Earlier this year, my colleague Sam Lind made a compelling case for incorporating your business in Ohio—highlighting not only legal advantages but also some timeless thoughts on college football. Today, I pose a similar question to lenders and creditors in commercial finance:
Why not choose Ohio law to govern your loan documents?
The answer lies in one powerful legal tool: cognovit (confession of judgment) provisions.
What Is a Cognovit Judgment?
Under Ohio Revised Code §2323.12-13 lenders can obtain a judgment against a borrower without notice, and, without a trial. This streamlined process allows lenders to skip lengthy litigation and move directly to enforcement actions like foreclosure. The time and cost savings are substantial.
When Can You Use a Cognovit Clause?
To take advantage of this provision, two key requirements must be met. The first is signing location: Ohio law permits enforcement of a cognovit judgment in the court where:
- The borrower resides, or
- The borrower signed the instrument.
Knowing this requirement, a best practice is to have borrowers sign documents in Ohio, ideally with notarization to confirm location.
The second requirement is document formalities: Ohio law requires specific warning language to appear:
- On the same page as the borrower’s signature,
- Directly above or below the signature, and
- The following prescribed language must be clearer and more conspicuous than anything else in the document:
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.
Additionally, your loan documents must include a confession of judgment clause, authorizing an attorney to appear on behalf of the borrower and confess judgment. Consult your attorney for the details of this clause.
Cognovit provisions aren’t limited to promissory notes. They also apply to guarantees, giving lenders the ability to obtain judgment directly against a guarantor, without first pursuing the borrower or collateral. This is especially useful when dealing with high-net-worth individuals or problematic collateral.
Are Cognovit Judgments Enforceable?
The short answer is yes. Despite occasional challenges on due process grounds, Ohio courts—including the Ohio Supreme Court—have consistently upheld properly drafted cognovit provisions. Even with electronic signatures, courts are generally supportive, recognizing modern business practices.
Why Ohio?
In summary, Ohio’s legal framework offers lenders efficiency, cost savings, and reliable enforcement. If you’re drafting or enforcing commercial loan documents, Ohio law gives you a strategic edge.
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