Enforcement of Promissory Notes

A promissory note is, in its broadest sense, a promise to repay money on certain terms and conditions. In business — particularly between banks and creditors — promissory notes are often bought and sold because there can be big money (and risk) in holding and collecting debt with interest. A deluge of legal issues can arise with the transfer of promissory notes, the majority of which cannot be fully discussed here. For purposes of this entry, who can enforce a promissory note?
To be entitled to enforce a promissory note, one must be (1) the holder of the instrument, (2) a nonholder in possession of the instrument who has the rights of a holder, or (3) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to Section 400.3-309 or 400.3-418(d). A”holder” is the person in possession if the instrument is payable to bearer or, in the case of an instrument payable to an identified person, if the identified person is in possession. Section 400.1-201(20), RSMo. A common misconception is that a creditor needs to have actual physical possession of the promissory note to sue/collect on it. Items (2)-(3) show is not necessarily correct.
Discussing item (2) further, a person not in possession of an instrument is entitled to enforce the instrument if (i) the person was in possession of the instrument and entitled to enforce it when loss of possession occurred, (ii) the loss of possession was not the result of a transfer by the person or a lawful seizure, and (iii) 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. Section 400.3-309, RSMo. Thus, despite being unable to produce a Note, a person may still be entitled to enforce it by establishing that there was possession at one time, that the Note has not been transfered, and that, currently, the Note’s whereabouts cannot be determined.
Why is this important? If push comes to shove and litigation commences, creditors and debtors both need to be prepared to engage in discovery to determine whether a person/entity is entitled to sue on a note. Contact us with questions relating to breach of promissory note disputes or other business/financial disputes.