A bill meant to promote fairness in commercial contract law remains in committee in the Ohio House of Representatives as lawmakers enjoy their summer recess.
House Bill 67 aims to ban boilerplate language in private commercial loans that amounts to a waiver by the borrower in favor of a lender that may immediately call in and collect a debt without notice to the debtor or giving him the opportunity to go before a judge.
Known as cognovit provisions in contract law, these confessions of judgment leave borrowers with little to no recourse, according to the bill’s sponsor Rep. Ron Young, R-LeRoy Twp.
“Even if the lender has provided faulty goods, breached the agreement or failed in a number of other ways, the lender can still demand and use a court to receive full payment of the loan balance immediately,” Young told his peers seated on the Financial Institutions, Housing and Urban Development Committee. “The old ‘Buyer Beware’ adage does not apply.
“In the vast majority of cases refusal to sign the note means that a person or business will not obtain the loan.”
Current state law requires the following language is included on notes with a cognovit provision:
“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.”
In addition to waiving a borrower’s right to trial and eliminating a prejudgment hearing, a borrower’s due process rights are violated by such provisions, Young argued.
“Since financial institution-authored commercial loans without a cognovit agreement are essentially non-existent in Ohio, even a schooled, well informed and wary borrower is left with very few options,” the lawmaker said. “In Ohio, if you need a commercial loan to hire, buy equipment or simply expand your business you will most probably be forced to sign a cognovit note.
“I have spoken with reputable construction contractors — one of whom is on the board of directors of a local bank — that have attempted to borrow from banks outside of Ohio in order to avoid cognovit agreements.”
Testimony against Young’s bill included that of the Ohio State Bar Association’s Chair of Banking, Commercial & Bankruptcy Law Committee, attorney Tyson Crist, partner of the law firm Ice Miller LLP.
“I have reviewed much of the testimony submitted in support or in favor of HB 67 and find it to be one-sided and not reflective of what actually happens with cognovit notes on a day-to-day basis from the perspective of an attorney,” he told House members. “I fear that HB 67 is being pushed through based on a select few sensationalized circumstances that may not be accurate and do not paint the whole picture.
“And it appears to be an attack on the enforcement of contracts. There is no reason to change the law on this subject as there is a very well established case law and practice currently in place, as well as the commercial practices of banks, all of which could be up-ended if HB 67 is passed, with a number of potential consequences that the proponents are not voicing.”
Decreased access to financing, higher interest rates and delays to lenders if a loan goes bad are just a few of the consequences, Crist noted.
“Does that help business in Ohio?” he asked. “The bottom line is that this legislation will most likely have the practical effect of increasing the costs to lenders of making commercial loans in Ohio because it will turn what would be an expedited process that quickly weeds out non-meritorious defenses into a year or more of litigation with significantly increased legal fees.
“These costs will be passed on to other borrowers.”
A substitute bill, which adds a provision giving the defendant the right to a post-judgment hearing, was accepted after HB 67’s initial introduction.
The bill, which has won the support of the Ohio Home Builders Association and the Ohio Association for Justice, is a facsimile of House Bill 291 of the 131st General Assembly of the Ohio Legislature. HB 291 cleared the House Judiciary Committee on a vote of 9-4.
A fourth hearing of HB 67 had not been scheduled at the time of publication.