Export-import Bank Of The United States v. Advanced Polymer Sci.S Inc

• Decision Date: 05 May 2010
• Docket Number: No. 09-3414.,09-3414.
• Citation: 604 F.3d 242
• Parties: EXPORT-IMPORT BANK OF THE UNITED STATES, Plaintiff-Appellee,v.ADVANCED POLYMER SCIENCES, INC., Defendant,Donald and Arlene Keehan, Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

604 F.3d 242

EXPORT-IMPORT BANK OF THE UNITED STATES, Plaintiff-Appellee,v. ADVANCED POLYMER SCIENCES, INC., Defendant,Donald and Arlene Keehan, Defendants-Appellants.

No. 09-3414.

United States Court of Appeals Sixth Circuit.

Argued: April 21, 2010.

Decided and Filed: May 5, 2010.

Rehearing and Rehearing En Banc Denied July 29, 2010.

ARGUED: Nicholas Aristides Panagopoulos II, Law Office, Cleveland Heights, Ohio, for Appellants.

Alexander A. Rokakis, Assistant United States Attorney, Cleveland, Ohio, for Appellee. ON BRIEF: Jon P. Yormick, Yormick & Associates Co., LPA, Cleveland, Ohio, for Appellants. Alexander A. Rokakis, Assistant United States Attorney, Cleveland, Ohio, for Appellee.

Before MARTIN, SUHRHEINRICH, and WHITE, Circuit Judges.

OPINION

BOYCE F. MARTIN, JR., Circuit Judge.

Export-Import Bank (Ex-Im Bank), an agency of the United States, was the holder of a promissory note by Advanced Polymer Sciences, Inc. (APS) and of guaranties by Donald Keehan and Arlene Keehan guaranteeing the entirety of the APS obligation. Ex-Im Bank obtained the note and the guarantees by assignment from Bank One, N.A., which had originally extended credit to APS. Both the note and the guarantees contained cognovit provisions, allowing the beneficiary to confess judgment against the obligor in the event of default. APS defaulted on the debt while the note and the guarantees were in the hands of Bank One. Several years later, Ex-Im Bank, as Bank One's assignee, confessed judgment in the principle amount of $2,166,661.10 against APS and the Keehans. The Keehans moved to set aside the judgments in the district court, alleging as meritorious the defenses of laches res judicata, and that the guarantees were unenforceable due to a fatal conflict among contractual terms. The district court declined to set aside the judgments. Export-Import Bank of U.S. v. Advanced Polymer Scis., Inc., 624 F.Supp.2d 696 (N.D.Ohio 2009). The Keehans now appeal, asserting that the applicable statute of limitations had run before Ex-Im Bank obtained the judgments and that an arbitration provision in the documents conflicts with the cognovit provision. We AFFIRM.

I.

In the late nineteen-nineties, APS took out a series of loans from Bank One. These loans were typically documented by promissory notes from APS. In August of 1998, the Keehans executed a blanket commercial guarantee in which they each personally guaranteed all debts from APS to Bank One. There are several important provisions in the guarantees. First, the guarantees contain a confession of judgment, that the parties refer to as “cognovit,” provision:

Guarantor hereby irrevocably authorizes and empowers any attorney-at-law to appear in any court of record and to confess judgment against Guarantor for the unpaid amount of this Guaranty, plus attorneys' fees as provided in this Guaranty, plus costs of suit, and to release all errors, and waive all rights of appeal.

(Guaranty at 2.) Second, the guarantees contain an arbitration provision:

Lender and Guarantor agree that upon the written demand of either party, whether made before or after the institution of any legal proceedings, but prior to the rendering of any judgment in that proceeding, all disputes, claims and controversies between them, whether individual, joint, or class in nature, arising from this Guaranty, any Related Document or otherwise, including without limitation contract disputes and tort claims, shall be arbitrated pursuant to the Commercial Rules of the American Arbitration Association.

( Id.) Third, the guarantees contain a broad waiver of defenses:

Guarantor also waives any and all rights or defenses arising by reason of ... (d) any defenses given to guarantors at law or in equity other than actual payment and performance of the indebtedness.

( Id.) Finally, the guarantees provide that they are governed by Ohio law. ( Id.)

One of the loans from Bank One was an export line of credit to APS, which was originally extended in 1999 in the amount of $1,300,000. Ex-Im Bank guaranteed the line of credit, presumably as part of a federal trade program. In June of 2000, the line of credit was increased to $2,050,000 and, by its terms, became due and payable on November 16, 2000. APS failed to make payment in full on the line of credit and several other obligations to Bank One, and the Keehans did not step in to pay the debt on APS's behalf.

On March 7, 2001, counsel for Bank One sent a letter to Donald Keehan declaring APS in default of all of its obligations to Bank One and demanding payment from APS and the Keehans. When APS and the Keehans failed to make payment, Bank One confessed judgment against APS and the Keehans in Ohio state court on November 26, 2002 on all of the APS obligations except for the line of credit.

The line of credit was excluded from Bank One's confession of judgment because it was guaranteed by Ex-Im Bank. So, instead of confessing judgment against APS on the line of credit note and against the Keehans on the guarantees, Bank One made demand on the Ex-Im Bank guaranty on October 30, 2002 in the amount of $1,302,448.99. Once Ex-Im Bank made good on its guaranty to Bank One, Bank One transferred its interest in the line of credit note and the guarantees to Ex-Im Bank by assignment dated January 23, 2003.

Ex-Im Bank did not immediately pursue its claim against APS and the Keehans, either formally or informally. Instead, Ex-Im Bank, by the United States Attorney for the Northern District of Ohio, filed suit as assignee of the cognovit note and guarantees in the United States District Court for the Northern District of Ohio on April 18, 2007. The record does not reveal what occurred, if anything, between Ex-Im Bank and the Keehans in the period between the January 2003 assignment and the April 2007 confession of judgment.

The district court entered judgment on May 23, 2007 against APS and the Keehans, jointly and severally, in the principal amount of $2,166,661.10, plus interest and the costs of suit. After obtaining the judgment, the government began negotiating with the Keehans. When the negotiations proved unsuccessful, the Keehans ¹ moved on March 4, 2008 to vacate the judgment pursuant to Federal Rule of Civil Procedure 60(b).

As the basis for their Rule 60(b) motion, the Keehans asserted three purportedly meritorious defenses to the confessed judgments. First, they argued that, because Bank One could have sued on the line of credit when it sued on all of APS's other obligations, the doctrine of res judicata barred Ex-Im Bank, as Bank One's assignee, from suing later on the line of credit. Second, they argued that the arbitration provision in the guarantees conflicted with the confession of judgment provision and, because contracts are construed against the drafter and because federal law favors arbitration, the confession of judgment provision must give way to the arbitration provision, rendering the cognovit judgments invalid. Third, they argued that the government's failure to act in the more than four years that elapsed between the assignment of the guarantees and filing suit on the guarantees gave rise to the defense of laches. Notably, in addressing the laches argument, neither party discussed the applicable or most analogous statute of limitations.

The district court denied the Rule 60(b) motion in an opinion and order dated March 11, 2009. 624 F.Supp.2d 696. The court focused on the requirement of a meritorious defense in seeking to vacate a judgment under Rule 60(b). As relevant to this appeal the court first found that, as a matter of Ohio law res judicata and laches are not meritorious defenses to cognovit judgments. It found that, under Ohio law on confessed judgments:

For purposes of a Rule 60(b) motion “a meritorious defense 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. A judgment on a cognovit note will generally not be vacated for reasons which do not encompass such matters of integrity and validity.”

Id. at 701 (quoting First Nat'l Bank of Pandora v. Freed, No. 5-03-36, 2004 WL 1489074, at *2, 2004 Ohio App. LEXIS 3209, at *7-8 (Ohio Ct.App. July 6, 2004)). From this, the court reasoned that laches and res judicata do not fit within the narrow class of defenses to confessed judgments, as neither defense affects the validity of the underlying debt, the validity of the agreement at issue, or the procedures used to confess judgment. Id.

The court then proceeded to address the merits of the laches argument and found them lacking. Among other reasons for this finding was that the Keehans could not show that Ex-Im Bank lacked diligence in waiting several years to confess judgment. In so doing, the court looked to the applicable statute of limitations as a guidepost in determining whether Ex-Im Bank had acted in a timely fashion. Importantly, the court found that Ohio's fifteen-year limitation period for actions on written contracts, O.R.C. § 2305.06, was the applicable limitations period. With that in mind, the court found that Ex-Im Bank's approximately four-year delay in confessing judgment did not rise to the level of lack of diligence necessary to support a laches defense. 624 F.Supp.2d at 706.

Finally, the district court found that the Keehans' argument regarding the supposed inherent conflict between the arbitration provision and the cognovit provision could be a meritorious defense to a cognovit judgment, as it went to the validity and integrity of the cognovit provisions themselves. The court acknowledged that the cognovit provision rendered the arbitration provision less useful because Ex-Im Bank could obtain judgment, and thus cut off the right to arbitration, without the Keehans ever knowing about it. However, the court found that just because the arbitration provision was less useful in this case did not mean...