April 12, 2018

Foreign Judgments Based on Illegal Contracts Are Still Enforceable; EBF Partners, LLC v. Evolving Solutions Inc.

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Indiana does not like cognovit notes. But as this pair of cases shows, Indiana’s aversion to these instruments does not prevent its courts from enforcing judgments based on those instruments.

Frank Terranova, an Indiana resident, apparently owns a couple of businesses, Evolving Solutions and Novabella. He used the future receivables from these companies to borrow $200,000 from EBF Partners, a Delaware company with a principal place of business in New York, with a total amount to be repaid of $273,000. When entering into the agreements memorializing these loans, the companies signed documents captioned “Affidavit of Confession of Judgment,” in which he confessed judgment and consented to venue in New York.

In July 2016, Terranova stopped making the loan payments to EBF Partners. EBF Partners obtained a “confessed” judgment in New York state court against both entities without notice and without a hearing.

EBF filed petitions in Marion County to domesticate the judgments against Evolving and Novabella. Evolving argued that the foreign judgment was unenforceable because it was obtained without notice and a hearing. Novabella argued that the New York judgment was barred because it was illegal and contrary to Indiana public policy. In each case, the (different) trial court refused to enforce the foreign judgment. In each case, EBF appealed.

The appeals were decided by two separate panels, with Judge Pyle being the only member of both panels. And in each case, Terranova and his companies failed to file an appellee’s brief.

The two cases were on slightly different procedural footings on appeal, as Evolving had successfully moved to set aside the judgment under Rule 60(B), while Novabella won without the need for Rule 60(B) relief. But these differences did not amount to much, as the analysis in both cases hinged on whether the New York judgments were enforceable in Indiana courts.

Cognovit notes like the ones at issue in this case are prohibited by I.C. § 34-6-2-22, and it is a misdemeanor for someone to procure an executed cognovit note in Indiana. I.C. § 34-54-4-1. Moreover, the Indiana Code states that a foreign judgment based on such a note is unenforceable in Indiana. I.C. § 34-54-3-3. Indeed, it is a misdemeanor to try to enforce a foreign judgment based upon a cognovit note in Indiana. I.C. § 34-54-4-1. But the Legislature’s attempt to make judgments like the ones EBF obtained unenforceable failed because of the Full Faith and Credit Clause.

While the Full Faith and Credit Clause generally forces states to respect the judgments of other states, there is an exception if the foreign court did not have both subject matter and personal jurisdiction. But neither Evolving nor Novabella argued that the New York courts lacked jurisdiction. As Judge Pyle wrote in both cases (concurring in Evolving and for the Court in Novabella), “If the New York court should not have entered the confessed judgment, Novabella’s recourse to challenge the New York confessed judgment lies in the New York court,” not in Indiana.

Lessons:

  1. Cognovit notes are illegal under Indiana law.
  2. It is a misdemeanor to attempt to enforce a foreign judgment based on a cognovit note.
  3. If a foreign judgment is based on a cognovit note, Indiana courts will still enforce the judgment under the Full Faith and Credit Clause.