Your company lends a borrower $100,000.00 and issues a promissory note to that effect, payable within two years. The note is straightforward, containing between 10 and 15 paragraphs of terms. After two years, you email the borrower asking for payment. The borrower responds to your demands for payment on the promissory note saying they will pay but never does. You fax the borrower a letter demanding payment of the $100,000.00 plus interest. The debtor responds saying they will pay but again doesn’t. While suing the borrower in court may seem like the obvious next step, suit may be premature if the note contains a notice clause with stated requirements.
Many agreements and stipulations executed by parties contain a notice clause specifically indicating the method parties must adhere to when providing notices or demands. Promissory notes frequently require notices to be in writing and either made by personal delivery or by registered or certified mail with a return receipt to ensure proof of delivery.
Going back to the example, despite notices sent by email and fax and the borrower acknowledging the amount due and promising payment, the demand for payment was not made in compliance with terms of the note. The note required all notices or demands to be sent by registered or certified mail, return receipt requested. An attorney retained to sue might overlook the notice clause and assume the acknowledged demands are enough to bring suit for two causes of action — the amount owed on the promissory note and for an account stated. An account stated is a demand by a creditor to a debtor for all amounts owed from transactions between parties as of a certain date. To plead for an account stated in New York, the following must apply:
- An account was presented
- It was accepted as correct
- The debtor promised to pay the amount stated
The second and third elements may be implied if a party receiving a statement of account keeps it without objecting to it within a reasonable time or the debtor makes partial payment.
Making Demands for Payment on a Promissory Note
Because demands were sent by email and fax, the account was not “presented” to the borrower because it did not comply with the note’s notice provisions. A lawsuit brought prior to the creditor properly sending notice can have a detrimental impact on a collection court case. The court would deem the account stated not made, and the plaintiff creditor would not be able to claim the initial demand for payment was made since it was not sent by the method required in the notice provision.
It may sound somewhat unfair to say notice was not given in a case where the debtor acknowledged the demands by writing and email. However, using certified mail, return receipt requested, ensures the notice was sent under agreed-upon terms and eliminates any ambiguity regarding whether it was received by the borrower.
While it’s important for the notice to be sent properly, it should also be drafted specifically. Rather than a generic demand for the amount due pursuant to the promissory note, the notice should specifically reference the note, the date it was issued, and the date payment came due. The notice should further indicate the specific amount due, including any interest, and if the amount outstanding continues to accrue with a specific rate of interest. Said notice will eliminate any ambiguity and any affirmative defense from a borrower that the demand was “generic” or unclear in any way.
Proof of the borrower’s receipt of such notice and failure to object in a timely fashion enables the creditor to file a lawsuit for both the amount outstanding and the account stated pursuant to the notice. You must construct the notice provision of the promissory note properly to avoid a faulty notice. If the notice is sent to the debtor’s address and a party signs the return receipt, but the debtor alleges it is not his or her signature, the question becomes whether the notice provision was satisfied when the notice was sent or received.
When proceeding against a borrower for defaulting on a promissory note, it is of utmost importance that notices are made in accordance with the terms agreed upon by the parties. Otherwise, any case brought by an attorney can be hindered, preventing recovery for the creditor.
If you are looking to collect on a promissory note or have questions regarding debt collection, contact Frank, Frank, Goldstein and Nager for a free consultation.