Merchants Bank & Trust Co. v. Five Star Financial Corp.

[Cite as Merchants Bank & Trust Co. v. Five Star Fin. Corp., 195 Ohio App.3d 42, 2011-Ohio-2476.]

IN THE COURT OF APPEALS
FIRST APPELLATE DISTRICT OF OHIO
HAMILTON COUNTY, OHIO

MERCHANTS BANK & TRUST : APPEAL NO. C-100037
COMPANY, TRIAL NO. A0800266
:
Appellee, D E C I S I O N.
:
v.
:
FIVE STAR FINANCIAL
CORPORATION et al., :

Appellants. :

Civil Appeal From: Hamilton County Court of Common Pleas

Judgment Appealed From Is: Affirmed

Date of Judgment Entry on Appeal: May 25, 2011

Thompson Hine L.L.P., and Bryce A. Lenox, for appellee.

Eric C. Deters & Associates, P.S.C., and Charles T. Lester Jr., for appellants.

F ISCHER , J UDGE .

{¶ 1} Five Star Financial Corporation and its president, Steven Winter, appeal a

decision of the Hamilton County Court of Common Pleas that denied their motions to vacate

a cognovit judgment entered in favor of Merchants Bank & Trust Company. For the

following reasons, we affirm.
OHIO FIRST DISTRICT COURT OF APPEALS

Factual Background and Procedural Posture

{¶ 2} On October 25, 2004, Five Star and Merchants Bank entered into a credit

and security agreement. As part of that agreement, Five Star executed a promissory note

in favor of Merchants Bank for a $2,000,000 line of credit. Under the note, the unpaid

principal balance and accrued interest owed by Five Star is determined by the “ledgers

and records” of Merchants Bank. In addition, Winter signed a guaranty agreement fully

backing Five Star’s obligations under the credit agreement and the note. Both the note

and the guaranty contain Ohio choice-of-law and warrant-of-attorney provisions.

{¶ 3} On January 9, 2008, Merchants Bank filed suit against Five Star and

Winter alleging default on the credit agreement, the note, and the guaranty. Pursuant to

the warrant-of-attorney provisions, attorney Brian Ewald appeared on behalf of Five Star

and Winter and confessed judgment against them for $1,458,279.95, plus interest, costs,

late charges, and attorney fees. The trial court promptly entered a cognovit judgment

with the same terms.

{¶ 4} On May 19, 2008, Five Star and Winter moved to vacate that judgment.

Over the next 18 months, Winter separately moved to vacate the judgment, and Five Star

and Winter filed an “Amended Motion to Dismiss and Declare Merchants Judgment Void

Ab Initio.” On December 21, 2009, the trial court denied these motions, and this appeal

followed.

The “Ledgers and Records” of Merchants Bank

{¶ 5} In their first assignment of error, Five Star and Winter argue that the

cognovit judgment is invalid because the “ledgers and records” of Merchants Bank were

not submitted before the judgment was entered. We are not persuaded.

{¶ 6} “The cognovit is the ancient legal device by which the debtor consents in

advance to the holder’s obtaining a judgment without notice or hearing, and possibly

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OHIO FIRST DISTRICT COURT OF APPEALS

even with the appearance, on the debtor’s behalf, of an attorney designated by the

holder.”1 “[T]he purpose of a cognovit note is to allow the holder of the note to quickly

obtain judgment, without the possibility of trial.”2

{¶ 7} In Ohio, R.C. 2323.12 and 2323.13 establish and govern the jurisdiction

of the state’s trial courts to enter cognovit judgments.3 The former allows for judgment

by confession, and the latter provides for warrants of attorney, which may authorize an

attorney to confess judgment against a defendant without prejudgment notice. All of

their requirements “must be met in order for a valid judgment to be granted upon a

cognovit note or for a court to have subject-matter jurisdiction over the same.”4 And

because the statutes empower courts to enter judgments that they would otherwise be

without authority to enter, warrants of attorney to confess judgment must be “strictly

construed, and court proceedings based on such warrants must conform in every essential

detail with the statutory law governing the subject.”5

{¶ 8} Five Star and Winter contend that the note is “facially insufficient” to

support a cognovit judgment because it determines the amount owed by Five Star by

referring to extrinsic documents. Specifically, the note provides that the “unpaid

principal balance of and interest accrued on this Note shall be determined by the ledgers

and records of [Merchants Bank] as maintained in accordance with the respective

ordinary practices to reflect Advances and payments.” Thus, at any given time, the

amount due on the note is not evident on its face.

1 D. H. Overmyer Co. v. Frick Co. (1972), 405 U.S. 174, 176, 92 S.Ct. 775.
2 Sky Bank v. Colley, 10th Dist. No. 07AP-751, 2008-Ohio-1217, at ¶ 7.
3 Id. at ¶ 9.
4 Id.
5 Lathrem v. Foreman (1958), 168 Ohio St. 186, 151 N.E.2d 905, paragraph one of the syllabus.

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{¶ 9} To support their proposition, Five Star and Winter cite Onda, LaBuhn,

Rankin & Boggs Co., L.P.A. v. Johnson.6 In Onda, a debtor signed a cognovit note to

secure his payment for legal services. The debtor promised to pay “all amount(s)

advanced by [the law firm] to [the debtor] for the purpose of securing legal fees, as

evidenced by the books and records of [the law firm] and [the debtor].”7 The firm later

obtained a cognovit judgment against the debtor, but the Fourth Appellate District

reversed. The judge authoring the opinion wrote that because the note required extrinsic

documents to calculate the amount owed, the note was “facially insufficient to support a

cognovit judgment.”8 The judgment was held void and vacated.9

{¶ 10} In our analysis, we turn first to the Revised Code. Although we must

strictly construe R.C. 2323.12 and 2323.13, we nevertheless have an “obligation to give

effect to the intention of the General Assembly.”10 If statutory language “conveys a

meaning that is clear and unequivocal, interpretation is at an end, and the statute must be

applied accordingly.”11

{¶ 11} Under R.C. 2323.13, “[a]n attorney who confesses judgment in a case, at

the time of making such confession, must produce the warrant of attorney for making it to

the court before which he makes the confession.” Neither statute, however, requires the

instrument containing the warrant of attorney to demonstrate by itself the amount owed

by the defendant. We therefore decline to adopt such a rule.

6 Onda, LaBuhn, Rankin & Boggs Co., L.P.A. v. Johnson, 184 Ohio App.3d 296, 2009-Ohio-4726,
920 N.E.2d 1000.
7 Id. at ¶ 9.
8 Id. at ¶ 11, citing Gunton Corp. v. Banks, 10th Dist. No. 01AP-988, 2002-Ohio-2873 (“where the
notes are facially insufficient to support the confession of judgment, without additional facts
being adduced, the cognovit judgment is void”).
9 Only the authoring judge subscribed to the opinion. The remaining two judges concurred in
judgment only.
10 Basic Distrib. Corp. v. Ohio Dept. of Taxation (2002), 94 Ohio St.3d 287, 291, 762 N.E.2d 979.
11 Id.

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OHIO FIRST DISTRICT COURT OF APPEALS

{¶ 12} Moreover, to hold otherwise would severely undermine the clear

legislative intent to allow warrants of attorney in nonconsumer transactions. Such a

holding would leave numerous proper lending arrangements unenforceable in cognovit

actions, particularly when the amount owed may change from day to day, such as with

open lines of credit and interest-bearing loans. Accordingly, we hold that the note was

not facially insufficient to support a cognovit judgment merely because it determined the

amount owed by Five Star by reference to extrinsic documents.

{¶ 13} Five Star and Winter alternatively argue that by its own terms, the note

required the submission of the “ledgers and records” of Merchants Bank before the

cognovit judgment was entered. We recognize that nothing in R.C. 2323.12 and 2323.13

prevents parties from creating contingent warrants of attorney that courts may enforce.

For instance, in Bank One, N.A. v. DeVillers, the Tenth Appellate District held that where

a warrant of attorney authorized the confession of judgment for an unpaid amount “as

evidenced by an affidavit signed by an officer of [the] Lender setting forth the amount

then due,” the lender was required to submit that affidavit before judgment.12

{¶ 14} But those are not the facts in this record. Here, the note authorizes “any

attorney at law to appear before any Court of Record, state or Federal, in the county or

judicial district where this note was executed or where [Five Star] or [Merchants Bank]

reside or may be found, after the unpaid principal balance of this note becomes due * * *

and confess judgment against [Five Star] in favor of [Merchants Bank] or other holder of

this Note for the amount then appearing due on this Note.”

12Bank One, N.A. v. DeVillers, 10th Dist. No. 01AP-1258, 2002-Ohio-5079. See also Onda,
LaBuhn, Rankin & Boggs Co., L.P.A. v. Johnson, 184 Ohio App.3d 296, 2009-Ohio-4726, 920
N.E.2d 1000, at ¶ 23 (Kline, P.J., concurring) (reasoning that the cognovit judgment was void
because the lender had not submitted the books and records necessary to determine the amount
owed).

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OHIO FIRST DISTRICT COURT OF APPEALS

{¶ 15} Similarly, the guaranty authorizes “any attorney-at-law to appear in any

court of record in Hamilton County, Ohio * * * after the indebtedness evidenced hereby

becomes due * * * and confess judgment against the undersigned in favor of [Merchants

Bank] for the amount then appearing due.”

{¶ 16} Even under a strict reading of these provisions, we see no requirement for

the submission of the ledgers and records of Merchants Bank prior to the entry of

judgment. Although the guaranty refers to “indebtedness evidenced,” the confession of

judgment was adequate to show the amount owed by Five Star and Winter.13 We

therefore overrule the first assignment of error.

Personal Jurisdiction

{¶ 17} In their second assignment of error, Five Star and Winter contend that the

trial court lacked personal jurisdiction to enter the cognovit judgment. We disagree.

{¶ 18} Five Star and Winter rely on Section 10.8 of the credit agreement, which

provides that “[Five Star] agrees that any action or proceeding to enforce or arising out of

this Credit Agreement or any of the other Loan Documents [including the Note and

Guaranty] may be commenced in the Court of Common Pleas for Montgomery County,

Ohio or in the District Court of the United States for the Southern District of Ohio, and

[Five Star] waives personal service of process and agrees that a summons and complaint

commencing an action or proceeding in any such court shall be properly served and shall

confer personal jurisdiction over [Five Star] * * *.”

{¶ 19} But in their initial motion to vacate the cognovit judgment, Five Star and

Winter did not challenge the trial court’s personal jurisdiction over them. Instead, they

pointed to the same forum-selection clause and challenged the court’s venue. Personal

13 See BJ Bldg. Co., L.L.C. v. LBJ Linden Co., L.L.C., 2d Dist. No. 21005, 2005-Ohio-6825, at ¶ 33
(holding that a cognovit note, in conjunction with a confession of judgment, was sufficient to
inform the court of the amount of the defendant’s indebtedness).

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OHIO FIRST DISTRICT COURT OF APPEALS

jurisdiction, which concerns the power of a court to exercise control over parties, is a

distinct concept from venue, which primarily concerns the selection of a convenient

forum among courts with jurisdiction.14 Because Five Star and Winter failed to raise the

issue at their first appearance in this case, they implicitly consented to the trial court’s

jurisdiction.15

{¶ 20} Moreover, in the note and guaranty, Five Star and Winter expressly

waived the issuance and service of process and authorized any attorney to appear on their

behalf to confess judgment against them. Winter’s waiver applied to the courts of

Hamilton County, and Five Star’s extended to all Ohio courts. They, therefore,

consented to the personal jurisdiction of the Hamilton County Court of Common Pleas to

enter judgment against them without prior notice.16

{¶ 21} Five Star and Winter nevertheless contend that under Indiana law, these

waivers were invalid and that because they never were served with process or entered an

appearance, the trial court lacked personal jurisdiction over them. But we see no reason

to apply Indiana law here. Although the state’s laws had governed an earlier lending

arrangement among the parties, the note and the guaranty expressly provide that Ohio law

shall govern. The second assignment of error is therefore without merit.

14 See Fish v. Nottoli, 7th Dist. No. 02-MO-4, 2003-Ohio-6275, at ¶ 38; Lindahl v. Office of
Personnel Management (1985), 470 U.S. 768, 793, 105 S.Ct. 1620, fn. 30.
15 See McBride v. Coble Express (1993), 92 Ohio App.3d 505, 510, 636 N.E.2d 356 (“[A]ny
objection to assumption of personal jurisdiction is waived by a party’s failure to assert a challenge
at its first appearance in the case, and such defendant is considered to have consented to the
court’s jurisdiction”).
16 See Collins v. Collins, 165 Ohio App.3d 71, 2006-Ohio-181, 844 N.E.2d 910, at ¶ 6 (“For a court
to acquire personal jurisdiction, there must be a proper service of summons or an entry of
appearance, and a judgment entered without proper service or an entry of appearance is void”).

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OHIO FIRST DISTRICT COURT OF APPEALS

Civ.R. 60(B) Motion

{¶ 22} Finally, in their third assignment of error, Five Star and Winter argue that

the trial court abused its discretion when it denied their motions to vacate the cognovit

judgment under Civ.R. 60(B). Again, we are not persuaded.

{¶ 23} In reviewing a trial court’s decision to grant or deny relief from

judgment, we look only for an abuse of discretion.17 We therefore will reverse only if the

trial court’s decision was unreasonable, arbitrary, or unconscionable.18

{¶ 24} “Generally, a party seeking relief under Civ.R. 60(B) must demonstrate

that ‘(1) the party has a meritorious defense or claim to pursue if relief is granted; (2) the

party is entitled to relief under one of the grounds stated in Civ.R. 60(B)(1) through (5);

and (3) the motion is made within a reasonable time.’ ”19 But when seeking relief from a

cognovit judgment, the movant “need only establish that it has a meritorious defense and

that the motion is timely raised.”20 Although cognovit notes cut off many defenses for

the maker, a “meritorious defense ‘goes to the integrity and validity of the creation of the

debt or note, the state of the underlying debt at the time of confession of judgment, or the

procedure utilized in the confession of judgment on the note.’ ”21 To allege a meritorious

defense, the movant must provide “operative facts in support thereof,”22 and these facts

must be alleged “with enough specificity to allow the court to decide whether it has met

that test.”23

17 Steinriede v. Cincinnati, 1st Dist. No. C-100289, 2011-Ohio-1480, at ¶ 5, citing Harris v.
Anderson, 109 Ohio St.3d 101, 2006-Ohio-1934, 846 N.E.2d 43, at ¶ 7.
18 Id., citing AAAA Ents., Inc. v. River Place Community Urban Redevelopment Corp. (1990), 50
Ohio St.3d 157, 161, 553 N.E.2d 597.
19 Lykins Oil Co. v. Pritchard, 169 Ohio App.3d 194, 2006-Ohio-5262, 862 N.E.2d 192, at ¶ 11,
quoting GTE Automatic Elec., Inc. v. ARC Industries, Inc. (1976), 47 Ohio St.2d 146, 150, 351
N.E.2d 113.
20 Id.
21 Id. at ¶ 14, quoting First Natl. Bank of Pandora v. Freed, 3d Dist. No. 5-03-36, 2004-Ohio-
3554, 2004 WL 1489 074, ¶ 10.
22 Id.
23 Elyria Twp. Bd. of Trustees v. Kerstetter (1993), 91 Ohio App.3d 599, 601, 632 N.E.2d 1376.

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OHIO FIRST DISTRICT COURT OF APPEALS

{¶ 25} Five Star and Winter first claim that they owe less money than was

confessed to the trial court. They allege that although the cognovit judgment was for

$1,458,279.95, a statement prepared by Merchants Bank on January 14, 2008, shows a

balance of $1,338,879. Five Star and Winter, however, do not contest that they in fact

owe the amount confessed at the time of judgment. Nor do they contest Merchants

Bank’s contention that the bank liquidated certificates of deposit with a face value of

$100,000 it held as collateral pursuant to the credit agreement as partial satisfaction of the

judgment. In fact, Winter has even assumed this was the case.24 We therefore cannot say

that the trial court abused its discretion in denying relief on this basis.

{¶ 26} Next, Five Star and Winter allege that the credit agreement, the note, and

the guaranty were unconscionable because the law firm that advised Winter to sign the

documents failed to disclose that it was also representing Merchants Bank. They

maintain that the firm failed to advise Winter of material differences between an earlier

lending agreement among the parties that did not contain a cognovit provision and the

note and the guaranty, which did. Allegedly relying on this advice, Winter signed the

credit agreement and the note on behalf of Five Star, as well as the guaranty, without

reading the documents.

{¶ 27} Before the trial court, however, Winter argued that he had relied on the

representations of “Plaintiff and counsel for the Plaintiff” and that he and Five Star “were

not permitted to retain separate counsel to review” the credit agreement.25 This account

is inconsistent with their assertion before this court that Five Star and Winter believed

that the law firm represented them. Five Star and Winter did not satisfy Civ.R. 60(B) in

this instance either.

24 T.d. 34 at 8.
25 Id. at 4, 5.

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OHIO FIRST DISTRICT COURT OF APPEALS

{¶ 28} Finally, Five Star and Winter contend that the warrant-of-attorney

provisions were invalid because they were procured in violation of Indiana law. For the

reasons set forth in our response to the second assignment of error, we reject this

argument and overrule the third assignment of error. The trial court’s judgment is

accordingly affirmed.

Judgment affirmed.

D INKELACKER , P.J., and H ILDEBRANDT , J., concur.