CHAPTER 4.02. Promissory Notes

• Jurisdiction: United States

4.02. Promissory Notes

[1] General

A promissory note is a promise to pay money. It is sometimes referred to as a bond, although that is a promissory note that is negotiable. More rarely, it may be referred to as a specialty, which is a contract for payment signed under seal.⁴

For a mortgage to have effect, it must secure an obligation.⁵ Usually, that obligation is for the payment of money, such as a promissory note, although the debt may be within the mortgage itself and not a separate obligation.⁶ Moreover, the debt secured by the mortgage may be the debt of a third party and not that of the grantor of the mortgage.⁷

The debt also establishes the measure of the mortgage lien.⁸ In other words, if a mortgage recites a debt of $100,000 but only $50,000 is actually lent, the mortgage lien applies to a debt of only $50,000. Likewise, if $100,000 was lent but $50,000 has been repaid, the mortgage lien only secures $50,000 even if new money is lent to the debtor, unless the mortgage provides for securing future advances.

The Delaware law applicable to Delaware promissory notes is found in both Article 3 of the Delaware U.C.C. and in the common law. The statute of limitations section of Article 3 of the Delaware U.C.C. is not intended to affect the Delaware common law rule governing instruments under seal.⁹ That common law rule provides no absolute bar to suit due to the lapse of time, but raises a presumption of payment after 20 years.¹⁰

[2] Negotiability

A promissory note is negotiable when it is an unconditional promise to pay a fixed sum and (i) is payable to the bearer or to order at the time it is issued or first comes into possession of the holder, (ii) is payable at a definite time or on demand, and (iii) does not state any other undertaking or instruction by the promisor to do any act in addition to the payment of money.¹¹ Delaware law permits a negotiable note to include some other undertaking without affecting negotiability, such as including a confession of judgment, waiver of lien, or agreement to provide collateral to secure the note.¹² On the other hand, if the note contains a condition to payment, that can make the note non-negotiable. For this purpose, a condition to payment could be subjecting the note to another document (e.g., a loan agreement) providing rights or obligations with respect to the promise to pay.¹³

The benefit to the creditor of a negotiable note is that a negotiable note may have greater value to a purchaser of the loan and...