Indiana’s Cognovit Note Prohibition

 

 

Warning Cognovit Note

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).

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