K One Ltd. Partnership v. Kahn ( 2014 )


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  • [Cite as K One Ltd. Partnership v. Kahn, 
    2014-Ohio-2079
    .]
    IN THE COURT OF APPEALS OF OHIO
    TENTH APPELLATE DISTRICT
    K One Limited Partnership,                          :
    Plaintiff-Appellee,                 :
    No. 13AP-830
    v.                                                  :            (C.P.C. No. 12CV-15880)
    Salh Khan et al.,                                   :       (REGULAR CALENDAR)
    Defendants-Appellants.              :
    D E C I S I O N
    Rendered on May 15, 2014
    Dinsmore & Shohl LLP, Peter W. Hahn, Nita Hanson and
    Gregory P. Mathews, for appellee.
    Crehan & Thumann, LLC, and Robert J. Thumann, for
    appellants.
    APPEAL from the Franklin County Court of Common Pleas
    CONNOR, J.
    {¶ 1} Defendants-appellants, Salh Khan and Olivia Khan, appeal from a judgment
    of the Franklin County Court of Common Pleas denying their Civ.R. 60(B) motion for
    relief from a judgment entered in favor of plaintiff-appellee, K One Limited Partnership
    ("K One"). For the reasons that follow, we affirm.
    I. Facts and Procedural History
    {¶ 2} On December 31, 2013, appellees filed a "complaint on a cognovit
    guarantee" wherein appellee demanded judgment against appellants in the total amount
    of $736,678.18, plus costs. Attached as exhibits to the complaint are: a $500,000
    "Revolving Cognovit Promissory Note" ("Note") signed by Neil Johnson as president of PL
    Funding, LLC; and a "Cognovit Guarantee" ("Guarantee"), which is signed by appellants.
    No. 13AP-830                                                                           2
    Appellee's counsel instructed the clerk to serve the complaint and summons on appellants
    by certified mail. Certified mail service was issued on January 2, 2013. Pursuant to a
    warrant of attorney, appellants' counsel filed a "cognovits answer" on January 7, 2013.
    The following day, retained counsel for appellants entered his appearance and filed an
    amended answer containing 18 enumerated defenses.
    {¶ 3}   On January 29, 2013, the trial court entered judgment in favor of appellee
    in the amount sought in the complaint. Thereafter, on March 12, 2013, appellants filed a
    motion for relief from judgment pursuant to Civ.R. 60(B). Appellants filed the affidavit of
    appellant, Salh Khan, in support of the motion.
    {¶ 4} In his affidavit, Khan chronicles the business relationship between
    appellants, who were the owners of a manufacturing company located in Michigan,
    known as AIDCO, and two other individuals: Dr. Sam Kiehl, owner of a company known
    as NS Fund I, L.L.C. ("NSF"); and Johnson, managing director of NSF and President of
    Lawrence & Evans, L.L.C. Dr. Kiehl is also the principal of appellee, K One. The
    relationship began in 2007, when appellants "were looking for strategic partners to raise
    working capital and [seek] investors." (Khan affidavit, at ¶ 3.)
    {¶ 5} In 2009, appellants believed that the sale of AIDCO was necessary to "pay
    off AIDCO’s debt to NSF, as well as to relieve AIDCO of other debt and tax obligations."
    (Khan affidavit, at ¶ 5.) Appellants acknowledge that AIDCO "received several loans from
    NSF" and they guaranteed those loans. (Khan affidavit, at ¶ 4.) According to Khan, Dr.
    Kiehl and Johnson persuaded appellants to sell AIDCO to Palligistics, L.L.C., a company
    controlled by Dr. Kiehl and Johnson. Khan alleges that Dr. Kiehl and Johnson realized a
    "significant personal gain" as a result of the sale of AIDCO to Palligistics, and that Dr.
    Kiehl and Johnson intentionally misled appellants regarding the existence of more
    suitable buyers. (Khan affidavit, at ¶ 7-10.)
    {¶ 6} Kahn avers that during the business relationship, Dr. Kiehl and Johnson
    engaged in a pattern of fraudulent activities that exposed appellants to significant
    unsecured liabilities including the debt underlying the Note. For example, Kahn claims
    that Dr. Kiehl and Johnson "fraudulently enforced" a $2.2 million dollar cognovit note in
    an action in Hamilton County, and in doing so, they violated a separate agreement to
    reduce appellants' debt by $1.1 million. (Khan affidavit, at ¶ 29-31.) According to Khan,
    No. 13AP-830                                                                               3
    appellants have filed a civil action in Hamilton County against Dr. Kiehl and Johnson
    alleging breach of contract, fraud, breach of fiduciary duty, and unjust enrichment. (Khan
    affidavit, at ¶ 32.)
    {¶ 7} Kahn admits that "on March 8, 2010 K One Limited Partnership * * * a
    company created by Dr. Kiehl for the purpose of loaning money to Palligistics, loaned
    $500,000 to Palligistics in exchange for the Note that is the subject of the litigation before
    this court." Khan also admits that "[w]e guaranteed the Note." (Khan affidavit, at ¶ 22.)
    {¶ 8} On August 27, 2013, the trial court denied appellants' motion for relief from
    judgment. The trial court found that appellants timely filed their motion for relief from
    judgment but that appellants had not asserted a meritorious defense to the cognovit note.
    On September 26, 2013, appellants filed their notice of appeal.
    II. Assignments of Error
    {¶ 9}    Appellants assign the following as error:
    I. THE TRIAL COURT ERRED BY DETERMINING
    THE KHAN'S FAILED TO RAISE A MERITORIOUS
    DEFENSE TO THE COGNOVIT NOTE[.]
    II. THE TRIAL COURT ERRED IN GRANTING
    JUDGMENT ON THE COGNOVIT NOTE WHEN THE
    JUDGMENT HAD NOT BEEN SERVED ON THE
    KHANS PURSUANT TO O.R.C. § 2323.13(C)[.]
    III. Standard of Review
    {¶ 10} To prevail on a Civ.R. 60(B) motion, a party must demonstrate that: (1) it
    has a meritorious claim or defense to present if the court grants it relief; (2) it is entitled
    to relief under one of the grounds stated in Civ.R. 60(B)(1) through (5); and (3) it filed the
    motion within a reasonable time, and, when relying on a ground for relief set forth in
    Civ.R. 60(B)(1), (2), or (3), it filed the motion not more than one year after the judgment,
    order, or proceeding was entered or taken. GTE Automatic Elec., Inc. v. ARC Industries,
    Inc., 
    47 Ohio St.2d 146
    , 150-51 (1976); Wells Fargo Bank, N.A. v. Perkins, 10th Dist. No.
    10AP-1022, 
    2011-Ohio-3790
    , ¶ 8. Ordinarily, all three of the elements must be
    established, and the test is not met if any one of the requirements is not met. Strack v.
    Pelton, 
    70 Ohio St.3d 172
    , 174 (1994). However, "[w]here the judgment sought to be
    No. 13AP-830                                                                            4
    vacated is a cognovit judgment, the standard as set forth in GTE is modified, and the party
    filing a Civ.R. 60(B) motion need only assert that the motion was timely made and that
    there is a meritorious defense available." Fifth Third Bank v. Jarrell, 10th Dist. No. 04AP-
    358, 
    2005-Ohio-1260
    , ¶ 11.
    {¶ 11} The decision to grant or deny a Civ.R. 60(B) motion rests in the trial court's
    sound discretion. Griffey v. Rajan, 
    33 Ohio St.3d 75
    , 77 (1987). "An appellate court will
    not reverse such a decision absent an abuse of that discretion." Bank of Am., N.A. v.
    Pandey, 10th Dist. No. 12AP-950, 
    2013-Ohio-3830
    , ¶ 7.
    IV. Legal Analysis
    {¶ 12} In their first assignment of error, appellants contend that the trial court
    abused its discretion when it concluded that appellants failed to assert a meritorious
    defense to the cognovit note. We disagree.
    {¶ 13} R.C. 2323.13 authorizes a cognovit judgment where the confessing attorney
    signs the answer confessing judgment, the answer is filed, and the warrant is produced to
    the court through the plaintiff's attorney. Union Sav. Assn. v. Home Owners Aid, Inc., 
    18 Ohio App.2d 63
     (8th Dist.1969). "A cognovit note 'contains provisions designed to cut off
    defenses available to a debtor in the event of default.' As such, the holder of a cognovit
    note that is in default 'obtains a judgment without a trial of possible defenses that the
    signers of the note might otherwise assert * * * because, under a cognovit note, the debtor
    consents in advance to the holder obtaining a judgment without notice or hearing.' "
    Huntington Natl. Bank v. G.J.P. Properties, L.L.C., 10th Dist. No. 12AP-1008, 2014-Ohio-
    124, ¶ 13, quoting Huntington Natl. Bank v. Royal Mt. Sterling Corp., 10th Dist. No.
    12AP-174, 
    2012-Ohio-4514
    , ¶ 11.
    {¶ 14} A cognovit judgment is available only where the debtor has defaulted on the
    payment terms of the instrument evidencing indebtedness. Henry Cty. Bank v. Stimmels,
    Inc., 3d Dist. No. 04-22-2013, 
    2013-Ohio-1607
    . By its very nature, a cognovit note
    eliminates every defense with the exception of payment and partial payment. Tines v.
    Immobilaire IV, Ltd., 10th Dist. No. 00AP-87 (Feb. 13, 2001). However, Ohio courts have
    also recognized additional meritorious defenses involving the integrity and validity of
    cognovit notes, including: " 'improper conduct in obtaining the debtor's signature on the
    note; deviation from proper procedures in confessing judgment on the note; and
    No. 13AP-830                                                                               5
    miscalculation of the amount remaining due on the note at the time of confession of
    judgment.' " Market Ready Real Estate Servs., Inc. v. Weber, 10th Dist. No. 12AP-803,
    
    2013-Ohio-4879
    , ¶ 9, quoting First Natl. Bank of Pandora v. Freed, 3d Dist. No. 5-03-36,
    
    2004-Ohio-3554
    .
    {¶ 15} To obtain relief from a cognovit judgment under the modified 60(B)
    standard, the moving party must " 'allege operative facts with enough specificity to allow
    the trial court to decide whether a meritorious defense exists.' " Jarrell at ¶ 11, quoting
    Advanced Clinical Mgt., Inc. v. Salem Chiropractic Ctr., Inc., Stark App. No.
    2003CA00108, 
    2004-Ohio-120
    , ¶ 15. Appellants have not alleged such facts in this case.
    {¶ 16} First, we note that appellants' amended answer does not assert payment or
    partial payment. Although appellants have alleged that Palligistics, by and through Dr.
    Kiehl and Johnson, intentionally breached an agreement to reduce the amount owed by
    appellants on another cognovit note, they have not alleged any facts which would permit
    the inference of payment or partial payment on the Note at issue in this case.
    {¶ 17} Appellants next argue that Khan's affidavit sets forth a meritorious defense
    of fraud. The material averments of Khan's affidavit reads, as follows:
    22. Also on March 8, 2010, K One Limited Partnership, the
    Plaintiff herein, a company created by Dr. Kiehl for the
    purpose of loaning money to Palligistics, loaned $500,000 to
    Palligistics in exchange for the Note that is the subject of the
    litigation before this court. Neil Johnson signed the Note as
    President of PL Funding, LLC, an authorized member of
    Palligistics. We guaranteed the Note.
    23. This Note was to be a bridge loan after Palligistics was
    created and was to be paid back after Johnson and Kiehl
    obtained a new working capital loan for Palligistics.
    24. After the notes and guarantees were executed, Johnson
    and Kiehl did not obtain the line of credit to clear our debt
    and so exposed us to AIDCO and Palligistics' unsecured and
    secured liabilities.
    {¶ 18} R.C. 1303.35(A) provides that "the right to enforce the obligation of a party
    to pay an instrument is subject to * * * [a] defense of the obligor based on * * * [f]raud that
    induced the obligor to sign the instrument with neither knowledge nor reasonable
    No. 13AP-830                                                                                     6
    opportunity to learn of its character or its essential terms." R.C. 1303.35(A)(1)(c). The
    facts relevant to the Note and Guarantee at issue in this case do not permit the inference
    that appellants were induced by K One to sign the instrument with neither knowledge nor
    reasonable opportunity to learn of its character or its essential terms.1 Khan admits that
    appellants knowingly signed the Guarantee at issue and that appellants understood the
    essential terms. The fact that Dr. Kiehl and Johnson subsequently reneged on their
    promise to find other financing to secure appellants' debt to K One does not alter the fact
    that appellants knew they were guaranteeing payment of the Note. Furthermore, to the
    extent that appellants allege that Dr. Kiehl and Johnson breached a fiduciary duty owed to
    appellants in respect to the Note and Guarantee, "[a] claim of breach of fiduciary duty * *
    * is not a defense to an action on a cognovit note; rather, it is a claim that must be brought
    in a separate action." See Ohio Carpenter's Pension Fund v. La Centre, L.L.C., 8th Dist.
    No. 86597, 
    2006-Ohio-2214
    , ¶ 16, citing Leonard v. Bank One Youngstown, 7th Dist. No.
    96-C.A.-42 (1997).
    {¶ 19} "As stated by the Ohio Third District Court of Appeals, 'a meritorious
    defense [in the context of a cognovit judgment challenge] is one that 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.' " Jacobs v. Acacia Chattanooga Vehicle Auction, Inc., S.D. Ohio No. 2:10-CV-912,
    (December 21, 2011), quoting Freed at ¶ 10. (Emphasis added.) Appellants have not
    alleged facts which impugn the integrity and validity of the creation of the Guarantee or
    Note.
    {¶ 20} Accordingly, appellants' first assignment of error is overruled.
    {¶ 21} In their second assignment of error, appellants contend that the trial court
    erred by failing to serve them with the judgment entry as required by R.C. 2323.13(C),
    which states: "Immediately upon entering any such judgment the court shall notify the
    defendant of the entry of the judgment by personal service or by registered or certified
    letter mailed to him at the address set forth in the petition." Appellee concedes that the
    1Both the Note and Guarantee contain the statutory "warning" regarding the waiver of prior notice and
    available defenses. See R.C. 2323.13(D).
    No. 13AP-830                                                                              7
    trial court failed to comply with the statute in this case but argue that any error was
    clearly harmless to appellants. We agree.
    {¶ 22} The record reveals the following series of events: certified mail service of the
    complaint and summons upon appellants on January 7, 2013; appellants retained counsel
    filed an amended answer on January 8, 2013; the trial court entered a cognovit judgment
    on January 19, 2013; and appellants timely filed a motion for relief from the judgment on
    March 12, 2013. Thus, the record shows that appellants received actual notice of the
    cognovit judgment even though the trial court did not serve appellants in accordance with
    the statute. Moreover, the case law establishes that a motion for relief from judgment
    pursuant to Civ.R. 60(B) is the appropriate procedural device for challenging a cognovit
    judgment. See Jacobs v. Acacia Chattanooga Vehicle Auction, Inc., 10th Dist. No. 10AP-
    1071, 
    2011-Ohio-3706
    , ¶ 18. The trial court ruled on the merits of appellants' 60(B)
    motion and appellants timely appealed to this court. Thus, appellants were not harmed by
    the lack of statutory notice.
    {¶ 23} For the foregoing reasons, appellants' second assignment of error is
    overruled.
    V. Conclusion
    {¶ 24} Having overruled each of appellants' assignments of error, we affirm the
    judgment of the Franklin County Court of Common Pleas.
    Judgment affirmed.
    O'GRADY and LUPER SCHUSTER, JJ., concur.
    _________________
    

Document Info

Docket Number: 13AP-830

Judges: Connor

Filed Date: 5/15/2014

Precedential Status: Precedential

Modified Date: 10/30/2014