Monday, November 5, 2012

Promissory Note Lacking Consideration Is Not Enforceable

Terry v. Myers (October 29, 2012)  2012 WL 5307912 (Unpublished)
California Court of Appeal, Second District, Division 3

Relying on the UCC, the Court of Appeal upheld the trial court's decision that a promissory note was unenforceable because it lacked consideration.

Terry and Myers both loaned money to a promoter in a real property transaction that turned out to be a Ponzi scheme.  The promoters required that Myers issue a $50,000 promissory note to Terry, as a condition to investing in the scheme.  When the scheme collapsed, Terry sued Myers on the $50,000 note. 

Myers' defense was that the note lacked consideration, because Myers did not actually borrow any funds  from from Terry.  Terry argued that consideration was presumed.  The court held that Terry had not established that the note was enforceable, and Myers had supplied sufficient evidence that the note lacked consideration to overcome the presumption.

Citing UCC 3-303(b) (specifically, California Commercial Code Section 3303(b)) the Court of Appeal held that negotiable instruments, including a promissory note, are subject to the defense of lack of consideration.  Consideration is defined as "any consideration sufficient to support a simple contract."  UCC 3-303(b). (Cal. Comm. Code Section 3-303(b).)  While a promissory note is presumed to be supported by consideration, that presumption may be overcome.  Myers was able to demonstrate that, under the circumstances of the investment--as to which Myers had no culpability-- he had not received consideration for the note.  Importantly, Myers did not receive $50,000 from Terry for the note; did not benefit from Terry's investment in the scheme; and Terry did not rely on the note to invest in the scheme.  Under these circumstances, the court of appeal held that the trial court had properly relied on basic UCC contract law to determine lack of enforceability of the note.

1 comment:

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