’s sparse and outdated case law, I would urge our legislature and Supreme Court, if the opportunity arises, to look beyond the man and cart method . . . and instead usher Indiana into the technological realities of the 21st century by formulating tools appropriate to handle the complexities of the internet’s realm.
We have written in the past on the topic of the need for logistics and transport companies to utilize provisions of the UCC to limit their exposure to liability. Follow this link to an article which demonstrates the type of disastrous liabilities that can hit a company that is improperly prepared.