A promissory note is a valuable tool for financial institutions and individuals alike. It establishes a clear record of a loan and puts all the relevant terms in writing. But what happens when the person who signed the promissory note fails to live up to that promise? If you are the one who is owed money, enforcing a promissory note is your responsibility. Read this article to learn how you can legally collect what is owed to you.
No one enjoys filing a lawsuit. Unfortunately, sometimes the only means of enforcing a promissory note is to file a lawsuit. Whether you are owed a debt or you owe money, the attorneys at Robinson & Henry can help. Call 303-688-0944 to begin your case assessment.
A promissory note is a written promise by one or more parties (makers) to pay a specified sum of money to another (payee). Promissory notes are often used in real estate, vehicle, personal, and college loans.
Note that there are several common terms used to refer to the parties involved in a promissory note. For the purposes of this article, we will refer to the party who is owed money as the creditor. The party that owes the money will be called the debtor.
Enforcing a promissory note is the creditor’s responsibility. That starts with making sure the agreement is legally binding in the first place.
If a promissory note is not signed, it will be up to the court to determine the contract’s enforceability based on all the facts and documents involved.
A contract requires accepting the terms of the agreement. Acceptance is typically made by the parties signing the contract. Promissory notes only require the signature of the debtor (maker). In that case, a promissory note can be valid and binding without a signature if both parties rely on it as a valid contract.
An oral contract is an agreement made with spoken words. An oral contract is typically enforced in the same way as a written agreement. However, it is more difficult to prove an oral contract exists. Oral contracts also usually have a shorter statute of limitations for bringing a lawsuit.
When a promissory note is secured, the borrower agrees to turn over an item as collateral to the lender if they default on the loan. The collateral might be a car, construction equipment, or a house, depending on the loan.
If you are the creditor, you must take steps to ensure your legal rights to the collateral in the event of default, known as the attachment of a security interest.
A security interest is “attached” when it becomes enforceable against the debtor. This usually happens instantly when the following three conditions are met:
Having these steps in place enables the creditor to protect their interests if the debtor defaults on the loan. C.R.S. 4-9-203
However, taking additional steps is more likely to guarantee you have the strongest claim to the property. This is called “perfection.”
Security interests for most types of collateral are usually perfected by filing a document known as a financing statement. The financing statement must be filed with the Colorado Secretary of State’s office.
The financing statement serves to make other people aware of the secured party’s security interest in the collateral. The UCC specifies what must be contained in a financing statement:
An unsecured promissory note does not use collateral. If the borrower defaults on the loan, the lender’s only means of enforcement is by filing a lawsuit against the borrower.
Colorado’s Consumer Protection Laws cap how much interest can be charged on promissory notes. The law prohibits you from charging more than 45 percent interest on a promissory note. If no interest rate is specified, Colorado law sets the rate at eight percent annually.
Enforcing a promissory note is fairly simple. Under the Uniform Commercial Code (UCC), a promissory note is proof that a debt exists. If the debtor fails to pay the debt specified in the promissory note, no other evidence of a breach of contract is necessary to enforce that debt.
To enforce a promissory note, you will likely need to:
If someone defaults on a secured promissory note, you can foreclose your lien on the secured property to recover it and satisfy the debt.
Nonpayment of a promissory note is considered a breach of contract. Therefore, enforcing a promissory note requires proving:
Most of this information should be contained within the promissory note. If the promissory note is valid, these claims should be easy to prove.
The creditor can file a lawsuit against the debtor on the day after the note has expired. From that time, you have six years to pursue a collection of the debt under the state’s statute of limitations. C.R.S. 13-80-103.5
Under C.R.S. 13-80-103.5, the right to collect on any debt is forfeited after six years.
A creditor learned this the hard way in one Colorado case. Let’s take a look.
In May 1998, Bevan Properties, LLC lent BLT Consulting $65,000. In exchange, BLT executed a promissory note in favor of Bevan to be repaid on or before October 1, 1998.
The promissory note was personally guaranteed by Lloyd and Betty Tidwell, owners of BLT Consulting. The note was secured by a deed of trust on real estate owned by the Tidwells.
The October 1998 deadline passes with no payments ever made on the promissory note. Bevan never sued to enforce the payment obligations set forth in the note.
On July 9, 2010 — almost 12 years after the note was due — the Tidwells filed an action in a Mesa County district court requesting that the promissory note, the personal guarantees, and the deed of trust be ruled invalid. The Tidwells pointed out that Bevan had failed to enforce the payment obligations of the promissory note within the required six-year statute of limitation period.
Bevan claimed in a cross-motion that the note and deed of trust were revived when the Tidwells filed the lawsuit:
“I spoke with both Betty Tidwell and Louise Forster, the sister of Lloyd Tidwell and a real estate broker representing Plaintiffs, and both acknowledged the debt and requested that Bevan Properties hold off on any action to collect the note until the Tidwells had a chance to sell the property.”
Tidwell v. Bevan Props., 262 P.3d 964, 966 (Colo. App. 2011)
The court ruled that the promissory note was invalid, thus extinguishing the lien against the Tidwells’ property. A Colorado appeals court upheld this decision:
Because defendant failed to produce a written instrument signed by plaintiffs acknowledging a delay in the payment of the promissory note, the district court correctly held that defendant’s affidavit failed as a matter of law to raise a genuine issue of material fact precluding summary judgment.
Tidwell v. Bevan Props.
The court’s ruling effectively left Bevan with no remedy or collection rights for the $65,000 the Tidwells had borrowed.
Creditors can take away two important lessons from Tidwell v. Bevan Props. First, you should be vigilant about enforcing the payment terms of a promissory note in a timely manner.
Additionally, you should document any modification to a promissory note. This is necessary in order to preserve your rights as a creditor.
In April 2012, the Colorado Supreme Court addressed the issue of when the statute of limitations begins to run on loans that are to be repaid in installments.
In this case, Daniel Hassler borrowed money to purchase a car. The loan was memorialized by a promissory note and security agreement, using the vehicle as collateral. Hassler defaulted on the loan payments.
Ultimately, the lender repossessed the car and sold it at auction. However, the proceeds from the auction were insufficient to cover the balance. Therefore, Hassler was still responsible for the remaining amount.
The lender then sued Hassler to recover the deficiency between the auction proceeds and the amount still owed on the loan. The suit was brought less than six years after the car was sold at auction, but more than six years after the loan default and repossession.
Both a Jefferson County court and a Colorado district court ruled that the lender’s lawsuit was not barred by the statute of limitations.
The state Supreme Court reached a different conclusion:
A separate cause of action arises on each installment, and the statute of limitations runs separately against each. However, if an obligation that is to be repaid in installments is accelerated — either automatically by the terms of the agreement or by the election of the creditor pursuant to an optional acceleration clause — the entire remaining balance of the loan becomes due immediately and the statute of limitations is triggered for all installments that had not previously become due.
Hassler v. Account Brokers of Larimer Cty., Inc., 2012 CO 24, ¶ 1, 274 P.3d 547, 548
The court found that by demanding payment in full and repossessing the vehicle, the lender had accelerated the debt. On the date the loan was accelerated, the entire balance of the obligation immediately became due and payable.
The suit against Hassler was brought more than six years after the remaining loan balance was called due. Consequently, the court determined that the lender was barred from suing to recover the deficiency amount.
What happens when a loan is in default, but not called due? Let’s find out.
Two loans were at issue in this 2012 Colorado Court of Appeals case:
Both loans were secured by the borrower’s home and required monthly payments. The promissory notes provided that a final payment of the unpaid principal balance plus accrued interest would be due on the maturity date. The maturity date is simply the day the loan becomes due.
The notes contained optional acceleration clauses. An acceleration clause is a contract provision that allows a lender to require a borrower to repay all of an outstanding loan if certain requirements are not met.
In this case, the borrowers made only two payments on the loans, first defaulting in July 2001. They sold the home in August 2002, with Castle Rock Bank receiving just $5,000 from the short sale proceeds. That amount was applied to the $75,000 loan.
The bank sent notices stating that the loans were delinquent. However, it never formally declared the loans in default or exercised its option to accelerate. Castle Rock Bank v. Team Transit, Ltd. Liab. Co., 2012 COA 125, ¶ 1, 292 P.3d 1077, 1079
The bank filed a lawsuit in June 2009 to recover the outstanding amounts owed on the loans. The suit was brought more than six years from the date of first default, but it had been less than six years from the loans’ maturity dates.
The borrower argued that the lawsuit was time-barred because the action had been brought more than six years from the date the loans went into default. However, the bank argued that while it had accepted additional payments on the loans after default, it had not accelerated or called the notes due prior to their maturity dates. Therefore, the six-year statute of limitations clock did not begin to run until the loans finally came due on their maturity dates.
The Colorado Court of Appeals concluded that in such a situation, the statute of limitations begins to run on the promissory note’s maturity date, not the date of first default. Chief Judge Alan Loeb cited the Hassler case in his written opinion:
In sum, applying the legal framework in Hassler, we conclude that the Bank, as a matter of law, did not exercise its option to accelerate the promissory notes at issue, and, by the terms of those notes, the statute of limitations began to run when [the] “final payment of the unpaid principal balance plus accrued interest” became due on the notes’ respective maturity dates.
Castle Rock Bank v. Team Transit, Ltd. Liab. Co., 2012 COA 125, ¶ 70, 292 P.3d 1077, 1090
The court concluded that the language of the promissory notes meant exactly what it said. The borrower was required to pay all outstanding amounts on the loan’s maturity date, regardless of whether the borrower was current on payments or had been in default for many years.
If the loan is not accelerated, the six-year statute of limitations clock does not start running until the loan’s maturity date.
The court ordered the borrower to pay the “unpaid principal balance plus accrued interest” on each note, plus the bank’s attorney fees.
Enforcing a promissory note may seem like a fairly straightforward process. However, don’t let that simplicity fool you. The laws around debt collection are numerous and complex. A seasoned attorney — like the ones at Robinson & Henry — can mean the difference between a bad debt and recovery of significant sums. Call 303-688-0944 to begin your case assessment.
