Indiana’s Dislike of Cognovit Notes
Indiana doesn’t look kindly upon cognovit notes, even though its neighbor, Ohio, routinely uses them. In fact, Indiana’s dislike of cognovit notes is demonstrated by the existence of an Indiana statute providing it’s a Class B misdemeanor to procure, retain possession of, or attempt to recover upon a promissory note with a cognovit provision in it. (see Indiana Code §34-54-4-1.)
So, cognovit provisions aren’t just unenforceable in Indiana, they’re illegal.
How can two states with a common border disagree so vastly about the legal attributes of the cognovit note? To answer this, it’s important to understand what a cognovit note is.
A cognovit provision is a legal device by which a debtor gives advance consent to a noteholder obtaining a judgment against him or her without prior notice or hearing. A cognovit is essentially a confession of judgment included in a note. Should there be a default, the holder can obtain judgment without giving the debtor notice or a hearing. This allows the noteholder to obtain a judgment without the delays inherent in having to serve notice on the debtor or dealing with any defenses the debtor might throw up. This makes the process much smoother and quicker for the noteholder.
But, what about the debtor? Doesn’t this fly in the face of constitutional due process?
Indiana thinks so, although several states, not just Ohio, think cognovits are okay. The states who agree with Ohio and consider cognovit notes legal are: Delaware, Virginia, Pennsylvania, and Maryland.
Why would any borrower agree to this? Simply because a borrower who doesn’t have substantial collateral to support a loan may find borrowing on a cognovit note the only way to get a loan. Time is money, and the longer it takes for a lender to navigate through the legal process of suing and obtaining a judgment on a defaulted note, the more costly the defaulted loan is to the lender. The cognovit provision is considered a viable solution where not prohibited, because the lender knows it will have an easier time suing on the note.
What is the outcome when a judgment on a cognovit note is obtained in a jurisdiction where such provisions are valid, and the plaintiff later seeks to enforce the foreign judgment in Indiana?
Cox v. First National Bank of Woodlawn, 426 N.E. 2d 426, 430 (Ind. Ct. App. 1981) established that Indiana will give full faith and credit to a valid foreign judgment based on a cognovit note, notwithstanding Indiana’s low opinion of such provisions.
If a lender attempts to enforce a cognovit note in Indiana in the first instance, will the entire cognovit note be deemed void and unenforceable, or only the cognovit provisions themselves?
In Jaehnen v, Booker, 8 06 N.E.2d 31 (Ind. Ct. App. 2004), the Indiana Court of Appeals captured Indiana’s historical attitude toward cognovit notes when it said, “. . .the evil prevented by prohibiting these notes is the evil of obtaining a judgment against a party without service of process or the opportunity to be heard.”
The Jaehnen Court was confronted with whether to prohibit the enforcement of the terms of a promissory note because the promissory note contained a cognovit provision, even though the cognovit provision wasn’t utilized to enforce the note. Booker had filed a complaint providing for service of process, thus giving Jaehnen the opportunity to engage counsel and be heard. Jaehnen argued the note was unenforceable because it was void when it was made because cognovit notes are prohibited in Indiana. The Indiana Court of Appeals held that the Indiana statute prohibiting cognovit notes wasn’t intended to make the entire contract containing cognovit clauses void, but only the portions of the contract containing the cognovit provisions. Thus, the judgment on the note containing the cognovit provision was upheld, because Booker hadn’t utilized the cognovit provision when he initially brought suit for enforcement.
The best practice in Indiana is to avoid the use of cognovit notes entirely, even if enforcement of the cognovit provisions themselves aren’t or won’t be sought. The presence of the cognovit provisions may allow the debtor to argue, even if unsuccessfully ultimately, that the entire note is void. If judgment on a cognovit note is obtained in another state that recognizes cognovit provisions when it’s likely the judgment will be enforced in Indiana, relying on the cognovit provisions in the initial enforcement action should be avoided if at all possible in order for the judgment to obtain full faith and credit in Indiana.
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