What are my rights if I entered into a promissory note agreement with a privately held corporation and it has defaulted?

I loaned them $350K. They were to pay me back $800,000 in 6 months. They defaulted on the payment. I have a personal guarantee from the majority shareholder of the company, however, I also believe they may not have the funds to pay me back at this time. Can I add penalties for each day that the note is in default? If so, how would that be accomplished? What other options do I have?

Asked on November 19, 2014 under Business Law, California

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 6 years ago | Contributor

1) Your options to recover money are to sue the company and any person (e.g. the majority shareholder) who gave you a personal guaranty. As you state, however, if they don't have funds, it may be difficult or impossible to recover the money--though if either the corporation or the personal guarantor owns property, you may be able, if sue them and win, to put a lien on it.

2) You cannot add penalties (e.g. late penalties) after the fact--only if there we4re in the promissory note which the other party signed. You are limited to recovering any amounts--and only those amounts--list in the note.

3) You may have a problem in that the deal you describe--you are talking about tripling (and more) your money in 6 months; that is a more than 400% annual rate of return on your promissory note. That rate is so high it may be illegal--it may be a violation of your state's usury laws, and so may be unenforceable.

Furthermore, that rate is literally "too good to be true"--NOBODY offers a 400%+ annual return. There is a high likelihood that this was a scam; and if it was, you can be sure that the other party has made sure there is no way you can recover money from them.

You should discuss this situation with an attorney in detail--and be prepared for possible bad news.


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