Mike McCluskey, a litigator at McKenzie Lake Lawyers in Guelph has been noticing an unsettling trend over the past year which he believes has been influenced by the precarious financial situation many in the community find themselves in.
Promises of high interest returns are enticing people to take a gamble by lending large sums of money backed only by an unsecured promissory note. Mike McCluskey is raising the alarm on this troubling trend. “I’m seeing a massive amount of breached promissory notes, to the point where I would refer to it as a pandemic of breached promissory notes. It tells me that the reason I’m getting a lot of phone calls right now from lenders in a panic is because people don’t understand what a promissory note is.”
What is a Promissory Note?
A Promissory Note is essentially a formal “I Owe You” (IOU) between a borrower and a lender where the borrower promises to repay a specified amount of money to the lender. For example, a lender gives the borrower $100,000 for the term of a year and the lender will receive $2,000 a month in interest and then on a specific date the $100,000 principle will be paid back.
McCluskey says, “That’s how they should work but what is happening a lot lately is that when the lender asks for their $100,000 back at the end of the term, the borrower says, they don’t have it.” Promissory notes are often unsecured, meaning there is no tangible asset like a house, to back the promise. While a promissory note is a legal contract, enforcing it can be difficult if the borrower is broke, or has disappeared. Now, these distressed lenders are turning to Mike McCluskey, asking, “How can we get our money back.”
As McCluskey says, “There is a reason why banks don’t typically provide loans without it being secured, typically by a mortgage against your house. Be like a bank, don’t lend money without it being secured, and a promissory note is not good security.”
It's risky business
Lenders often see dollar signs when high rates of return are dangled before them. McCluskey says, “People are more trusting than they should be with unsecured money that they’re loaning, and I understand that they may want to take some aggressive investment strategies to ensure they’re not falling behind.” If a borrower is offering a 25% return on an investment and the bank is offering 3% on a Guaranteed Investment Certificate many people would choose the higher return. But McCluskey points out, “You will get your money back with a GIC. You may not get your money back when you do a private investment secured by a promissory note.”
Along with due diligence, promissory notes can work between trusted parties, however, McCluskey warns, “An unsecured promissory note is worth about the same as a briefcase full of IOUs similar to what Jim Carrey has in Dumb and Dumber. That’s pretty much the value of a promissory note if the borrower defaults. You don’t want to trade your hard-earned money for a pile of empty promises.”
People often tell McCluskey that the reason they loaned the money is because the borrowers are really nice and seemed trusting. McCluskey tells them, “If they are truly as nice as they appear, they should understand your desire to secure your investment beyond a promissory note and work with you to make that happen.”
Don’t wait, call a lawyer
McKenzie Lake Lawyers has been receiving a flood of calls recently from private lenders who are in a full-blown panic because the payments are late or not being made at all.
Don’t sit back and hope for the best. There are various strategies a lawyer can use to recover the money. McCluskey stresses, “Call a lawyer, because behind the scenes, there is likely a pool of money being depleted by other lenders. Those lenders who take immediate action may be able to receive some of the money before it’s gone.
It's like the Titanic
At the first sign of a delayed or missed payment call a lawyer and put the borrower on notice that if payment is not received in a couple of days the matter will go to a litigation lawyer. McCluskey says, “You don’t want to be waiting. You want to be one of the first ones to get in that lifeboat and get off the sinking ship.”
Some people may fear reaching out to a lawyer because they don’t understand the process, are worried it’s too expensive, or wondering if it’s worth chasing the money. But McCluskey assures people, “Most lawyers, me included, will give you a budget and be very transparent about the fees, the process, and the general strategy, including your chances of collection. Never let your fear of the unknown prevent you from contacting a lawyer.”
Most borrowers are not bad people but giving them the benefit of the doubt and hoping things will change is not the right strategy. McCluskey says it’s like a snowball rolling downhill, “If you can stop it before it turns into an avalanche, you may be able to rectify the situation. Before you get to the panic stage, you should be contacting our office to say you don’t like the trend you’re seeing and find out what we can do about it.”
You should also speak to a lawyer before entering into an agreement. A lawyer will look at what is being funded, the project’s appraised value, and what how much equity is tied up with other lenders. McCluskey stresses, “Ensure you’re getting independent legal advice and a secured loan, and if there is no clear roadmap as to what happens if the borrower does not pay, then it’s a bad deal.”
Very often the lender is an older person who is looking to do something smart with their savings and when they find out their savings are gone, they now feel incredible shame. Mike McCluskey has some encouraging words, “If you’ve made such an investment, don’t feel shame, let’s get to work to try to get your money back or recoup what we can to minimize the damage.”
Contact Mike McCluskey at [email protected] (519) 826-4333 Ext 7604. Or visit their website.