Export-Import Bank of U.S. v. Advanced Polymer, Case No. 1:07CV1138.

• Decision Date: 11 March 2009
• Docket Number: Case No. 1:07CV1138.
• Citation: 624 F.Supp.2d 696
• Parties: EXPORT-IMPORT BANK OF the UNITED STATES, Plaintiff, v. ADVANCED POLYMER SCIENCES, INC., et al., Defendant.
• Court: U.S. District Court — Northern District of Ohio

624 F.Supp.2d 696

EXPORT-IMPORT BANK OF the UNITED STATES, Plaintiff, v. ADVANCED POLYMER SCIENCES, INC., et al., Defendant.

Case No. 1:07CV1138.

United States District Court, N.D. Ohio, Eastern Division.

March 11, 2009.

COPYRIGHT MATERIAL OMITTED

Alex Rokakis, Office of the U.S. Attorney, Cleveland, OH, for Plaintiff.

Barry H. Fromm, Columbus, Ronald H. Isroff, Ulmer & Berne, Cleveland, Jason B. Desiderio, Assistant Prosecuting Attorney, Wooster, OH, for Defendants.

OPINION AND ORDER

CHRISTOPHER A. BOYKO, District Judge.

This matter comes before the Court upon Defendants' Motion to Vacate the cognovit judgment entered against them by this Court on May 22, 2007. For the reasons set out below, the Court DENIES the Motion to Vacate.

I. FACTS

Advanced Polymer Sciences ("APS") was a Delaware corporation and the family business of Defendants Donald and Arlene Keehan (collectively "Keehans"). Between 1997 and 2000, APS took out a series of loans from Bank One, N.A. ("Bank One"). The series of loans encompassed a domestic line of credit evidenced by three promissory notes dated February 27, 1997, August 10, 1998, and July 30, 1999 (the "Bank One notes"). The series also included an export line of credit evidenced by a single promissory note dated June 29, 2000 (the "Ex-Im note"). In connection with these transactions, the Keehans each signed commercial guarantees (the "Guarantees") dated August 10, 1998, in which they agreed to personally guarantee repayment of any and all debts and obligations of APS to Bank One in the event of default by APS. The Ex-Im note was also guaranteed by Plaintiff Export-Import Bank of the United States ("Export-Import Bank").

In 2001, APS ran into business difficulties and defaulted on the repayment of all the notes to Bank One. On October 17, 2002, Bank One sent a notice of default and demand for payment of the notes to APS and the Keehans; however, the amounts due were not repaid. Bank One filed a claim with Export-Import Bank on the Ex-Im note, since Export-Import Bank was a guarantor of that note. On November 26, 2002, Bank One confessed judgment pursuant to cognovit provisions against APS and the Keehans, as guarantors, on the Bank One notes in the Lorain County Court of Common Pleas and obtained a judgment. On January 23, 2003, Bank One assigned its interest in the remaining Ex-Im note to Export-Import Bank for ninety percent of the outstanding value, as required by the guarantee agreement between Bank One and Export-Import Bank.

According to Export-Import Bank, it then unsuccessfully attempted recovery on the Ex-Im note through direct contact and via a recovery agent. Eventually, on April 18, 2007, Export-Import Bank filed a cognovit complaint before this Court against the Keehans as guarantors of the Ex-Im note, pursuant to the cognovit provisions contained in the Guarantees signed by the Keehans. The Court entered judgment in favor of Export-Import Bank against the Keehans on May 23, 2007. The Keehans now move the Court to vacate the cognovit judgment entered against them on the Ex-Im note. The Keehans allege that if allowed to proceed to trial, they can demonstrate meritorious defenses to the Ex-Im note, namely: res judicata, laches, and the invalidity of the cognovit provisions in the Guarantees.

II. LAW AND ANALYSIS

A. Standard of Review

Under certain circumstances, a court may relieve a party from final judgment by vacating an existing judgment. The grounds for granting a party relief from judgment are set out in the Federal Rules of Civil Procedure, which provide in pertinent part:

Grounds for Relief from a Final Judgment, Order, or Proceeding. On motion and just terms, the court may relieve a party or its legal representative from a final judgment, order, or proceeding for the following reasons:

(1) mistake, inadvertence, surprise, or excusable neglect;

(2) newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b);

(3) fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party;

(4) the judgment is void;

(5) the judgment has been satisfied, released or discharged; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable; or

(6) any other reason that justifies relief.

Fed.R.Civ.P. 60(b) (emphasis added).

It is clear from the facts of this case that the specific grounds set out at Rule 60(b)(1)-(5) do not apply. Thus, the Keehans are left to seek relief under Rule 60(b)(6), which "vests power in courts adequate to enable them to vacate judgments whenever such action is appropriate to accomplish justice." Klapprott v. United States, 335 U.S. 601, 614-15, 69 S.Ct. 384, 93 L.Ed. 266 (1949). "In order to be granted relief under the broadly drafted Rule 60(b)(6), defendants must show that exceptional or extraordinary circumstances exist that would justify relief from the operation of a judgment in addition to satisfying the three criteria set forth in United Coin Meter." Valvoline Instant Oil Change Franchising, Inc. v. Autocare Assocs., Inc., 173 F.3d 857 (Table), 1999 WL 98590, at *3 (6th Cir. Jan. 26, 1999) (emphasis added). The three criteria, in addition to exceptional circumstances, are: whether the plaintiff will be prejudiced; whether defendant has a meritorious defense; and whether culpable conduct of the defendant led to the default. United Coin Meter Co., Inc. v. Seaboard Coastline R.R., 705 F.2d 839, 845 (6th Cir.1983).

B. Determining the Merit of the Particular Defenses Raised

An important, initial consideration that must be dealt with is exactly what type of showing the Keehans must make to demonstrate that they have a meritorious defense sufficient to justify relief under Rule 60(b). The Keehans cite authority from the First Circuit for the proposition that:

while a movant, in order to set aside a judgment, need not establish that it possesses an ironclad claim or defense which will guarantee success at trial, it must at least establish that it possesses a potentially meritorious claim or defense which, if proven, will bring success in its wake.

Teamsters, Chauffeurs, Warehousemen and Helpers Union, Local No. 59 v. Superline Transp. Co., Inc., 953 F.2d 17, 20 (1st Cir.1992). Off this authority, the Keehans base an argument that they have alleged facts which, if proven at trial, constitute a meritorious defense. (Def.'s Reply in Supp. Mot. Vacate at 8). They then state: "The Court's uncertainty about a defense is not reason to allow this judgment to stand. Trial is the appropriate forum for resolution of such doubts." Id. It is clear from this argument that the Keehans misunderstand the operation of the meritorious defense requirement in the context of the defenses they have raised.

While trial may be the appropriate forum to resolve factual doubts, trial is unnecessary to resolve issues purely of law. The meritorious defense requirement exists because "a litigant, as a precondition to relief under Rule 60(b), must give the trial court reason to believe that vacating the judgment will not be an empty exercise." Soto v. Mineta, No. 01-71244, 2008 WL 4428010, at *6 (E.D.Mich. Sept. 30, 2008) (quoting Teamsters, 953 F.2d at 20). If after vacation of the judgment the court would rule against a defendant on the legal merits of his defenses, even though all his factual allegations were proven true, then vacation of the judgment would still be an empty exercise. The Keehans raise three allegedly meritorious defenses: res judicata (specifically, claim preclusion); conflict between the arbitration provision and cognovit provision in the Guarantees, resulting in the cognovit clause being void (an issue of contract interpretation); and laches. The applicability of all these defenses to the facts of this case are strictly matters of law (or in the case of laches, equity), to be determined solely by the judge. Therefore, if the Court determines that none of these defenses are cognizable as a matter of law, then vacating the judgment would be an empty exercise and relief under Rule 60(b) is not justified.

C. Res Judicata and Laches Are Not Meritorious Defenses to a Cognovit Judgment as a Matter of Law

The cognovit provision that was the basis for the judgment rendered in this case is a creature of Ohio state statutory law, specifically Ohio Revised Code § 2323.13, which provides for the creation of and procedures to govern use of confessions of judgment by warrant of attorney (commonly referred to as cognovit notes and judgments, respectively). In brief, the statute allows a debtor in a non-consumer transaction to empower his creditor as an attorney-at-law, who may thereafter produce the cognovit note in the event of default and obtain judgment without hearing or notification to the debtor. See generally, § 2323.13. Likewise, the Guarantees signed by the Keehans, which contained the cognovit provisions, specifically state that they "shall be governed by and construed in accordance with the laws of the state of Ohio." (Compl. Ex. 3 & 4). Therefore, Ohio state law governs what defenses are available to a claim on a contractual obligation containing a cognovit provision.

Given the nature and purpose of a cognovit provision, the defenses available to a debtor who has agreed to such provision are limited. "By definition, a cognovit provision in a promissory note cuts off every defense, except payment, which the maker of the note may have against enforcement of the note." Tinnes v. Immobilaire IV, Ltd., No. 00AP-87, 2001 WL 122073, at *6 (Ohio App. 10th Dist. Feb. 13, 2001) (citing BLACK'S LAW DICTIONARY 260 (6th ed. 1990)). "But `[t]he defense of non-default is not the only meritorious defense recognized by courts as being available to a cognovit judgment debtor seeking Civ.R. 60(B) relief.'" Lykins Oil Co. v. Pritchard, 169 Ohio App.3d 194, 195, 862 N.E.2d...