Promissory Notes

A promissory note is a written promise between two persons by which one called the maker promises to pay to the other called a payee (or called a bearer if no specific payee is identified on the note) a fixed amount of money, with or without interest or other charges, payable on demand or at a definite time. The note may not state any other undertaking or instruction by the person promising payment to do any act in addition to the payment of money, but the note’s promise may contain an undertaking to give, maintain or protect collateral to secure payment, an authorization or power to the holder to confess judgment or realize on or dispose of collateral or a waiver of the benefit of any law intended for the advantage or protection of the maker. G.L. c. 106 §3-104.

For business transactions to operate effectively, commercial paper must be generally accepted as money. To be readily accepted, it must be freely transferable, that is that the holder of the note must be able to negotiate and transfer it to others. Any question about the negotiability of a promissory note is resolved under Article 3 of the UCC. If the note is nonnegotiable, any disputes must be resolved under ordinary contract law. In order for the note to be negotiable, the Code requires that it must be in writing, be signed by the maker, be an unconditional promise to pay, state a specific sum of money, be payable on demand or at a definite time and be payable to the payee or bearer. G.L. c. 106 §3-104(a).

When the seller of the business agrees that the buyer can pay part of the purchase price at some time in the future or in installments over some period of time, at closing the buyer executes and delivers a promissory note to the seller. When the buyer pledges collateral to secure payment, the note should reference the separate agreement (the security agreement or mortgage) about that collateral and its relationship to payment of the note’s obligations. When the buyer is a corporation or limited liability company, the seller is best advised to require personal guaranties from the buyer’s primary owners that the note will be paid by the buyer or them.