Welcome to Scutt Law, PLLC’s primer on promissory notes made in Texas. First, what is a promissory note? A promissory note is a signed paper promising to pay another a certain sum of money. In order to be legitimate and acceptable as a proper promissory note, the writing MUST contain the following elements:

1. UNCONDITIONAL: There cannot be any conditions to payment. For instance, “I promise to pay if it rains on June 15th.” That statement makes the payment conditional on rain on June 15th.

2. PROMISE OR ORDER TO PAY: There must be a written undertaking to pay money that is signed by the person undertaking to pay. For example, “I, John Doe, promise to pay to the order of Jane Doe one thousand dollars.”

3. TO PAY A FIXED AMOUNT OF MONEY: The principal amount due under the promissory note must be fixed. The amount of interest due does not need to be fixed. However, the interest rate must not be unconscionable, or it may violate the Texas Usury Laws, which are state laws that specify the maximum interest rate that can be charged before it becomes unlawful.

4. PAYABLE TO ORDER OR BEARER: The promissory note must be payable to order or to bearer. For instance, “Pay to the order of Jane Doe,” or “I promise to pay to the order of bearer”. A bearer is any person who may present the note to the person who made it (“the maker”) for payment.

5. PAYABLE ON DEMAND OR AT A DEFINITE TIME: The note is payable on demand if it states that it is payable “on demand” or “at sight”, or if it does not state a time for payment. This means that it is payable at the will of the holder of the note. The note is payable at a definite time if it specifies a specific date for payment, or if it states a specific period of time after sight, such as “120 days after presentment for payment”. However, as addressed above, made sure that there are no conditions on payment.

6. DOES NOT STATE ANY UNAUTHORIZED UNDERTAKING OR INSTRUCTIONS: Finally, the Texas Business & Commerce Code states that a promissory note must not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money.

Who uses promissory notes? Banks often use them, and people use them in day-to-day transactions (such as when family members or friends loan money to one another that must be repaid). Promissory notes can even be used in Texas as capital contributions to Limited Liability Companies (“LLC”s) by LLC members.

Why must a promissory note contain the elements describe above? Because it is then what is called a “negotiable instrument”. A negotiable instrument allows the holder to transfer that instrument (here, a promissory note) in the same way that cash can be transferred. Therefore, if it is “negotiable”, and adheres strictly to the elements listed above, a promissory is a very useful and powerful instrument. This is because it is a safe and convenient substitute for cash in certain situations.

How is a promissory note a substitute for cash? If the note is transferred to another holder in a special way (if it is “negotiated”), the new holder can enforce the note against the maker of the note, and in that way, it is like cash. The process of negotiation is a topic for another primer, but it is important to understand how a promissory note can become a negotiable instrument in the first place.

If you are interested in having a promissory note drafted, or if you have concerns involving one that has already been executed, you should contact an attorney for advice about your specific situation. It is important to consult an attorney to make sure your rights are protected.

*Disclaimer: The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.