What is a Promissory Note?
A promissory note (or "note") is a document by which one person (the "maker" or "maker(s)") promises to pay a certain sum of money to another person (the "payee" or "payees"). The magic words in the note are "I promise to pay"; not "I agree to pay," or "I promise to pay subject to" or "pay as we might mutually agree." In short, the promise to pay cannot be conditional: it is an unconditional promise to pay the amount specified in note.
Notes can be signed by an individual, a corporation or a partnership. It still remains true, however, that the obligation of the note is personal to the signer. An example may be helpful. ABC Corp. borrows $100,000 from XYZ Bank. ABC Corp., pursuant to its corporate bylaws, executes a note in favor of XYZ Bank. If ABC Corp. defaults on the note , XYZ Bank cannot sue ABC Corp.’s shareholders, even if they guarantee the note. Of course, the shareholders may have to provide a personal guarantee to induce the bank to loan money to the corporation, but if the bank can only rely on the stockholders’ proxy to reconstitute ABC Corp. to sue for collection, such a proxy voted stockholder action is not enough to satisfy the statute of limitations and may not be able to sue the original borrower ABC Corp.
Notes are used regularly and almost interchangeably with other expressions of debt, such as a bond, certificate of deposit, evidence of debt (or evidence of membership) or any other writing under which money may be borrowed. Like the simple promissory note discussed here, these instruments are also generally governed by Articles 3 and 5 of the Uniform Commercial Code.
Essential Components of a Florida Promissory Note
Section 673.113, Florida Statutes, lays out the requirements for creating a legally enforceable promissory note in Florida. To start, the note must contain the names of all parties involved to be considered valid. The note maker, for instance, must be identified as the one owing money to the note holder, or the lender. Meanwhile, the note holder is the party who is owed the payment.
Aside from identifying the parties, a Florida promissory note must also contain a principal amount. This is the amount that the note maker will owe the note holder. The principal amount, of course, varies per note.
Next, promissory notes in Florida must include an interest rate. The note maker will pay this interest rate on top of the principal amount. Additionally, the note must include the terms of payment.
While all of these elements are critical in forming a legally enforceable Florida promissory note, so too it is important to have the following elements as well:
- promise by the note maker to pay the note holder;
- consent of both parties;
- intention to form a legal mortgage; and
- legality of subject matter.
If a promissory note contains each of the elements outlined above, it is legally enforceable under Florida law.
Legal Requirements for Florida Promissory Notes
Under Florida law, promissory notes are governed by Article 3 of the Uniform Commercial Code, Florida Statutes § 673.101 – § 673.604. These statutes generally follow the model UCC language, with some unique provisions applicable to Florida. Florida does not require any particular form of promissory note to be enforceable; however, the note must contain an unconditional promise to pay a fixed amount of money in the future (or at sight), and it must be signed by the promisor. Additionally, the note must be payable in an authorized medium, such as cash, check, or bank deposit; it must be payable on demand or at a future time or date, subject to the provisions contained in Florida Statutes § 673.1081; and it must be payable to an identified person or to bearer (a note payable to bearer is not negotiable). A promissory note can be negotiated, sold, and transferred similar to other negotiable instruments. After it has been transferred, however, it cannot be further negotiated if: (i) the transfer violates any terms of the instrument that prohibits transfer for value or requires the transferee to be a holder in due course (HDC) that was unaware of the terms prohibiting transfers; or (ii) the transfer was a prohibited restriction on transfer that precluded any negotiability feature. An assignment of a promissory note under Florida law "creates a security interest" in the note to the extent that payment is to be made against the collateral. Fla. Stat. § 679.302(2). In that instance, the assignor must take steps to perfect its security interest in the note in order to have priority over a lender that subsequently obtains a security interest in the same collateral. Florida law provides that perfection of security interests in promissory notes can be achieved with or without a pledge of the note. Fla. Stat. § 679.312(2)(c) & (d).
Types of Promissory Notes
There are various types of Florida promissory notes including the following:
Secured Promissory Notes – A secured promissory note is a promissory note that is secured by a mortgage or other lien on real property or a lien on personal property. When a promissory note is secured by collateral, if the borrower defaults, the lender gets the added benefit of being able to foreclose on their security in addition to suing on the promissory note. A well-drafted promissory note that is secured by real estate should contain a cross-default provision, meaning that if the borrower defaults on the promissory note, this also acts as default on the mortgage (or vice versa) making it easy for the lender to obtain possession of the collateral quickly and efficiently.
Unsecured Promissory Notes – An unsecured promissory note is not secured by a mortgage or lien on any real property. If the borrower defaults on an unsecured promissory note, the lender’s only recourse is to sue the borrower.
Demand Promissory Note – A demand promissory note is a promissory note that is due upon demand. In most instances, the lender does not have to provide a specific amount of notice to the borrower that it intends to accelerate the maturity date and collect payment on the note. However, in practice, most lenders still want to provide some notice to the borrower of its intent to demand payment. In Florida, the statute of limitations for filing a lawsuit on a promissory note is five years, so it should be noted that a lender needs to file a lawsuit on the promissory note within five years of making their demand for payment after the borrower defaults.
Term Promissory Note – A term promissory note is a promissory note that is due some time in the future on a specific date as opposed to upon demand.
Enforcing a Promissory Note in Florida
If the terms of the promissory note are broken, the lender can proceed with any of the remedies contained in the promissory note and/or any other remedies which apply. If the note is secured, the lender can foreclose on the collateral; if not secured, the lender can file suit to obtain a judgment against the borrower for the amount owed, and if the lender can obtain a judgment he or she can use the judgment to attempt to collect the amount owed from the borrower. Damages are generally sought if the borrower defaults on payments, which include interest due, late charges, penalties and attorney’s fees, as well as any other amounts that were agreed upon in the note.
A lender can also obtain a judgment "in rem" (against the collateral) and move forward as a judgment lien creditor to liquidate the asset(s) not otherwise exempt within the context of Chapter 222, Florida Statutes. In addition, a clear and definite lien can be placed on a personal residence where a homestead exemption is not claimed pursuant to Article X, Section 4(a)(1)(C) of the Florida Constitution. Certain items of property, such as a family vehicle, are subject to a "Notice of Lien by Judgment Creditor" to the Department of Highway Safety and Motor Vehicles for purposes of collection of judgments.
Many times a lender will utilize a debt restructuring agreement or a modification agreement to restructure a defaulted obligation of the borrower . The ideal situation is to have any agreement pertaining to a default in a promissory note be in writing and prepared in accordance with Florida Statute § 687.0304, which states in pertinent part: 687.0304 Writing requirement. — No claim based on an interest in money, goods, or choses in action, or an unsecured loan, which is regulated by this chapter, shall be valid unless the agreement upon which such claim is based, or a memorandum or other record of the agreement, is in writing, signed by the principal debtor or other party agreeing to pay the same, on or before the time the claim for payment is either made or received. Nothing in this section shall invalidate a claim based on an interest in money, goods, or choses in action secured by a security agreement listed in s. 671.201, or comply with the Chapter 673 requirement for the use of written negotiable instruments. However, the statute of frauds is satisfied if the agreement is evidenced by some other writing which is in existence and in such form as to indicate a contract for a loan within the statute of frauds.
It is always better to have written modifications and restructuring agreements for the purpose of establishing the contractual intent of the parties and preserving and enhancing other collection remedies.
Florida Promissory Note: Comparison to Other States
Florida requires that any promissory note contain a signature from the payor. Although in some states, signatures are not necessary to create a binding note, this is not the case with Florida as per Fla. Stat. § 673.2041(2). In addition to the necessity of a signature, Florida courts have also been known to require notes to be notarized in order to enforce the agreement against the payor. Defenses to notes are more limited in Florida than in other jurisdictions, specifically the defense that a note is incomplete. Incomplete notes are not disallowed in Florida as they are in other jurisdictions. As a general rule for other states, the agreement must state that the payor can be sued after one year for failure to pay. In contrast, Florida does not require such language to be included in the promissory note.
Common Pitfalls when Preparing a Promissory Note
A promissory note can work for you as long as you understand what you are doing when you create one. It’s not enough just to write down the basic terms and conditions of a loan on scrap paper. You must be specific and even then, your promissory note may still not be legally binding if you make some mistakes that are easy to make.
Here are some mistakes to avoid when drafting a promissory note:
- Don’t be vague – A promissory note should list the specific amount being loaned. It should also list specifically how the money will be repaid, including the interest rate. Others terms can also come into play, such as what interest rate is being charged on default and acceleration clauses. But mostly, you should avoid being vague with any of the other policies and rules in your agreement.
- Don’t make it non-negotiable – Some people try to make a promissory note that can’t be assigned to anyone else. But in Florida law, you cannot prohibit a subsequent holder of a promissory note from enforcing its terms. This would include the right to assign that note.
- Don’t forget the date – You need to write down the exact date that the money was loaned, as well as the date that the promissory note is signed. If either of these two dates is missing, the loan could become hard to enforce.
- Don’t forget the signatures – Either the borrower signs the promissory note, or the lender must sign it (if they loan money to the borrower). Both parties signing is even better.
Professional Resources
Given the potential pitfalls and legal complexities involved with promissory notes under Florida law it is imperative that parties seek professional assistance when preparing and/or reviewing a promissory note. An attorney will be able to guide you with regard to many issues which are beyond the understanding of non-attorneys, and such issues include: Florida attorneys should ensure that they are familiar with the best practices for promissory notes in Florida by reviewing the available case law. For example , attorneys are well served by reading cases such as Town & Country Plaza v. Tyson, 23 So. 3d 848 (Fla. 5th DCA 2010). Promissory notes are complex financial instruments which may be the basis of litigation for many years to come, and it is imperative that you seek professional assistance when preparing and/or reviewing a promissory note.