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Inconspicuous Cognovit Warning Precludes Enforcement of Foreign Judgment

By Sean E. Andrussier

In Gardner v. Tallmadge, a divided panel of the Court of Appeals determined that a foreign judgment could not be enforced in North Carolina because - in the majority's opinion - the Ohio court that originally issued the judgement lacked the necessary subject matter jurisdiction to do so.

In March 2004, Defendant Bruce Tallmadge entered into a "demand cognovit promissory note" with Plaintiff Michael Gardner. A cognovit agreement in "which the debtor consents in advance to the holder's obtaining a judgment without notice or hearing, and possibly even with the appearance, on the debtor's behalf, of an attorney designated by the holder." Pursuant to the cognovit agreement, after an alleged breach of the terms of the note Gardner filed a verified complaint against Tallmadge, an attorney appointed by Gardner to represent Tallmadge entered answer that confessed judgment in favor of Gardner, and, less than two weeks after complaint was filed a judgment was entered against Tallmadge.

Gardner subsequently initiated an action to confirm the judgment in Rockingham County. Tallmadge challenged the enforcement action on several grounds, including that the Ohio court lacked subject matter jurisdiction. The Honorable L. Todd Burke entered an order "recognizing and giving full faith and credit to the Ohio judgment[.]" Tallmadge appealed Judge Burke's order.

The majority opinion, authored by Judge Linda Stephens and joined by Judge Robert N. Hunter, Jr., reversed Judge Burke's opinion on the ground that the Ohio court did not have subject matter jurisdiction to enter the original judgment. The majority's conclusion was based upon Ohio statutes and case law that render cognovit agreements invalid and deprive courts of jurisdiction to enforce them unless the agreement contains warning language that is "in such type size or distinctive marking that it appears more clearly and conspicuously than anything else on the document[.]"

According to the majority, the warning language regarding the cognovit agreement in the did not meet the standard required by Ohio law:

In the present case, the warning language in the Note appears directly below the
space provided for Defendant?s signature, as mandated by Ohio Rev. Code Ann. §
2323.13(D). The warning language appears in all-capital letters. However, the
Note?s page headings and the introductory phrases ?FOR VALUE RECEIVED? and ?IN
WITNESS WHEREOF? are also written in all-capital letters in the same font size
as the warning language and, thus, are equally conspicuous. Furthermore, the
most prominent, conspicuous, and distinctive markings on the Note are the title
and the eight subject headings which not only appear in all-capital letters of
the same font size as the warning, but are underlined as well. Thus, the title
and the subject headings appear more clearly and conspicuously than the warning
language.

In the majority's opinion, the failure to make the cognovit warning language more conspicuous than anything else in the loan agreement deprived the Ohio courts of subject matter jurisdiction to enter a judgment. The Ohio court's lack of subject matter jurisdiction meant that North Carolina's courts could not enforce the judgment.

Although he found that the case presented "a number of troubling issues," Judge Sanford L. Steelman., Jr. dissented from the majority opinion because "the conspicuous nature of the cognovit warning is not one of them." Judge Steelman determined that the language regarding the cognovit agreement complied with Ohio law because it "is clearly the most conspicuous portion of the document." Judge Steelman's opinion that the warning language complied with Ohio law was based upon an Ohio Court of Appeals decision that declared an argument very similar to the majority's reasoning to not only be incorrect, but "specious."

Full post as published by North Carolina Appellate Blog on October 06, 2010 (boomark / email).