“You” Really Means “You”: Ohio Supreme Court Reaffirms Contract Interpretation Principles for Cognovit Notes
Business Restructuring, Creditors’ Rights & Bankruptcy Update
Date: December 14, 2020
Last month, the Supreme Court of Ohio issued an opinion that reaffirmed several legal principles of contract interpretation, construing the word “you” to avoid a seemingly absurd interpretation of the required statutory warning language for cognovit notes. See Sutton Bank v. Progressive Polymers, L.L.C., et al., Slip Op. No. 2020-Ohio-5101. Ohio is one of only a handful of states that still permit the use and enforcement of cognovit notes, which are valuable because they enable a lender to file suit against a borrower upon default and immediately obtain a confessed judgment without notice. They must include a “warrant of attorney,” which is essentially language that authorizes the lender to select an attorney to act on the borrower’s behalf and confess judgment against the borrower. Under the strict requirements of Ohio Revised Code (O.R.C.) § 2323.13(D), such warrants of attorney can only lead to a confessed judgment if the lender also includes the following specific statutory warning either directly above or below the borrower’s signature:
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.
This language must be more conspicuous than any other language in the document and is intended to alert the borrower that they are giving up their right to notice and trial. Due to the rather harsh nature of this remedy and disproportionate bargaining power under cognovit notes, Ohio courts require that a warrant of attorney and required statutory warning language be strictly construed against the person in whose favor the judgment is given. See, e.g., Lathrem v. Foreman, 168 Ohio St. 176, 188, 151 N.E.2d 905 (1958), citing Haggard v. Shick, 151 Ohio St. 535, 86 N.E.2d 785 (1949); Peoples Banking Co. v. Brumfield Hay & Grain Co., 172 Ohio St. 545, 548, 179 N.E.2d 53 (1961); Cushman v. Welsh, 19 Ohio St. 536, 539 (1869); Spence v. Emerine, 46 Ohio St. 433, 439, 21 N.E. 866 (1889).
In Sutton Bank, the requirement that cognovit notes must be strictly construed against the lender was put to the test. Borrowers Progressive Polymers, L.L.C. and Darin A. Bay executed a cognovit note in favor of their lender, Sutton Bank, which included both a warrant of attorney and the required warning language. The lender thereafter obtained a confessed judgment against the borrowers in the trial court. The borrowers appealed, asserting a hypertechnical argument that the statutory warning language placed above their signature block did not comply with O.R.C. § 2323.13(D). They contended that the warning had to be read as being directed to the lender and not to them, since the terms “you” and “your” used in the warning clause were expressly defined under the note to refer solely to Sutton Bank. In a split decision, the Eleventh District Court of Appeals reversed and vacated the trial court’s cognovit judgment in favor of the lender, based on the long-standing principle that cognovit notes must be strictly construed against the party seeking enforcement, as well as what the court deemed to be the parties’ apparent intent as revealed by the note’s definitions.
The Supreme Court of Ohio ultimately reversed the Eleventh District’s opinion, relying on long-standing principles of contract interpretation. It began by identifying two “categories” of rules of contract interpretation: primary and secondary interpretive rules. According to the Supreme Court, reviewing courts must always start with the primary interpretive rule that “courts should give effect to the intentions of the parties as expressed in the language of their written agreement,” while secondary interpretive rules “do not operate unless the primary rules of interpretation fail to resolve the contract’s meaning.” And among those secondary interpretive rules is “[t]he rule that a contract provision should be strictly construed against one party and liberally construed in favor of the other,” which the court expressly found “does not come into play unless the intent of the parties cannot be deciphered because the contract language is reasonably susceptible of two different interpretations” (emphasis added). In case there was any doubt, the Supreme Court also unequivocally held that “traditional rules of contract interpretation do apply to cognovit provisions, just as they would to any other provision in any other contract.”
With these principles in mind, the Supreme Court found in Sutton Bank’s favor and determined that the parties did not intend the statutory warning to be applied to the lender, despite the express definition of “you” and “your” set forth at the beginning of the cognovit note. First, the Supreme Court noted that pursuant to the language of the warning itself, “you” and “your” clearly referred to the signers of the note, which in this case were only the borrowers. Second, it observed that the warning language was clearly meant to apply to parties obligated to pay, which again were obviously the borrowers. Finally, the Supreme Court held that the language of the second sentence of the statutory warning could only sensibly be understood as referring to the party who is not the lender because it discusses that party having claims against the lender. Accordingly, the court concluded that “the statutory-required language of the warning provision, coupled with the placement of the signature line, can leave no doubt that the notice was directed to the makers of the note: Progressive Polymers and Bay.” Id. at ¶ 20. Despite the inconsistent use of “you” and “your” between the warning and the rest of the cognovit note, the Supreme Court determined that the parties did not intend that the warning should be applied to Sutton Bank instead of the borrowers. Id.
The Sutton Bank opinion reaffirms a basic tenet of contract law: that the parties’ intent should ultimately be given the highest priority, even with respect to otherwise strictly construed cognovit notes. Furthermore, despite the harsh nature of cognovit notes, their interpretation is to be treated no differently than any other contract. By construing the word “you” in a rational manner and rejecting the borrowers’ hypertechnical assertions regarding the required cognovit warning language, the Supreme Court of Ohio avoided a potentially absurd application of contract interpretation principles and reached a just result.
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