What is a Minnesota Promissory Note?
A Minnesota promissory note is a legal instrument (contract) under which the borrower makes an unconditional promise in writing to pay a sum of money to a third party (the lender or "payee") either at a fixed or determinable time in the future or upon demand by the payee.
A Minnesota promissory note meeting certain criteria is considered a "negotiable instrument" under Article 3 of the Uniform Commercial Code (UCC) much like a check and can be assigned to third parties.
A Minnesota promissory note is different than an "IOU" insofar as it contains a specific promise to pay – under specific terms – rather than simply acknowledging the existence of the debt.
What Terminology is Used in Minnesota Promissory Notes?
The following terms and provisions are sometimes found in Minnesota promissory notes:
Acceleration Clause: A clause stating that in the case of default, the holder of the note can "accelerate" the remaining payments and declare them immediately due and payable.
Borrower: The party borrowing the money and issuing the promissory note; also called the "Issuer" or "Maker" of the note.
Choice of Law Clause: A clause stating which state’s law will govern the interpretation and enforcement of the promissory note.
Creditor: The lender who is receiving the promissory note in exchange for the loan; often called the "Payee" or "Holder" of the note.
Cure Period: A stated period during which the Maker can "cure" any defaults under the note before various penalties and remedy provisions are triggered. Not all promissory notes include cure periods.
Default: A clause stating at which point the Maker will be considered in "default" under the promissory note, thereby triggering certain penalty and remedy provisions. Sometimes, a "Grace Period" for accepting late payments is recognized. In other cases, the Holder of the note must provide "Notice of Default" and a "Cure Period" before the Maker can be declared in default.
Demand Note: A promissory note that requires the Issuer to pay the balance of the note at any time upon "demand" by the Holder of the note.
Grace Period: A period of time (typically several days) during which late payments under the promissory note will be accepted without triggering a "Default" under the terms of the note.
Holder: The party that is holding the promissory note; typically this is the "Lender" or "Creditor" that originally received the note after making a loan. Because many promissory notes are considered negotiable instruments, however, that can be assigned to third parties, the "Holder" technically refers to anyone who received an assignment of the legal right to enforce the note. The Holder has the legal right to receive payments under the note.
Interest: The rate of interest charged under the promissory note. Certain state and federal "usury" laws may restrict the maximum amount of interest charged.
Issuer: Same as "Maker" or "Borrower."
Lender: The party making the loan that is the subject of repayment under the promissory note; also called the "Payee" or "Holder" of the note (unless and until the note has been assigned to a third party).
Maker: Same as "Issuer" and "Borrower."
Note: Same as "Promissory Note."
Note Payable: Same as "Promissory Note."
Notice of Default: A clause in the promissory note that requires the Holder to provide written notice of default before certain penalties and remedies are triggered; may also be used in conjunction with a "Cure Period."
Payee: Usually the "Lender" or "Holder" of the promissory note. Most promissory notes, however, provide that the Holder of the note can designate another party to receive payments under the note as the Payee.
Prepayment Penalty: A payment or early termination fee for paying off the promissory note early. A prepayment penalty in certain types of transactions may be unlawful under applicable state law.
Principal: The original sum of money borrowed that is the subject of repayment under the promissory note.
Repayment Schedule: The schedule of payments set forth in the promissory note; often a series of installment payments, one "balloon" payment at a date certain, or upon “demand” by the Holder at any time.
Venue Clause: A clause stating where lawsuits over the promissory note must (or may) be filed (e.g., "All disputes concerning this promissory note must be filed in the federal and state courts of the State of Minnesota."). Generally, you want the venue to be your home state.
When is a Minnesota Promissory Note Necessary?
If you borrow start-up money for your business from a bank or other commercial financial institution, the lender will almost always require you to sign a Minnesota promissory note. The bank will present you with its own form. Often, you will have little opportunity to negotiate over the terms of the promissory note.
On the other hand, if you borrow money from a friend or relative, a Minnesota promissory note might come in handy. More importantly, if you are the person lending the money to an associate, friend, or relative, it is critical that you draft a promissory note that sets forth the interest rate and other terms of repayment.
What are the Advantages of Using a Promissory Note?
When someone borrows money, the repayment terms are not always written down. In many cases, however, they should be documented and a promissory note is a perfect vehicle for recording the agreed-upon terms of the loan. Drafting an appropriate Minnesota promissory note will serve several important purposes:
- Help to avoid misunderstandings about whether the money was intended as a loan or a gift;
- Memorialize the principal amount of money that is being borrowed;
- Set forth a reasonable rate of Interest;
- Document the agreed-upon Repayment Schedule;
- Define what will constitute and event of Default;
- Build in a reasonable Grace Period and/or Cure Period;
- Indicate whether there is a Prepayment Penalty; and
- Include any other terms agreed upon by the parties.
In addition, a Minnesota promissory note should be utilized when the owners of a business lend money to the company with the expectation of being repaid as a loan. This will avoid disputes about whether the money was intended as "paid in capital" to the business rather than a loan.
For S-Corporations, however, the IRS strictly regulates the terms of promissory notes issued to shareholders in order to avoid the inadvertent creation of two classes of stock by granting one of the shareholders what amounts to a preferential right to the company's profits. This can, in some circumstances, run afoul of the general rule that an S-Corporation must have only one class of stock.
Always Read the Fine Print in Your Promissory Note
Whenever you are asked to sign a Minnesota promissory note, you should read it carefully along with all other loan documents. Some promissory notes, especially those prepared by commercial banks, will contain complicated legalese and one-sided provisions. For example, the promissory note might include an "Acceleration Clause" that allows the lender to declare the entire balance due upon default. If possible, make sure that "Default" is defined carefully and that you build in an appropriate "Grace Period" and "Cure Period" before the note can be accelerated. Similarly, make sure the promissory note does not include a "Pre-Payment Penalty."
How Can a Minnesota Promissory Note Lawyer Help?
A Minnesota promissory note is a legal document. Whether you are being asked to sign a promissory note – or you need to prepare a promissory note in connection with your business or personal financial transactions – a qualified business law attorney can help.
The sponsor of this website, Trepanier MacGillis Battina P.A. law firm in Minneapolis, Minnesota, offers a two (2) hour Initial Minnesota Promissory Note Legal Consultation for the flat fee of $500. During this consultation, we will help you through the process of drafting and negotiating the terms of a promissory note. Click here to review the Terms and Conditions of our Initial Legal Consultation Policy.
Craig W. Trepanier, Esq.
Trepanier MacGillis Battina P.A.
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Minneapolis, MN 55415
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The Minnesota corporate law firm of Trepanier MacGillis Battina P.A. in Minneapolis, Minnesota represents corporations, businesses, entrepreneurs, business owners, and individuals who wish to draft a Minnesota promissory note, loan documents, finance documents, start a Minnesota business, or incorporate a Minnesota business, limited liability company (LLC), S-Corporation, S-Corp., Subchapter S Corporation, or other legal entity in the Twin Cities and Greater Minnesota area. Our attorneys represent clients in Minneapolis, St. Paul, St. Cloud, Rochester, Duluth, Albert Lea, Apple Valley, Eagan, Eden Prairie, Edina, Minnetonka, Stillwater, the Twin Cities, and other Minnesota cities (MN) (Minn).