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  1. #1
    Join Date
    Sep 2009
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    1

    Default Promissory Note Default - What Are My Options and Their Ramifications

    My question involves collection proceedings in the State of: Alaska.

    Promissory note default -- What are my options and their ramifications?

    I live in the state of Alaska. Last year I lent money to the LLC of a friend. The unsecured loan was documented in a notarized promissory note. The note requires annual interest only payments and balloons at the end of the third year. The note contains penalty clauses (in the form of late fees and increased interest rates) for non-payment as well as an acceleration clause (enabling me to declare the entire note due and payable if the periodic payments are not made.) The amount of the loan is above small claims limits. I don't anticipate any legal challenges to the contents of the note document.

    My understanding is that the LLC invests in a diversified array of lending, real estate development, joint partnerships, and the like -- so basically, the assets would probably be third party promissory notes, partnership or LLC shares, and the like (as opposed to tangible, physical assets).

    Last fall, the national economy crashed. In the spring I emailed the borrower, reminding him of the upcoming payment and asking if there were any concerns regarding it -- no response. In June, I emailed another reminder a couple of weeks before it was due -- no response.

    The borrower failed to make the annual interest-only payment in June and repeatedly avoided me -- "I don't have time to talk about it" when I'd reach him by phone.

    I sent him a formal past-due/default-pending letter.

    In mid-July, the borrower met with me and said that one of his investments failed, but he does not expect any others to fail -- but that the investments will take longer to complete/mature and cash out/exit. He said that he would be to be able to make the annual payment "sometime in August". I gave him an extension on the annual payment until the end of August (also documented with a formal letter) and asked him to keep me informed if he anticipated any payment problems.

    In mid-August, I emailed him a reminder that the payment was due by the end of the month.

    Well, it's September, I have not received payment that was to be made in August, and the borrower is avoiding me again.

    I understand that the economy may adversely impact the profitability and timing of the pay-off of his investments (and his ability to repay his LLC's debts, such as mine) -- and I am willing to work with him as best I can to grant extensions or restructure the loan. However his attitude and behavior is undermining my ability to work with him or to trust him. But, I digress....

    Getting back to the main issue, I am concerned about the viability of his LLC and its ability to repay the principal of my loan: My understanding is that the LLC has borrowed significant amounts of money from other individuals under similar terms to the promissory note that I have -- and, although the LLC's investments may be profitable in the long term, I fear that the LLC will not have the liquidity to meet its short term obligations -- and a number of investor claims may be filed against the LLC in the future.

    Assuming that numerous investor claims are made against the LLC:

    Q1: What, if any, are the advantages for me to accelerate the loan and get a judgment? (Sub-question: Are the pay-off of judgments prioritized based on judgment date? (In other words, is this similar to the prioritization of mortgages where the first recorded mortgage has priority over subsequent mortgages?))

    Q2: What, if any, are the disadvantages for me to accelerate the loan and get a judgment?

    Thanks for your help in advance,
    Jim

  2. #2
    Join Date
    Sep 2005
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    98,846

    Default Re: Promissory Note Default - What Are My Options and Their Ramifications

    If you're worried about the viability of a business entity to which you loaned money, you had best take strong action to collect the debt. That may mean suing before you end up behind a line of other creditors.

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