In this article I will provide some thoughts on promissory notes. This is is written from the perspective of someone who has not only drafted promissory notes, but have enforced promissory notes through litigation. The reason why I mention that is because the act of enforcing a promissory note goes hand in hand with drafting one. Like any other agreement, you want to hope for the best, but ultimately be prepared for the worst.
Before I get too far into this, I need to mention that I am a business and civil litigation attorney located in Venice, and I serve all of Sarasota County, Manatee County, and Charlotte County. This article is being written for educational purposes only. It is not legal advice. If you have a question about preparing or enforcing a promissory note, you will want to talk with a real live lawyer.
Consider the Parties
One aspect of a promissory note to consider is whether a corporation or an individual will be borrowing the money. If it’s a corporation, you want to be especially careful because a borrower can try to use that to escape personal liability. I would consider including a personal guarantee or including both the business and individual as named borrowers on the note. If you are an individual about to sign a guarantee, you want to understand the limits of the guarantee, if any, and the host of other issues that come with signing contracts and guarantees.
Include Terms for Default
It is important to spell out clear terms in the promissory note defining what a default under the note is. What if the borrower dies? What if the borrower initiates filings for bankruptcy? What if the borrower doesn’t timely pay? These situations all need to be considered (among many others) when preparing the agreement, along with the remedies in the event of default.
Attorneys Fees and Costs
This ties in with terms of a default, but the lender will always want to see prevailing party fee language if the note needs to be enforced or collected upon. I can’t tell you how many $5,000-$10,000 notes have come into my office prepared by non-lawyers without prevailing party fee language. Often times it doesn’t make sense to hire a lawyer at $200-300 an hour to enforce these kinds of notes as the attorney’s fees will quickly swallow the amount in controversy, so the holders of the note are left holding the bag. It’s important to draft the note properly from the start to protect the lender, and including an attorney’s fee clause will help.
Keep The Original
Once you go through the trouble of getting a promissory note properly prepared and executed, you want to keep it somewhere safe. Preferably in a fire safe or safe deposit box. Somewhere it won’t get lost or inadvertently destroyed. In the state of Florida, it is well established that the original promissory note must be surrendered to the court as a condition of enforcement. If you don’t have the original note, you will need to “reestablish” the note under Florida Statute 673.3091. The statute (at the time of writing this article) allows a person seeking to enforce a lost note to reestablish the note under one of the the following conditions:
- The person seeking to enforce the instrument was entitled to enforce the instrument when loss of possession occurred, or has directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred;
- The loss of possession was not the result of a transfer by the person or a lawful seizure; and
- The person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.
Rather than having to prove all of this in court, it’s much better to preserve the original of your promissory note.
Obtain Doc Stamps
Florida law imposes documentary stamp taxes on promissory notes executed in the state of Florida. Currently, promissory notes are taxed at a rate of $.35 per $100 and the tax is paid through the Florida Department of Revenue. You can learn more about the nuts and bolts of paying the tax here, but the bottom line is that if you want to enforce a promissory note in Florida you will need to have these taxes paid. You can do this by going to the Department of Revenue’s local office with your note and paying the tax.
Promissory Notes – Final Thoughts
I hope this primer on promissory notes has helped you consider some of the issues that come up in preparing and enforcing these kinds of documents. I can’t cover every issue, so by no means is this exhaustive, but if you are in Southwest Florida and want to discuss either drafting or enforcing a promissory note with me, feel free to call my office at (941) 882-4367 so we can continue the conversation.
