Enforcing a Promissory Note

March 7, 2022 | Bill Henry

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.

Let Us Help You With Enforcing a Promissory Note

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 free case assessment.

What is a Promissory Note?

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.

A valid promissory note in Colorado must:

  • be signed by both the creditor and the debtor
  • contain an unconditional promise or order to pay a certain sum of money, and no other promise
  • be payable on demand or at a definite time, and
  • be payable to the person owed the money.

Is An Unsigned Promissory Note Valid?

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 a knowing acceptance of the terms it contains. Acceptance is typically made by the parties signing the contract. This is proof that the parties have mutually agreed to the terms stated in the contract and found those terms acceptable.

Even if one of the parties has not signed the promissory note, the agreement will be valid and binding for that party if he or she accepts it, and if both parties rely on it as a valid contract.

An oral contract is an agreement made with spoken words. An oral contract may typically be enforced the same as a written agreement. However, it is much more difficult to prove the existence or the terms of an oral contract. These contracts also usually have a shorter statute of limitations for bringing a lawsuit.

Even if a promissory note is not a negotiable instrument, it still can be an oral contract.

A Colorado Promissory Note May Be Secured or Unsecured

Secured Notes

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 of a promissory note, you must take special steps to ensure your legal rights to the collateral in the event of default. These steps are known as attachment of a security interest.

Attachment of Security Interests

Attachment means a security interest has become enforceable against the debtor with respect to the collateral.

There are three requirements for attachment:

  1. The secured party gives value.
  2. The debtor has rights in the collateral or the power to transfer rights in it to the secured party.
  3. The parties have a security agreement authenticated (signed) by the debtor, or the creditor has possession of the collateral.

However, you must take additional steps to more fully ensure your legal rights in the event that other parties are asserting an interest in the same piece of collateral. These additional steps are known as perfecting a security interest.

Perfecting Security Interests

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:

Unsecured Notes

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.

Promissory Note Interest Rates

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

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:

  • sue the debtor of the note
  • get a judgment from the court
  • collect on the judgment through typical collection remedies (i.e., wage or asset garnishments)
Enforcing a Secured Promissory Note

If someone defaults on a secured promissory note, you can foreclose your lien on the secured property to recover it and satisfy the debt.

Proving Nonpayment of a Promissory Note

Nonpayment of a promissory note is considered a breach of contract. Therefore, enforcing a promissory note requires proving:

  1. the existence of the note
  2. your performance of the note
  3. the opposing party’s failure to perform under the note; and
  4. that a balance was due and owed under the note.

Most of this information should be contained within the promissory note. If the promissory note is valid, these claims should be easy to prove.

How Long Do I Have to Enforce a Promissory Note?

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.

Real World Promissory Note Cases and Lessons

Lesson One: Pay Attention to the Statute of Limitations

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.

BLT Misses the Deadline

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 Files Counterclaim

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)

Court Rules in Favor of Promissory Debtors

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.

What Did We Learn? Timing is Everything & Get it in Writing.

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.

Lesson Two: Accelerating the Debt Can Affect the Statute of Limitations

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

How the Debt was Accelerated

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.

Case Three: Honoring a Note’s Maturity Date Can Help You Collect Debt

Two loans were at issue in this 2012 Colorado Court of Appeals case:

  1. A March 1, 2001 loan for approximately $75,000
  2. A March 1, 2001 loan for approximately $49,000

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.

Borrowers Fail to Make Payments

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

Bank Files Suit for Outstanding Debt

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.

Colorado Court of Appeals Finds in Favor of Bank

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.

Get Help Enforcing a Promissory Note

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 free case assessment.

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