D. H. Overmyer Co., Inc., of Ohio et al. v. Frick Co.
405 U.S. 174 (1972)
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Rule of Law:
A cognovit clause, which allows for a confession of judgment without prior notice or hearing, is not per se unconstitutional under the Due Process Clause of the Fourteenth Amendment. A party can voluntarily, intelligently, and knowingly waive their due process rights to prejudgment notice and a hearing, particularly in a commercial context between sophisticated parties of equal bargaining power who are represented by counsel.
Facts:
- Frick Co. entered into a contract to install an automatic refrigeration system for D.H. Overmyer Co., Inc. for $223,000.
- Overmyer fell behind on its payments, becoming delinquent by approximately $120,000, which caused Frick to stop work.
- In February 1967, the parties negotiated a workout agreement where Overmyer paid a portion in cash and executed an installment note for the balance; this first note did not contain a cognovit clause.
- After Frick completed the work, Overmyer again struggled with payments and requested further accommodation, including the release of mechanic's liens Frick had filed.
- In June 1967, with both parties represented by counsel, they negotiated a new agreement.
- Overmyer executed a second promissory note which, for the first time, contained a cognovit (confession-of-judgment) clause.
- In exchange for agreeing to the cognovit clause, Overmyer received substantial consideration: Frick released its mechanic's liens, reduced the monthly payment amount, extended the repayment period, and lowered the interest rate.
- Overmyer subsequently defaulted on the payments required by the second note.
Procedural Posture:
- Using the cognovit clause in the promissory note, Frick Co. obtained a judgment against D. H. Overmyer Co., Inc. in the Common Pleas Court of Lucas County, Ohio, without prior notice to Overmyer.
- Overmyer filed post-judgment motions in the Ohio trial court to stay execution and vacate the judgment, which the court denied.
- Overmyer, as appellant, appealed the trial court's ruling to the Court of Appeals for Lucas County, Ohio.
- The intermediate appellate court affirmed the trial court's decision.
- Overmyer, as appellant, appealed to the Supreme Court of Ohio, which dismissed the appeal 'for the reason that no substantial constitutional question exists herein.'
- The United States Supreme Court granted Overmyer's petition for a writ of certiorari.
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Issue:
Does a cognovit clause in a promissory note, which authorizes a creditor to obtain a judgment against a debtor without prior notice or a hearing, violate the Due Process Clause of the Fourteenth Amendment?
Opinions:
Majority - Mr. Justice Blackmun
No. A cognovit clause is not per se violative of Fourteenth Amendment due process. The Court reasoned that due process rights to notice and a hearing are subject to waiver, provided the waiver is voluntary, knowing, and intelligent. In this case, the standard for a valid waiver was met. Overmyer was a sophisticated corporation engaged in an arm's-length negotiation with Frick, another corporation of equal bargaining power. Both parties were represented by competent counsel. The cognovit clause was not part of a contract of adhesion; it was specifically bargained for in the second note in exchange for substantial consideration beneficial to Overmyer. The Court limited its holding to the facts of this case, suggesting that in situations involving contracts of adhesion, great disparity in bargaining power, or a consumer context, the outcome might be different. The availability of a post-judgment procedure in Ohio to vacate the judgment upon showing a valid defense also supported the conclusion that due process was not offended.
Concurring - Mr. Justice Douglas
No. The waiver of constitutional rights was valid due to the arm's-length bargaining between the corporate parties. This opinion concurs to emphasize that Ohio's post-judgment relief procedures provide a meaningful safeguard. Under Ohio law, a trial judge has a duty to vacate a confessed judgment if the debtor presents credible evidence supporting a defense from which reasonable minds could reach different conclusions. This standard ensures that the debtor has a genuine opportunity to be heard post-judgment if they can pose a jury question on their defense, thereby preventing an unbridled exercise of judicial discretion and satisfying due process concerns.
Analysis:
This decision establishes that cognovit clauses are not inherently unconstitutional, carving out a significant space for their use in commercial transactions. By focusing on factors such as equal bargaining power, representation by counsel, and consideration, the Court created a fact-intensive analysis for determining the validity of a waiver of due process rights. The ruling preserves a tool for creditors in commercial lending while signaling that such waivers will face much stricter scrutiny in consumer contracts or contracts of adhesion. This distinction between sophisticated commercial actors and ordinary consumers has become a crucial aspect of due process analysis in contract law.
