promissory notes form by harvey1

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									PROMISSORY
  NOTES

Prof. Irene Kosturakis
Chief Intellectual Property Counsel
        BMC Software, Inc.
               and
Prof. Cherie O. Taylor
   South Texas College of Law
           04/02/07
              Notes Basics
► Loan transactions
► Regulated lenders
   Accelerated relief
   Suit on promissory note
                  Negotiability
► Complexity               Negotiability

► Negotiable   notes
    Can be transferred
    Free of certain defenses
    Makes a note an article of commerce
► Negotiability   may not matter
    Except for those destined for the secondary
    market
             Notes Basics
► Who owes?
► How much?
► To whom?
► How and when is the money to be repaid?
► What if it isn’t repaid as agreed?
              A Basic Note
$100,000.00               Houston, Texas
                          November 30, 2007

Within 12 months after date, Securikey, Inc.
promises to pay to the order of BIG COUNTRY
BANK the sum of $100,000.00, plus interest at the
rate of 15% per annum.

                    Securikey, Inc.
                    By /s/Billie Bobb
                    CEO
              A Basic Note
$100,000.00               Houston, Texas
                          November 30, 2007

Within 12 months after date, Securikey, Inc.
promises to pay to the order of BIG COUNTRY
BANK the sum of $100,000.00, plus interest at the
rate of 15% per annum.

                    Securikey, Inc.
                    By /s/Billie Bobb
                    CEO
            A Basic Note
$100,000.00              Houston, Texas
                         November 30, 2007

Within 12 months after date, Securikey, Inc.
promises to pay to the order of BIG COUNTRY
BANK the sum of $100,000.00, plus interest at
the rate of 15% per annum.

                   Securikey, Inc.
                   By /s/Billie Bobb
                   CEO
              A Basic Note
$100,000.00              Houston, Texas
                         November 30, 2007

Within 12 months after date, Securikey, Inc.
promises to pay to the order of BIG COUNTRY
BANK the sum of $100,000.00, plus interest at
the rate of 15% per annum.

                   Securikey, Inc.
                   By /s/Billie Bobb
                   CEO
              A Basic Note
$100,000.00               Houston, Texas
                          November 30, 2007

Within 12 months after date, Securikey, Inc.
promises to pay to the order of BIG COUNTRY
BANK the sum of $100,000.00, plus interest at the
rate of 15% per annum.

                    Securikey, Inc.
                    By /s/Billie Bobb
                    CEO
                  Who Owes?
► Name of maker of note should be correct
► Multiple debtors agree to be “jointly and severally”
  liable
    Each subordinates to the debt any claim or security it
    has or may have against other Obligor(s) or their assets
    Each waives all defenses
► Guarantor
    Signs on a separate form
    Guarantor’s defenses usually waived
► Obligations to Lender not affected by bankruptcy,
  insolvency, merger, consolidation, dissolution, or
  death of any Obligor
                     Obligor Waivers
►   Diligence, notice of default, nonpayment, demand for payment,
    indulgences and notices of any kind, and notice of acceptance of (i)
    Note, (ii) Loan or (iii) any other security instrument
►   Lender’s delay in exercise of any right/remedy
►   Release, compromise, subordination, substitution, impairment, or
    failure to perfect any security, or rights or remedies against any
    Obligor
►   Rights to marshaling, subrogation, reimbursement or indemnity until
    indebtedness has been fully paid and Borrower’s ability to obtain credit
    under the Loan has been irrevocably terminated
►   Right to request or obtain from Lender information about other
    Obligor(s)
►   Any act, omission or thing which might operate as a legal or equitable
    defense or discharge of any Obligor(s)
►   Any other defense available to a surety/guarantor under law
          Borrower Consents To
► Every  renewal, forbearance, extension of time,
  and other change in the terms or conditions of any
  indebtedness
► Every waiver of Lender’s rights against any
  Obligor(s) or any security, without such waiver
  prohibiting the later exercises of same rights
► Any election of rights or remedies by Lender,
  including enforcement of the Note, without first
  pursuing Lender’s rights against any Obligor(s) or
  any security
       Borrower’s Responsibilities
► To keep informed of the financial condition
  and assets of other Obligor(s)
► To keep informed of all circumstances
  bearing upon the risk of non-payment of the
  debt
► To understand the risks each Borrower
  assumes and incurs
► To understand that Lender has no duty to
  advise Obligor(s) of risks or circumstances
                How Much?
► Note  bears interest on the face amount, the
  amount being loaned
► If loan is over a line of credit, lenders prefer
  a single Note, signed up front for the
  amount of the maximum possible advances
  to be made
          Repaid How and When?
►   Simple Notes – entire principal sum, plus interest within
    the term of the Note
►   In many commercial transactions, e.g., line of credit Notes,
    lenders obtain a demand Note, i.e., all sums due are
    payable on the Lender’s demand
►   A Note that recites it is payable on demand and then
    contains events of default is not really a demand Note
►   Can insert a maturity date on a line of credit Note, even if
    is a demand Note:
    “This note is payable ON DEMAND or, if not sooner
    demanded, then on or before [date]”
       Repaid How and When?
► Installment   payment Notes:
  “ . . . payable on monthly installments of
  $__ each on the __ day of every month
  commencing on [date] and the entire
  unpaid balance on [maturity date]”
► Avoids clerical errors in calculating the last
  payment where different from other
  payments
► Used in balloon Notes
                     Interest
► Simple:
  “. . . said payments including interest on the
  principal balance outstanding at the rate of __%
  per annum”
► Variable   Rate:
  “. . . payable on monthly installments of (i)
  principal each in the amount of $___ plus (ii)
  interest at the rate hereinafter specified,
  commencing on [date], and continuing on the
  same day of each month until [maturity date],
  when any remaining unpaid principal balance and
  accrued interest shall be due and payable”
                                Interest
► Prime rate = the lowest rate, the rate charged by Lenders to most
  credit-worthy customers on short-term obligations
► Class actions litigated whether this was really the Lender’s lowest rate
► Prime rates vary from lender to lender
      Lender’s prime rate
      “Interest shall be computed for each payment at the Lender’s rate
      described by it from time to time as its prime rate, plus __% per annum,
      on the balance then outstanding, as such rate shall vary from time to
      time.”

      External prime rate
      “This is a variable interest rate loan in which the interest rate will fluctuate
      in accordance with the base rate, which will be the “Prime Rate” published
      in the Wall Street Journal. . . . Where, at an adjustment date, the base
      rate is expressed in a range in said publication . . . the spread will be
      added to the lower rate of the reported range.”
                             Interest
►   Adjustable rate:
      Rate fixed for an initial period, then automatically re-fixes, based
      on some objective market standard, e.g., the five-year U.S.
      Treasury securities
      “During the first five (5) years, from the date of this Note, the
      Borrowing Rate shall be eight percent (8%) per annum. Thereafter,
      on the five-year anniversary of this Note and on each anniversary
      thereafter (Rate Adjustment Date), the Borrowing Rate shall be
      adjusted as follows. On and after each Rate Adjustment Date, the
      Borrowing Rate shall be adjusted to a rate per annum equal to two
      and one-half percent (2 ½%) above the Index Rate on the Rate
      Adjustment Date. At all times, the Borrowing Rate shall be
      calculated on the basis of a 360-day year and the actual number of
      days elapsed.”
                            Interest
►   Default Interest Rate:
    “If Lender makes actual demand for payment of Note
    (Lender being under no obligation to make such demand),
    or if Lender commences suit to collect this Note or
    exercises its right to sell any collateral, then interest on the
    unpaid principal balance hereof shall thereafter accrue at
    the highest rate of interest permitted by applicable law.”
►   Approaches the usury limit
►   While post-default rates are justified by
       Lender’s increased risk
       Lender’s need to apply more internal resources to handling a
       defaulted loan
►   Better to set the default rate with reference to pre-default
    rate
    “. . . shall accrue interest at four percent (4%) in excess of
    the Borrowing Rate”
                             Interest
►   Compensating balance requirement = an undertaking by Borrower that
    a portion of the funds loaned will be kept on deposit with the Lender in
    a non-interest-bearing account
   “In addition to the principal and interest payments noted above,
   Borrower promises to pay to Lender a balance deficiency fee, annually
   in arrears, to be computed as follows:
A. For each calendar month beginning after [date of loan], Lender shall
   compute (1) the average daily account balances maintained during the
   month by Borrower with the Lender, less (2) the average daily
   unavailable funds, less (3) reserve requirements, and less (4) __ % of
   the average daily balance due under this Note during the month, said
   balance being the “average daily investable fund,” or “ADIF”. If the
   ADIF is a positive number, the Lender will compute a tentative credit
   to Borrower equal to interest on the ADIF for one month at the then
   prevailing rate for U.S. Treasury bills. If the ADIF is a negative
   number, Lender will compute a tentative charge to Borrower equal to
   interest on the ADIF for one month at the interest rate then applicable
   to this Note.
                             Interest
B. The tentative charge or credit, less amounts necessary to cover
   account services, shall be the “balance deficiency” (if a negative
   number), or the “balance excess” (if a positive number).
C. The Lender shall notify Borrower monthly of the balance deficiency or
   balance excess being carried forward to the following month, until the
   end of the loan year, when the Lender shall notify Borrower of the net
   balance deficiency or balance excess for the year in question. If there
   exists a balance deficiency for that year, Borrower shall pay Lender
   the balance deficiency on the last day of the loan year.
D. A “loan year” shall consist of the twelve (12)-month period
   commencing on ____ of each year and terminating on ___ of the
   following year; provided, however, that if this Note is paid in full other
   than at the end of a loan year, the final loan year shall terminate on
   the last day of the month immediately previous to the month in which
   the loan is paid.”
                                Usury
► Usury = a maximum rate applicable to commercial transactions or to
  loans to individuals even though for a commercial purpose.
► A violation in some States
► The existence of an individual guarantor might bring a loan under the
  usury statute even if the primary obligor is a corporation.
► In such jurisdictions, must add an “oops clause” to the interest
  provision:
    “. . . provided, however, that in no event shall the amount of interest
    paid hereunder, together with all amounts reserved, charged, or taken
    by Lender as compensation for fees, services, or expenses incidental to
    the making, negotiation, or collection of the loan evidenced hereby
    exceed the maximum rate of interest on the unpaid principal balance
    hereof allowable by applicable law. If any sum is collected in excess of
    the applicable maximum rate, the excess collected shall be applied to
    reduce the principal debt.”
►   Drafted to conform to the “Statute of Anne” usury model and may
    require modification in some States.
                     Prepayment
►   In many jurisdictions, there is no right to prepay an
    installment obligation unless that right is specifically
    granted by the Lender.
►   In some states, there is a common law right to prepay if
    the prepayment is accompanied by all of the interest that
    would have been paid had the loan been carried to
    maturity
►   Counsel for Borrower must request prepayment provision
    without penalty
►   Counsel for Lender must request that double payment in
    one month does not satisfy the payment for the next
    month
    “Borrower shall have the right to prepay all or any part of
    the principal, without penalty, all such prepayments to be
    applied upon installments of most remote maturity.”
                        Prepayment
►   Lender will want to impose a requirement that
    prepayments be in a certain minimum amount, or multiples
    of a certain sum, or impose a decreasing prepayment
    penalty during the early years of the loan.
    “Borrower may prepay all or part of the principal, subject
    to payment of the following prepayment penalty: three
    percent (3%) of the amount of the prepayment if the
    prepayment is made within one (1) year from the date
    hereof; two percent (2%) of the amount of the
    prepayment if the prepayment is made within two (2)
    years from the date hereof; and one percent (1%) of the
    amount of the prepayment if the prepayment is made
    within three (3) years from the date hereof.”
►   Courts do not like prepayment penalties
       Most challenges have focused on what is a prepayment:
        ► Collection by liquidation or by obtaining the collateral?
        ► If lender receives payment for insurance or condemnation proceeds?
                      Prepayment
►   Prepayment definition
    “Prepayment includes any payment or other reduction of
    the balance due under this Note, regardless of whether
    such payment or other reduction:
         (a) is voluntary or involuntary;
         (b) is occasioned by Lender’s acceleration of this Note
    or demand hereunder;
         (c) is made by Borrower or by a third party;
         (d) results from Lender’s receipt or collection of
    proceeds and condemnation awards;
         (e) results from Lender’s exercise of its right of set-
    off; and/or
         (f) is made during a bankruptcy, reorganization or
    other proceeding, or is made pursuant to any plan of
    reorganization or liquidation.”
                      Prepayment
►   Penalty should not appear to be liquidated damages.
►   Penalty should be calculated on a yield equivalent formula
    tied to the Lender’s cost of funds, rather than just a fixed
    percentage amount of prepayment. See Form 9.3, § 5
►   A good practice is to spell out the reasons for the penalty
    “Borrower acknowledges that the Borrowing Rate is a
    favorable fixed interest rate, available only because Lender
    has incurred, or may incur, one or more liabilities or
    commitments to fund the loan evidenced by this Note, and
    that any prepayment is likely to cause loss to the Lender as
    the direct result of such liabilities or commitments.”
                       Default
► Acceleration clause states if one payment is
  missed, or some other event transpires, then all
  subsequent payments can be declared due by the
  holder of the Note at its option.
► Triggered by:
    Failure to pay
    Uncured default in performance of any other obligation
    to Lender
    Insolvency
    A general assignment for the benefit of creditors
    Filing of any petition under bankruptcy or reorganization
    Borrower’s suspension of its business
    Making of false representation or warranty by Borrower
    about loans by Lender
                   Finally
► Waiver of certain rights a maker make have
 is generally effective.
   Presentment, demand for payment, notice of
   dishonor, other notices
   Waivers or modifications consented to by
   Lender in re the time of payment
   Suretyship defenses
► Agreement  to pay all costs of collection,
 including attorneys’ fees

								
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