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Promissory Note
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I had some shares in the privately-held company I worked for. Per the shareholders’ agreement, I had to sell the shares back to the company when I left. Instead of paying me the money for the shares, the company gave me a promissory note saying they would pay me in 3 years and pay a monthly interest to me until the principal was paid off.
A few months ago, they told me to sign a subordination agreement, to subordinate my loan to the company’s bank's loan. Of course, I didn’t sign away my rights via this subordination agreement. The company’s lawyer just sent me a letter saying that, since I did not sign the subordination agreement, the promissory note is unauthorized and cannot be honored.
I can't believe they can do this, since they owe me the money. What are my options?
Michael Lewis Van CiseEstate Planning AttorneyAtlanta, GA ·
First, you should review the shareholders' agreement to determine 1) whether the shareholders' agreement requires any promissory note to be subordinated to company loans and 2) whether the form or terms of the promissory note is specified in the shareholders' agreement. Even if you are not specifically required to subordinate your promissory note to new loans obtained by the company, the shareholders' agreement could require other, more broadly defined, actions which could be construed to require you to subordinate the promissory note.
Second, review the promissory note you received. Determine whether or not the promissory note requires you to sign agreements subordinating the promissory note to any new loans obtained by the company.
Third, if you do not see any language that would seem to require you to subordinate your promissory note to company loans, you may want to wait to see if the company continues to make payments on the promissory note. The mere fact that their attorney sent you the letter probably does not put them in default on the promissory note or in any way breach any agreement between the company and you.
However, once the company is late with a payment (see the terms of the promissory note to see when this occurs) then the company is in default on the promissory note and you have remedies either under state law or under the terms of the promissory note. You should have some mechanism to enforce the note. I recommend seeking legal counsel from someone licensed in Virginia, or if the company is in another state, counsel licensed to practice in the state in which the company is located. If the company operates in multiple states, the state of incorporation or headquarters may be the best state in which to bring suit. In addition, the shareholder's agreement or promissory note may contain a "choice of law" provision or a jurisdictional provision that specifies where lawsuits must be filed and/or which state's law governs.
In sum, until the company defaults on the note or becomes in violation of its terms or the terms of the shareholder's agreement, you may not be able to do anything. Once the company defaults, either by refusing to pay or being late with a payment, at that point you likely have an enforceable right on which you can sue the company to enforce the promissory note. Sometimes the terms of the note even specify that you can recover attorneys fees and costs for collecting on the note.
A second option, if you are permitted to transfer/assign the note to third parties, would be to sell the note to get some cash now and that third-party would step into your shoes. If you think the company is good for the money (i.e. the company is solvent and likely to remain in business for the duration of the 3 years which the promissory note is paid over) it may be better to keep the note and sue the company to enforce the promissory note.
DISCLAIMER: THIS COMMUNICATION DOES NOT CREATE AN ATTORNEY-CLIENT RELATIONSHIP. I AM LICENSED IN GEORGIA ONLY. THE ABOVE IS FOR INFORMATION AND EDUCATIONAL PURPOSES ONLY.
