A seller’s creative use of a promissory note recently backfired when a Texas Court of Appeals found that the seller failed to show that it actually lent the money described in the promissory note. In this case, a purchaser of goods owed the seller $69,000 for the goods it had ordered. The seller refused to release the goods unless the purchaser signed a promissory note for the amount of the goods.
Promissory notes are often used to document loans. In such cases, a lender (a bank, family friend, etc.) writes a document in which the recipient of the money confirms that they are bound to repay a certain sum of money to the lender under specific terms. Not surprisingly, many borrowers default on their promissory notes, in which case lenders are forced to sue to enforce the notes.
PRACTICAL TIP: When lending money to a business, it is always a good idea to require a personal guarantee from the owner of the business, who can be personally liable for the repayment of the loan and be added as a defendant in an enforcement lawsuit.
To prevail on its claim to collect on a promissory note, a lender must prove: (1) the existence of the promissory note in question, (2) that the alleged recipient of the funds signed the note, (3) that the lender is the owner or holder of the note, and (4) that a certain balance is due and owing on the note.
This past month, a Texas Court of Appeals ruled that a party seeking to enforce its promissory could not do so because it could not prove that it actually lent the money to the borrower, hence, that a balance of the note was due and owing. The note’s language was key:
As of the 27th day of February, 2018, hereinafter known as the “Start Date”, U[S]-U[K] International Supply Group, LLC, hereinafter known as the “Borrower”, has received and promises to pay back HTS Services, Inc., hereinafter known as the “Lender,” the principal sum of Sixty-Nine Thousand Five Hundred Eighty-One and 00/100 US Dollars ($69,581.00) with interest accruing on the unpaid balance at a rate of five percent (5%) per annum, pursuant to the terms of this Promissory Note, hereinafter known as the “Note[.]”
Since the borrower testified at trial that he never received any money from the lender, and, the lender, apparently, could not prove otherwise, the trial court found in favor of the borrower, and the Court of Appeals affirmed. Specifically, the borrower testified that he was forced to sign the promissory note to secure the release of the goods that he had ordered from the lender and that the lender was holding for him.
BOTTOM LINE: While the lender’s desire to have a promissory note from the borrower in this situation is understandable, different language in the promissory note or a different contractual arrangement to document the debt would have been a better solution.
Leiza Dolghih is the founder of Dolghih Law Group PLLC. She is board certified in labor and employment law and has 16+ years of experience in commercial and employment litigation, including trade secrets and non-compete disputes. You can contact her directly at leiza@dlg-legal.com or (214) 531-2403.