Breach of Promissory Note

What is a Promissory Note?

A promissory note is a legal document in which one party (the maker or issuer) promises to pay a specified sum of money to another party (the payee or lender) at a future date or upon demand. Promissory notes can be used in personal loans, business transactions and real estate deals to provide a clear and enforceable record of a debt obligation. When the issuer (borrower) fails to meet the terms of the Promissory Note, whether by missing payments or refusing to pay entirely, it constitutes a breach of Promissory Note. The payee (lender) can pursue legal action to enforce the Promissory Note and recover the outstanding debt.

Enforcing a Breach of a Promissory Note

1. Review the Promissory Note

Make sure to thoroughly review the terms of the promissory note before addressing the breach. A quick review of the Promissory note will assist in specifying the payment schedule, interest rate (if applicable) and any conditions related to default. It’s recommended to consult with a lawyer during this stage to ensure that the Promissory Note is legally enforceable and that all required steps are followed by the payee (lender) to reclaim the loan amount and interest payments.

2. Sending a Demand Letter to recover Debt

Before initiating a legal action, it is important to send a formal Demand Letter for Payment by lender’s lawyer to the issuer (borrower) of the promissory note and/or their lawyer. This Demand Letter provides a final opportunity for the issuer to make the payment before the lender goes through legal proceedings to recover their money from the borrower. The lender provides a deadline for payment in the Demand Letter and states that legal action will be pursued if the debt is not settled by the said date.

3. Filing a Lawsuit

If the demand for payment goes unanswered or the issuer refuses to pay by the given time and date, the next step to recover the debt is to file a lawsuit. The payee begins by submitting a Statement of Claim to the court, outlining the details of the promissory note, the breach and the amount owed. The issuer (defendant) will be served with the claim and has the opportunity to respond with a Statement of Defense. The defendant may raise defenses such as arguing that the note is invalid or that they have already fulfilled their obligations.

4. Summary Judgment

In many cases where breach of a promissory note is involved, the facts are straightforward, and there may not be any disputes about the evidence. In such cases, the payee can apply for Summary Judgment, which is a request for the court to rule in their favor without the need for a full trial. Summary judgment can expedite the case, saving time and legal costs.

5. Discovery Process

If the case does not qualify for summary judgment, it will proceed to the discovery phase. During discovery, both parties exchange relevant documents and information. In a breach of promissory note case, this may involve providing copies of the promissory note itself, proof of payments made or missed and any communications between the parties related to the debt. Examinations for discovery (oral questioning under oath) may also take place, although this is less common in straightforward debt cases.

6. Negotiation and Settlement

Many breach of promissory note cases are resolved through negotiation or settlement before reaching trial. After discovery, the parties may do settlement discussions, either directly or through mediation. Settling the case can save both parties’ time, legal fees and the uncertainty of a trial. If a settlement is reached, the terms should be recorded in a legally binding agreement that resolves the dispute.

7. Trial

If settlement discussions fail, the case will go to trial. During the trial, both sides present their evidence and arguments to the judge. The payee will need to prove that the promissory note is valid, that the issuer has breached the terms and that the amount claimed is accurate. The judge will then issue a judgment, determining whether the payee is entitled to recover the debt and any additional costs or interest.

8. Appeal

After the trial, either party may appeal the court’s decision if they believe there were errors in the trial process or in the application of the law. Appeals in breach of promissory note cases are rare but may occur if there are complex legal issues or if the judgment is significant in amount.

9. Enforcement of Judgment

If the court rules in favor of the payee, the final step is to enforce the judgment. The court may issue orders to garnish the defendant’s wages, seize assets or place liens on property to recover the debt. Enforcement actions can be complicated, especially if the defendant attempts to avoid payment. In such cases, a lawyer can help navigate the enforcement process and ensure the payee receives the amount owed.