UNITED STATES DISTRICT COURT 

SOUTHERN DISTRICT OF OHIO

EASTERN DIVISION

ALEXIS ANN JACOBS,

Plaintiff,

 Case No. 2:10-cv-912

v. Judge George C. Smith

 Magistrate Judge Abel

ACACIA CHATTANOOGA

VEHICLE AUCTION, INC., et. al.,

Defendants.

OPINION AND ORDER

This matter is before the Court on the motion of Defendants Acacia Chattanooga Vehicle

Auction, Inc. (“Acacia Chattanooga”), Acacia Automotive, Inc. (“Acacia Automotive”), and

Steven L. Sample (“Sample”), for relief from the cognovit judgments entered by this Court on

February 23, 2011, and corrected by a Nunc Pro Tunc Order filed July 26, 2011 (Doc. 28). For

the reasons that follow, the Court GRANTS Defendants’ motion for relief.

I. Background

Sample is the president and CEO of Acacia Automotive, which owns several subsidiary

automobile auction businesses. Sample formed Acacia Automotive after having worked in the

automobile and truck industry for approximately 30 years and holding management positions for

large automobile auction companies during the course of 15 years. In 2009, Acacia Automotive

purchased a vehicle auction business located in Chattanooga, Tennessee, and created a subsidiary,

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Acacia Chattanooga, to operate the new business. As part of this transaction, Acacia

Chattanooga purchased assets from Chattanooga Auto Auction Limited Liability Company

(“CAA”), established a lease with Auction Venture Limited Liability Company (“Auction

Venture”), which owned the premises upon which the auction was operated, and received a line

of credit from Plaintiff Alexis Ann Jacobs (“Jacobs” or “Plaintiff”), who owns Auction Venture

and CAA. This line of credit, evidenced by a revolving loan note containing a cognovit provision,

was guaranteed by Acacia Automotive and Sample. The guaranties also contained cognovit

provisions. Furthermore, as part of the loan transaction, Acacia Automotive executed an

agreement (the “stock pledge agreement”) pledging all of the shares of Acacia Chattanooga to

Jacobs as collateral for the loan.

In September 2010, Jacobs filed an action in this court, assigned Case No. 2:10-cv-863

(the “original cognovit action”), alleging default on the cognovit note, and suing on it and the

guaranties. On the same day, Jacobs sent notice to Acacia Automotive and Sample asserting that,

due to Acacia Chattanooga’s alleged default upon the loan, she was exercising her right under the

stock pledge agreement to vote the entirety of Acacia Chattanooga’s stock. Jacobs thereupon

elected Keith Whann as sole director of Acacia Chattanooga, and Whann subsequently elected

himself as president of Acacia Chattanooga.

In October 2010, the parties stipulated to the dismissal of the original cognovit action

without prejudice. On the same day as the filing of the stipulation of dismissal, Jacobs filed a

substantively identical action in the Court of Common Pleas of Franklin County, Ohio. Jay

McKirahan, Esq. (“McKirahan”) appeared on behalf of Defendants Acacia Chattanooga, Acacia

Automotive, and Sample pursuant to the warrants of attorney contained in the note and

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guaranties, and confessed judgment. Franklin County Common Pleas Court Judge Stephen

McIntosh signed the final judgment entry, but, before the judgment was docketed on October 12,

2010, the law firm of Thompson Hine LLP, purporting to act on behalf of all the defendants,

removed the action to this Court and filed an “Amended Answer.”1 Jacobs moved for this Court

to strike the purported Amended Answer, and McKirahan, purporting to act on behalf of Acacia

Chattanooga, moved to remand this action to state court.2

On February 23, 2011, this Court denied the motion to remand and granted the motion to

strike (Doc. 27). Finding no impediment to enter judgment in this cognovit action, the Court

granted Jacobs judgment on the cognovit note against Acacia Chattanooga, and judgment on the

guaranty agreement pertaining to the note against Acacia Automotive and Sample. Id. Two

weeks later, Defendants filed a Motion for Relief from Cognovit Judgment pursuant to Federal

Rule of Civil Procedure 60(b) (Doc. 28), and a Motion to Stay execution on the cognovit

judgments pursuant to Federal Rule of Civil Procedure 62 (Doc. 29). On March 28, 2011, the

Court granted the motion to stay the execution of the cognovit judgments, pending resolution of

Defendants’ Rule 60(b) motion (Doc. 31). In May 2011, and pursuant to Federal Rule of Civil

1

 Because the Franklin County trial court lacked jurisdiction to enter the cognovit

judgment once the matter was removed, the Ohio Tenth District Court of Appeals vacated the

judgment. See Jacobs v. Acacia Chattanooga Vehicle Auction, Inc., No. 10AP-1071, 2011 WL

3210061 (Ohio Ct. App. July 28, 2011).

2

 In view of Jacobs’ actions in asserting rights under the stock pledge agreement, the

parties dispute the actual ownership and control of Acacia Chattanooga and correspondingly who

has authority to represent this company in this litigation. Because resolution of this issue appears

to hinge on the adjudication of other issues, such as whether an event of default occurred,

whether the stock pledge agreement gave Jacobs the authority to elect Whann as sole director of

Acacia Chattanooga, and whether the agreements themselves were procured by fraud, it will not

be resolved at this time.

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Procedure 60(a), Defendant moved for correction of the judgment amount ordered by this Court

on February 23, 2011. The Rule 60(a) motion was unopposed, and the Court issued a Nunc Pro

Tunc Order correcting the amount of the judgments (Doc. 41). The Court will now resolve

Defendants’ pending Rule 60(b) Motion for Relief from Cognovit Judgment.

II. Standard of Review

Defendants move for relief from judgment pursuant to Federal Rule of Civil Procedure

60(b), which provides a mechanism for a defendant to challenge a final judgment under certain

circumstances. Rule 60(b) does not directly set forth a standard for setting aside a cognovit

judgment, and there is no federal common law on the issue. Ohio courts, however, have

established such standards. Accordingly, Ohio law controls the standard for vacating the cognovit

judgment entered in this case. See Fifth Third Bank v. MacLaren, No. 3:08-CV-02819, 2009 WL

3271364, at *4 (N.D. Ohio Oct. 9, 2009) (applying Ohio law to the issue of whether a cognovit

judgment should be vacated).

Under Ohio Rule of Civil Procedure 60(B), a party seeking relief from judgment must

demonstrate that he: 1) has a meritorious defense; 2) is entitled to relief under one of the grounds

stated in 60(B); and 3) makes the motion within a reasonable time. GTE Automatic Elec. Inc. v.

ARC Industries, Inc., 351 N.E.2d 113, 113 (Ohio 1976). However, due to the “harsh results of

the cognovit procedure, namely, that the defendant has never received a day in court or chance to

be heard,” a party seeking relief from cognovit judgment need only show that he has a meritorious

defense and that his motion is timely raised. Lykins Oil Co. v. Pritchard, 862 N.E.2d 192, 197

(Ohio Ct. App. 2006). The movant must “allege operative facts with enough specificity to allow

the trial court to decide whether a meritorious defense exists.” Advanced Clinical Management,

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Inc. v. Salem Chiropractics Ctr., Inc., No. 2003CA00108, 2004 WL 57710, *2 (Ohio Ct. App.

Jan. 12, 2004). These asserted facts must be more than mere conclusory allegations. See Fifth

Third Bank, 2009 WL 3271364, at *4 (citing Urbana College v. Conway, 502 N.E.2d 675, 678

(Ohio Ct. App. 1985)). Such a party is not required, however, to prove that it will prevail on the

defense. Lykins Oil Co., 862 N.E.2d at 197-98. “Rather, the burden on the moving party is only

to allege operative facts which would constitute a meritorious defense [or claim] if found to be

true.” Fouts v. Weiss–Carson, 602 N.E.2d 1231, 1233 (Ohio Ct. App. 1991).

Within the context of reviewing a party’s motion for relief from cognovit judgment,

however, a court must also be mindful of the principle that “[b]y definition, a cognovit provision

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. February. 13, 2001). “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., 862 N.E.2d at 195 (citations omitted). 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.” Nat’l Bank of Pandora v. Freed, No. 5-03-

36, 2004 WL 1489074, at *2 (Ohio App. 3rd Dist. July 6, 2004). Conversely, a “judgment on a

cognovit note will generally not be vacated for reasons which do not encompass such matters of

integrity and validity.” Id.

Here, the motion for relief was filed two weeks after the Court granted the cognovit

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judgments, and thus Plaintiff does not challenge the timeliness of the motion. At issue is whether

Defendants have alleged a meritorious defense. Defendant Acacia Chattanooga asserts that it has

at least six meritorious defenses, which are as follows: Jacobs’ Complaint fails to state a claim on

its face; Acacia Chattanooga did not default on the credit line; Acacia Chattanooga was

fraudulently induced into purchasing the auction’s assets and taking the loan; Jacobs did not

afford Acacia Chattanooga notice and a reasonable opportunity to cure the supposed defaults, as

required under the loan documents; Jacobs materially breached the loan agreement by acting in

bad faith; and the loan agreement does not meet Ohio’s statutory requirements for a cognovit

judgment. Defendants Acacia Automotive and Sample assert that they have the same defenses as

Acacia Chattanooga, as well as the defense that Jacobs never made the demand for payment

required by the guaranties before she filed suit. Plaintiff argues that Defendants have failed to

establish a meritorious defense.

The Court will first address whether Defendants demonstrate a meritorious defense by

their assertion that they were fraudulently induced into the sale and the loan transaction. Because

fraud in the inducement goes to the integrity and validity of the creation of the debt or note, it

constitutes a meritorious defense that would justify relief from a cognovit judgment. See, e.g.,

Davidson v. Hayes, 590 N.E.2d 18 (Ohio Ct. App. 1990) (finding that trial court abused its

discretion in denying party’s motion for relief from cognovit judgment when said party presented

evidence which supported defense of fraud in the inducement). Thus, the issue becomes whether

Defendants allege operative facts of fraudulent inducement that would undermine the integrity and

validity of the underlying loan agreement and corresponding guaranties.

 A claim of fraud in the inducement arises when a party is induced to enter into an

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agreement through fraud or misrepresentation. ABM Farms, Inc. v. Woods, 692 N.E.2d 574, 578

(Ohio 1998). To prove fraud in the inducement under Ohio law, a plaintiff must prove that the

defendant made a knowing, material misrepresentation with the intent of inducing the plaintiff’s

reliance, and that the plaintiff relied upon that misrepresentation to her detriment. Id. (citing Beer

v. Griffith, 399 N.E.2d 1227, 1231 (Ohio 1980)). “A classic claim of fraudulent inducement

asserts that a misrepresentation of facts outside the contract or other wrongful conduct induced a

party to enter into the contract.” ABM Farms, Inc., 692 N.E.2d at 578.

The reliance on the representation must be justifiable, and the resulting injury must have

been proximately caused by the reliance. Williams v. Aetna Financial Co., 700 N.E.2d 859, 868

(Ohio 1998). To determine whether reliance is justifiable, courts look to various circumstances,

including the nature of the transaction, the form and materiality of the representation, and the

relationship of the parties and their respective means and knowledge. Johnson v. Church of the

Open Door, 902 N.E.2d 1002, 1007 (Ohio Ct. App. 2008). Reliance on misrepresentations is not

justifiable when the true facts are equally open to both parties or when the party had no right to

rely on the representation. Aetna Ins. Co. v. Reed, 33 Ohio St. 283, 292 (1877). 

Defendants assert that they were fraudulently induced into the sale, loan, and guaranty

transactions based on misrepresentations made by CAA and Jacobs through her attorney and

business partner, Whann. In support of their motion for relief, Defendants have submitted a

declaration of Sample which details the facts surrounding Acacia Automotive’s purchase of the

automobile auction business in Chattanooga. This declaration was supplemented by a reply

declaration of Sample submitted in response to Plaintiff’s memorandum in opposition to

Defendants’ motion for relief. Sample’s declarations set forth specific facts that would support a

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finding that he and his company were fraudulently induced into purchasing the auction and

entering the loan agreements and guaranties connected with that transaction. As it relates to

alleged fraudulent inducement, Sample’s declarations assert the following:

In August 2009, CAA, through its Vice President, Whann, offered to sell the

Auction Business to Acacia Automotive. Auction Venture, also through Whann as

Vice President, would lease the Premises to Acacia Automotive.

On August 10, 2009, and at other times thereafter and before the Sale closing,

CAA and Whann made representations to Acacia Automotive regarding the

operating costs and financial state of the Auction Business. CAA and Whann

represented that the Auction Business had a positive cash flow and was profitable.

CAA and Whann also represented monthly operating expenses of $158,344.41 and

monthly revenues of $202,488.90, resulting in a monthly profit of $44,144.49 on

an average basis. They represented that it was a good time for Acacia Automotive

to purchase the Auction Business.

Relying upon CAA’s and Whann’s representations, Acacia Automotive and Acacia

Chattanooga entered into and closed the sale transaction.

Acacia Automotive, Acacia Chattanooga, and I (collectively, “Defendants”) have

since discovered that the operating costs and financial status of the Auction

Business represented by CAA and Whann were false and the operating costs had

been materially understated. CAA was actually operating the Auction Business at

a substantial loss and on a negative cash flow basis, in contrast to CAA’s and

Whann’s representations. The actual monthly operating costs, which CAA and

Whann had represented to be $158,344.41 per month were actually $297,532.00

per month.

But for CAA’s and Whann’s misrepresentations, Defendants would not have

entered into and closed the sale transaction or signed the credit line documents,

including the Note and Guaranties.

(Doc. 28-1, Sample Mar. 9, 2011 Decl., ¶¶ 16-20). Sample’s reply declaration further states as

follows:

[A]s an inducement for Acacia Automotive to purchase the assets of CAA and the

Auction Business, Keith Whann provided Acacia Automotive with certain detailed

financial and operating information of CAA and the Auction Business relative to

income and expenses, all of which depicted the Auction Business to be profitable

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and cash flow positive, and he confirmed the financial information to be reliable.

In April 2010, more than three months after Acacia Chattanooga took title to the

assets of CAA and the Auction Business, Acacia Chattanooga and Acacia

Automotive received newly created financial records of CAA for fiscal year 2009.

At no time did Acacia Chattanooga or Acacia Automotive control the complete

books and records of CAA or the Auction Business or prepare financials for CAA.

Acacia Automotive and Acacia Chattanooga did not have full access to all of the

books and records that reflected the true and accurate history of CAA and the

Auction Business.

(Doc. 33-1, Sample Apr. 21, 2011 Decl., ¶¶ 5-8).

Plaintiff argues that any asserted reliance on alleged misrepresentations cannot be

reasonable or justifiable in view of Sample’s extensive experience in the automobile and truck

industry, including years managing large auction companies. Additionally, Plaintiff argues that

any reliance was not reasonable because Defendants operated the auction business, and had

“unfettered access” to the books and records for nearly four months prior to the transaction

closing. (Pl.’s Mem. in Opp’n, p. 20). In sum, Plaintiff argues that Defendants cannot establish

that any reliance on the alleged misrepresentations was reasonable, and therefore Defendants’

fraudulent inducement claim fails as a matter of law.

The Court finds that Sample’s assertions, if true, set forth a defense of fraudulent

inducement. Sample asserts that CAA and Whann significantly misrepresented the operating

expenses and financial status of the auction business, and that his company relied upon these

representations in deciding to enter into and close the transaction. Certainly, the financial

condition of a business, including whether the business is operating at a profit or loss is material

to any decision of another company to acquire the business. Plaintiff suggests that Defendants

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were on equal footing regarding the financials of the auction business prior to the closing of the

transaction. Sample, however, states that his company did not have complete control of, or full

access to, the books and records of the acquired auction business. Thus, according to Sample’s

statements, the parties were not on equal footing because the true facts were not accessible to his

company. Moreover, while Sample has extensive experience in the automobile and truck

industry, which would seem relevant to the reasonableness of his reliance on the asserted

operating expenses of the auction business, that experience does not per se preclude, or deem as

unreasonable, his reliance on representations of agents of the auction business he sought to

acquire when he allegedly did not have full access to the financials of the business.

Based on these alleged operative facts, the Court finds that Defendants have alleged a

meritorious defense. Accordingly, because Defendants have timely filed a motion for relief from

cognovit judgment and alleged a meritorious defense, they are entitled to relief from cognovit

judgment. Whether Defendants will ultimately prevail on this defense, however, is not a matter to

be decided at this time. Furthermore, because Defendants allege at least one meritorious defense,

it is unnecessary at this time to address the other possible defenses.

III. Conclusion

For the foregoing reasons, the Court GRANTS Defendants’ Motion for Relief from

Cognovit Judgment (Doc. 28). Accordingly, the cognovit judgments previously entered by this

Court are hereby VACATED.

The Clerk shall remove Document 28 from the Court’s pending motions list.

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IT IS SO ORDERED.

 s/ George C. Smith 

GEORGE C. SMITH, JUDGE

UNITED STATES DISTRICT COURT

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