Legal Definitions - judgment note

Judgment Note

A judgment note, also sometimes called a cognovit note, is a special type of promissory note where a borrower agrees in advance to allow a lender to obtain a court judgment against them without a trial if they fail to repay the loan.

Essentially, by signing a judgment note, the borrower grants a "power of attorney" within the note itself. This power authorizes the lender's attorney to appear in court on the borrower's behalf and "confess judgment"—meaning to admit the debt and agree to a court order for a specific amount—should the borrower default. This process bypasses the usual legal steps of filing a lawsuit, serving papers, and conducting a trial.

Because judgment notes can be seen as unfair to borrowers, potentially stripping them of their right to defend themselves in court, they are either illegal or heavily restricted in most U.S. states.

Here are some examples to illustrate how a judgment note would operate:

• Example 1: A Business Loan in a Permitting State

  Imagine a small manufacturing company in a state where judgment notes are still permitted for commercial transactions. The company needs a quick loan to purchase new equipment and secures funding from a private lender. As part of the loan agreement, the lender requires the company's owner to sign a judgment note for the loan amount. If the manufacturing company later struggles and defaults on its payments, the lender could use the judgment note to immediately obtain a court judgment against the company for the outstanding debt, without having to go through a lengthy lawsuit process.

  This example illustrates how a judgment note allows a lender to quickly secure a court order for repayment upon default, bypassing the traditional litigation process.

• Example 2: Historical Use in Commercial Real Estate

  Consider a scenario from several decades ago, when judgment notes were more common. A developer wanted to purchase a piece of land for a new project and secured a loan from a bank. The bank, seeking extra security, included a judgment note in the loan documents. If the developer failed to make payments as agreed, the bank could present the judgment note to a court and obtain a judgment against the developer almost immediately, allowing them to pursue collection actions like seizing assets or foreclosing on the property much faster than if they had to file a standard lawsuit.

  This demonstrates the historical application of judgment notes in commercial lending, highlighting their purpose of providing lenders with a swift path to judgment in case of borrower default.

• Example 3: Why They Are Mostly Illegal for Consumers

  Suppose a consumer took out a personal loan from a lender who, if judgment notes were legal for consumer transactions, included one in the loan agreement. If the consumer then faced unexpected financial hardship and missed a payment, the lender could, theoretically, use the judgment note to quickly get a court judgment against them. This judgment could then be used to garnish the consumer's wages or seize their bank accounts without the consumer ever having the opportunity to present their case or defenses in court. This potential for abuse and lack of due process is precisely why judgment notes are now largely prohibited for consumer loans in most jurisdictions.

  This example clarifies the protective intent behind laws restricting judgment notes, showing how they could disadvantage consumers by removing their right to a fair hearing.