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Negotiable Instruments: Promissory Notes

A promissory note is a negotiable instrument that allows the holder to transfer that instrument in the same way that cash can be transferred. Promissory notes are used for a wide variety of purposes, including to create enforceable debts between private parties, and as capital contributions to Limited Liability Companies by LLC members. In order for a promissory note to be legally binding and enforceable, the note must satisfy all of the following elements:

1. UNCONDITIONAL: There cannot be any conditions precedent to payment.

2. PROMISE OR ORDER TO PAY: There must be a written undertaking to pay money that is signed by the person promising to pay. For example, “I, John Smith, promise to pay to the order of Jan Smith two hundred dollars” would satisfy this requirement.

3. A FIXED AMOUNT OF MONEY: The principal amount due under the promissory note must be absolute and not subject to change. The amount of interest due may vary. However, the interest rate must not be so extreme as to be unconscionable, or it may violate Texas Usury Laws.

4. PAYABLE TO ORDER OR BEARER: The promissory note must be payable to order or to bearer by using language such as “Pay to the order of Jan Smith”—or “I promise to pay to the order of bearer”. A bearer is simply the person who presents the note to the person who made it for payment.

5. PAYABLE ON DEMAND OR AT A DEFINITE TIME: The note is payable on demand if it states that it is payable “on demand” or “at sight” or if it does not dictate a specific time for payment. This makes the note payable at the will of the note’s holder. The note is payable at a definite time if it specifies a specific date for payment, or if it states a specific period of time after sight, such as “120 days after presentment for payment.”

6. DOES NOT STATE ANY UNAUTHORIZED UNDERTAKING OR INSTRUCTIONS: Finally, the Texas Business & Commerce Code prohibits promissory notes from stating any other undertaking or instruction by the person promising or ordering payment to do any act beyond the payment of money.

R. D. Adair, PLLC offers experienced business counsel and can assist you with your promissory note concerns. To learn more about the preparation of promissory notes, or how we can assist you in a related matter, contact us today to schedule a consultation.

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