Breach Of Promissory Note
Offering a loan comes with a lot of risks, which is why lenders must understand the importance of promissory notes. While a promissory note isn’t as formal as a contract, it can still assist in clarifying the loan terms, as well as the consequences involved in case of payment failure or breach of contract. The various elements of a promissory note make it legally binding, which helps the lender in case of a breach. In case of a breach of promissory note, a lawsuit can be pursued to resolve the case.
A promissory note, also referred to as a promissory letter, is a legally binding document that highlights the agreement made between two or more parties. When all the parties involved agree to the terms stated in the promissory note and sign it, the note becomes a legally binding documentation, which obliges all the involved parties to perform the stated duties or payment terms as per the agreement.
The promissory note is flexible, which means that it can either be detailed and complex while covering various issues or can be straightforward and a simple form of agreement. No matter what is the scope of this promissory note, once it has been signed by all parties involved, it becomes a legal document, which can be later enforced in case of a breach of contract.
Types of Promissory Notes
It is important to keep in mind that all promissory notes are not the same. In case of a breach of promissory note, it is essential that you determine the type of promissory note that was signed between you and the borrower before you pursue your next legal steps.
There are two types of promissory notes:
- Collateralized or Secured Promissory Notes
- Unsecured Promissory Notes
A collateralized promissory note explicitly specifies all the assets that are to be utilized as collateral in case of a breach of promissory note as per the specified terms. For collateral, any high value asset that can be utilized including personal property, real estate, and business assets.
On the other hand, unsecured promissory notes are challenging as they typically include a lawsuit and also involves post-judgment efforts of collection.
Elements of a Promissory Note
Following are the main elements of a promissory note:
When a legal action is made on a promissory note, it is essential to get a judgment, which enables the attachment of the debtor’s assets after breaching of the promissory note. This means that if your promissory note has been breached, you need a court action, which might last for about three years or if you had wisely created the note, it could lead to arbitration, which would still last for six months or more depending on your case.
A faster and more secure way to ensure the collection of assets in case of a breach is to have an asset as a means of pledging security of the promissory note. Typically, the assets that can be pledged for security includes personal property, including financing documents, or real property including mortgages or deeds of trusts.
This pledging security allows you the seizure of the specified secured assets much quicker as compared to arbitration or court proceeding in case of a breach. This can assist in avoiding the bankruptcy dangers to a certain extent, which makes the debt uncollectible.
Promissory notes must also include clauses of ‘consideration of’, which helps in specifying the terms of charging interests for which the lender is entitled for. These clauses comprise a certain timeline in regards to the accrual of interest. In general, if the promissory note includes the interest rates that are legally acceptable and are as per the statue of limitations then the note can be upheld in court. Therefore, if you have a legally binding promissory note that clearly states the charging interest then you can charge interest when seizing the secured assets.
Securing Necessary Signatures
If your promissory note has been breached and you are thinking about pursuing a lawsuit against the borrower but the promissory note doesn’t include the signature of the other party then there might be challenges involved for you. Even when a promissory note is being utilized for exchanging money for the right currency, includes all the terms and conditions rather clearly, but if it doesn’t have the necessary signature then it is deemed invalid in court.
It is essential to understand that promissory note is a kind of official contract between parties and it cannot be valid unless there are signatures included in the note of all parties involved. The signature highlights the fact that all involved parties have read the terms and are agreeing to them.
Therefore, if your promissory note doesn’t include the signature of the borrower, no matter how clearly defined the terms are, you can’t pursue a lawsuit as the note will be termed invalid.
Attorney’s Fee Provisions
When there is a breach of promissory note, a lawsuit can be pursued by officially filing a complaint. This initiates the process of taking a legal action against the breach of the note and requesting the court for damages to be granted to you (the lender and the plaintiff in the case). This complaint is generally filed where the defendant (the borrower) resides in or conducts his or her business, or where the promissory note specified the governing jurisdiction or court or where the note was formed. Damages can be granted in various forms including through items like attorney fees, court costs, interest and balance due, or the assets highlighted in the promissory note at the time of agreement.
Collecting the damages or assets when a breach of promissory note has been made can be challenging and might require investment of money and time. To ensure your investments are protected, it is essential to seek help of an experienced attorney when drafting or signing a promissory note. If you are about to sign a promissory note or drafting one, or want the legal services of a lawyer to assist you with breaching of a contract, get in touch with Shiner Law Group and get a free evaluation of your case by our experienced business litigation lawyers.