Tuesday, January 12, 2010

Ohio Doc Nearly Loses All After Unwittingly Co-Signing Promissory Note Booby-Trapped w/ Cognovit Clause; Says Lender Sprung It On Him At Loan Closing

In Newark, Ohio, The Newark Advocate reports:
  • A local doctor co-signed on a commercial loan to help a Newark couple develop a 30th Street property and nearly lost everything for his efforts. Mourad Abdelmessih, a neurologist, said he did not fully read the contract when he co-signed the cognovit note, which sets aside every defense a borrower might otherwise have. "It gives banks the leverage, for whatever reason, to call back the loan," Abdelmessih said. "It puts every business owner or operator in jeopardy, even if not in default. They have no right to trial and cannot defend themselves."

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  • The bank wanted to foreclose on the property and force Abdelmessih to pay the $370,000 difference between the liquidation value and current loan value. The bank got a court judgment against Abdelmessih, garnished one bank account and wanted to garnish his wages. "I was really flabbergasted," Abdelmessih said. "I couldn't believe this could exist in the United States and in a civil society. They hire an attorney for me to speak against me."

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  • James Thurston, spokesman for Ohio Bankers League, said, "It's a pretty generally accepted business practice in Ohio. If you don't want to take a loan with that specific practice, you don't have to." [...] Dave Stuthard, head of commercial loans at Chase Bank in downtown Newark, said the cognovit feature is common in commercial loans and certainly not hidden.(1)

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  • The problem, Abdelmessih said, is digesting so much information at the closing. "It is (spelled out), but it's among the 125 papers that you sign," the doctor said. "And, you've already set up the plan. It is really too late to let people know about it at closing. You're already ready to go. My point is to let people know what they're signing," Abdelmessih said. "If you couldn't refinance, you could be forced into bankruptcy."

For the story, see Licking County doctor: Commercial loan procedure unfair (Banks say borrowers made aware of ramifications).

(1) Use of the cognovit language in promissory notes is not allowed in most states - only a few states allow it. In Indiana, for example, not only is it prohibited, it's a Class B misdemeanor (punishable by a $1,000 fine or 180 days imprisonment) to slip the cognovit language into a promissory note or to try to enforce a cognovit note taken in another state or other jurisdiction where such a racket is allowed by law. Indiana Code 34-54-4-1.

For more on cognovit notes in Ohio, see:

posted by Home Equity Theft Reporter at 4:02 AM