A promissory note is a written statement that proves that one individual or entity owes money to another individual or entity. They are often issued in the context of loans and other financing. To be enforceable, it must contain certain requirements, also known as material terms.
● The parties: names and addresses of the parties to the agreement
● The promise: a statement of what exactly is being agreed upon (in this instance a repayment of money). Any terms or conditions on repayment must be clearly stated, and there should be a definitive date of repayment
● The amount payable: the exact amount that must be repaid. In New York state these debts may be repaid with money or bank notes.
● Signatures: the signatures of all parties to the agreement must be included, with witness signatures and document notarization being optional
The Financial Industry Regulatory Authority (FINRA) often arbitrates promissory note disputes between brokerage firms and brokers. In the securities industry, brokerages frequently offer account executives up front bonuses or forgivable loans to persuade them to join the firm and also make sure that the broker won’t get a windfall if they leave soon after arriving. The employment agreement usually stipulates that if the broker is fired within a specified period or leaves the firm for any reason, the balance due on the loan immediately becomes payable.
When a promissory note comes due and the party owing the money declines to pay or avoids discussing repayment, the party holding the note should seek legal advice as soon as possible, as there is a six-year statute of limitations on collecting. If a brokerage firm brings a FINRA arbitration against a terminated broker to collect the amount outstanding on a promissory note, the broker should retain counsel immediately to negotiate with the brokerage firm and/or defend them in any promissory note arbitration.
The penalties for failing to honor the terms of a promissory note depend on the type of note. A secured promissory note attaches a lien against a tangible item. If the loan is not repaid, the item can be seized by the lender and sold to recoup any losses. If the note is unsecured, there is no collateral and a lender has the option of suing the borrower for repayment. If the judgement is in favor of the lender, the lender may be able to seize certain eligible assets in order to recoup losses.
In addition to secured and unsecured promissory notes, there are demand notes, which do not have an end date specified, balloon notes, which demand repayment in a lump sum instead of installations, and usury notes, which do not charge interest on the amount owed.
In Wells Fargo Investments vs. Shaffer (FINRA Arbitration No, 10-00773), a FINRA arbitration panel learned that Wells Fargo Investments had made a forgivable loan to a former employee when he began to work at the company. The employee, Kenneth Schaffer, signed a promissory note stating that if Wells Fargo terminated his employment within a specified period for any reason, the amount due on the loan would immediately become payable. Shaffer was fired in October 2009, and the brokerage firm demanded the $74,617 due under the promissory note.
The FINRA panel called the note “both procedurally and substantively unconscionable” and declared it unenforceable. It further held that Wells Fargo was liable to Shaffer for $75,000 for defaming him by stating on his Form U-5 that he had been fired for good cause, namely violation of company policies. The former employee was awarded compensatory damages of $75,000 for defamation, and the arbitration award ordered that the above-quoted statement of reasons be removed from the Form U-5 and replaced with “Violation of company policies regarding intra-company e-mails.”
A promissory note is a valid contract, and both courts and FINRA arbitration panels normally favor its enforcement unless the terms of the note are flawed to the extent that the agreement is unreasonable or against public policy. A successful defense against repayment of up front bonuses / forgivable loans at brokerage firms is proving that the termination of the broker by the firm was discriminatory or improper in some way.