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Breach of Promissory Note

A promissory note is, in its simplest form, a written promise by one party to pay money to another by a date certain. Although promissory notes are simple by nature, promissory note default or breach litigation can become highly complex. Our attorneys have experience handling collection and litigation matters involving breach or default of both simple and complex promissory notes. Although no two promissory note lawsuits are similar, we have outlined common defenses as well as steps any lender should take following a promissory note default.

Breach of Promissory Note – A Step by Step Guide Step 1 – Retain an Attorney

Retaining an attorney early in a promissory note breach case is critical. Your attorney will need to review the specific terms of the promissory note, research the law that may apply, and plan a strategy.

Step 2 – Identify the Breach or Default

Although promissory notes may be very simple (i.e. only requiring payment on a date certain), more complex promissory notes may make collection efforts more difficult. For example, a more complicated promissory note may state that payments are only due when certain conditions are met by one of the parties. These conditions may be highly complex or involve multiple other agreements.

Step 3 – Identify the Law that Applies

This, again, may seem obvious, but this step is often overlooked even by attorneys. Oftentimes when parties execute promissory notes, they tend to copy form documents, paying attention only to the “important” terms, like payment and interest. Parties usually overlook what some may call boilerplate promissory note provisions – such as a choice of law. Unfortunately, these provisions become incredibly important when it comes time to enforce the promissory note through a lawsuit.

Step 4 – Conditions Precedent to Breach of Promissory Note

Many promissory notes have conditions that must be satisfied before a party can pursue litigation. For example, it is very common for promissory notes to require that the breaching party be served with written notice of default and be given a reasonable opportunity to cure. Before commencing litigation, it is important to satisfy all conditions precedent. If you fail to satisfy one of these conditions, it may result in significant delay or, worse, your lawsuit may be dismissed.

Step 5 – Where to Sue?

There are two factors to consider when determining where to initiate a breach of promissory note case. The first is the promissory note itself, which may mandate that disputes be initiated in a specific court or through arbitration. Assuming the promissory note does not contain a forum selection clause, the next consideration is to determine which forum may be the most advantageous to the lender. For example, states like New York have a special procedure for expediting promissory note litigation. This procedure is known as summary judgment in lieu of complaint.

Step 6 – Commence a Breach of Promissory Note Lawsuit

As you can see, there are numerous complex steps that must be taken by an attorney prior to commencing a breach of promissory note lawsuit based on a borrower’s default.

Frequently Asked Questions About Breach of Promissory Note Lawsuits
What is the Difference Between a Secured and Unsecured Promissory Note?

A secured promissory note is “backed” by real estate or some other asset that has value. An unsecured promissory note is not backed by anything other than the promise of the person signing the note.

What is the Statute of Limitations for Promissory Note Default?

There is generally no separate statute of limitations for promissory note defaults, which are considered contracts under the laws of most states. As a result, the limitation period for pursuing a promissory note in default is usually the same limitation period as the one for breach of contract. These limitation periods vary from state to state. You should contact an attorney to determine what the statute of limitations may be for your case.

What is the Difference Between a Promissory Note and a Mortgage?

A promissory note is a written promise by one person, a borrower, to pay another, a lender. A mortgage is a document that is recorded in the chain of title and memorializes that real estate pledged by the borrower will serve as collateral for their promise to pay back money.

What is the Difference Between Interest and Usury?

Usury is a legal term used to describe unlawfully high interest rates. Usury laws are established by individual states and vary state-to-state.

Can I Sue for My Attorneys’ Fees?

Absent a statute or an agreement, the default rule in the United States (known as the “American Rule”) is that parties pay their own attorneys’ fees. Most standard promissory notes, however, will state that the party in default will have to pay the other side’s attorneys’ fees.

Can I Sell a Promissory Note?

Absent a restriction in the note itself, promissory notes may be capable of transfer. These issues are often complex and you should consult an attorney prior to selling or transferring any promissory note.

What is a Choice of Law Provision?

A choice of law provision is a contractual provision whereby parties to an agreement, such as those parties to a promissory note, agree to apply the law of a particular jurisdiction to their dispute.

What is Summary Judgment in Lieu of Complaint?

This is a procedural mechanism available in New York State that allows lenders to pursue collection of simple promissory notes on an expedited basis. The procedure is codified in New York CPLR 3213 and the statute can be accessed here. Contact one of our attorneys today to discuss if you can file this application for your breach of promissory note case.

Defenses to Breach of Promissory Note

Fraud or Fraud in the Inducement: Fraud in the inducement is a common defense in breach of promissory note cases. It arises when one person argues that they were tricked or defrauded into signing a promissory note.

Forgery: Forgery is defense that requires a handwriting or other forensic expert to testify that the contract or promissory note at issue was forged. In addition to being a defense to a claim of breach of promissory note, many states also have statutes that award special damages to victims of forgery. Your attorney should check the laws in your particular jurisdiction to determine if you are protected by a forgery statute.

Waiver: The conduct of one party may operate as a legal waiver of their rights. For example, if a lender consistently waives late payment penalties for a borrower, the borrower may be able to argue that the lender effectively waived their right to seek these payments by virtue of their conduct.

Lack of Consideration or Gift: This defense is most common in cases involving personal promissory notes entered between friends or family members. The basis for the defense is that the “borrower” will argue that the transaction between the parties was a gift that does not require repayment and not a loan.

Prior Payment: This defense argues that the borrower already made payment to the lender.

Unsatisfied Conditions Precedent: Borrowers who assert this defense argue that the contract or promissory note required the lender to take certain steps prior to initiating a lawsuit through an attorney. The most common condition precedent is the service of a notice of default; however, promissory notes are contracts and conditions can become as complex as the parties want.