How is a Promissory Note Different from a Forbearance Agreement?

Under Texas law, a promissory note “is a written unconditional promise to pay another a certain sum of money at a certain time.” (Edlund v. Bounds, 842 S.W.2d 719, 724 (Tex.App. —Dallas 1992, no writ). The time need not be a specific date, but it must be a time that will certainly arrive. For instance, a note payable on demand or “on or before” a specified date may constitute a promissory note. A promissory note is also a contract subject to the rules applicable to interpreting contracts. DeClaire v. G & B Mcintosh Family Ltd. P’ship., 260 S.W.3d 34, 44 (Tex.App.—Houston [1 Dist.] 2008, no pet.).

The difference between a promissory note and a forbearance agreement is that a forbearance agreement is an agreement not to enforce rights you already have.

A forbearance agreement is an agreement typically between a creditor and a debtor whereby the creditor agrees to forgo some legal right in return for concessions from a debtor who is in default. Swilley v. City Inv. Co., 288 S.W. 485, 486 (Tex.Civ.App.—Galveston 1926, writ ref’d) (explaining that forbearance of a legal right is sufficient consideration for a promise of guaranty). A forbearance agreement is a powerful tool for creditors who face debtors in or near default on their obligations, and often should be used in lieu of entering into a promissory note.

In a typical forbearance agreement, a creditor will agree not to sue on a balance due in exchange for certain concessions by the debtor, such as an increased interest rate, as well as various admissions that can prove invaluable to a creditor should the debtor fail to fulfill the terms of the agreement.

It may also contain the remaining balance on the indebtedness, and an admission that the debtor is in default. A creditor might also receive an increased interest rate and a waiver of various notice requirements in the event of a future default. The agreement typically will also contain a provision that allows the creditor to reassert the rights that have been forgone under the agreement should the borrower fail to make a payment, or fail to fulfill any obligation of the agreement by a certain date. If this occurs, the debtor’s signed admissions concerning the original note could prove invaluable in a lawsuit.

Prepared by Chris Patterson. Reviewed and revised by Marc L. Lippincott.

Austin Lawyer: "Produce the Note" Claims in Foreclosure

There have been many news reports making the rounds about ways to avoid foreclosure, and many Texas residents are believing such news reports to be a "magic bullet" to stave off foreclosure. One needs to realize that different states have different laws related to foreclosure of real estate, particularly residential real estate foreclosures, and one should not get their legal advice from such news reports.

So, what is all of this "produce the note" craze? What does it mean?

The basics of the idea is, when a debtor is desperate and their house is ready to be foreclosed upon, some lawyers (usually in other states) tell homeowners to request that the bank "produce the promissory note" related to the transaction. As many real estate lenders have acquired the promissory notes through sometimes hundreds of large portfolio transfers, often these are done electronically and the original closing paperwork gets lost in the mix, or so the theory goes. So if you need an extra two or three months to get finances back in order, so sayeth the news reports, this will provide the debtor with the time to do just this while the lender "scrambles" to find the promissory note signed at closing.

Sounds great, right? We never have to pay our mortgages again! Hooray!

Well, in Texas, as you can well imagine, it is not nearly that simple. Under Texas law, lenders hardly ever file a lawsuit to foreclose on residential real estate, choosing instead to do what's called a "non-judicial foreclosure". This is a procedure whereby notices are mailed and posted and ultimately the lender holds an auction on the courthouse steps on the First Tuesday of a month to foreclose their interest in the real estate and filing what's called a "Trustee's deed" (often a Substitute Trustee's Deed). Which means, unless the DEBTOR files a lawsuit PRIOR to the foreclosure and auction sale, there is never a time to demand that a lender "produce the note". Which means it ain't no magic bullet without litigation.

The other problem with the buy time theory is that by the time the foreclosure sale is posted, usually a lender has "accelerated" the note. Meaning, the debtor does not just owe the lender the three missed $1200 house payments. Now the debtor actually owes the lender the ENTIRE balance of the promissory note. So if a debtor waits until the foreclosure sale to try to block all of these things, they are usually not in a position to come up with the, say, $187,000 owed on the Note in order to stop foreclosure. Three months delay asking the lender to produce the note may not even matter, even if the debtor could then make all of their payments current.

Now, this is not to say that there are no ways to delay even a proper lender from foreclosing on a property. Bankruptcy filings and litigation can be used to delay foreclosure proceedings, as every lender knows. In fact, if there are legitimate reasons to believe that the lender has misapplied or failed to apply payments, or if there are other reasons to challenge the acceleration of the note (due to waiver or unlawful behavior by the lender), it is a very effective tool necessary to sort through these issues.

In such situations, a lawyer representing a homeowner, or the homeowner pro se (although this is not advised, but may be a financial reality), can seek injunctions against acceleration and foreclosure, as well as seek discovery that can be very time consuming and costly for the lender which may lead to settlement by negotiation. But they will first need to get a judge to so order prior to foreclosure in order for the note production to be relevant in most circumstances.

If there is litigation, certainly part of this process will be to determine by what authority the lender seeks to foreclose its interest, and burdens will be on the lender to prove a contract exists and they are the lawful holder of said note contract and security interest in the form of a deed of trust. When there have been hundreds of transfers, this is certainly more time consuming and difficult for a lender. Unfortunately for the "magic bullet-ers" out there, often these deeds of trusts securing the note and transfers are done in the real property records and it is simply a matter of getting the documents from the county clerk's office as certified copies. Certified copies of public records are usually automatically considered authentic under Texas Rules of Evidence 901(7) and are exempt from hearsay typically under Texas Rules of Evidence 803(14).

Also, as far as the Note goes, the lender does not need to have the original signature in pen ink to foreclose or get summary judgment. To prevail on a motion for summary judgment to enforce a promissory note, a plaintiff/lender must only establish that (1) a note exists, (2) the plaintiff/lender is the legal owner and holder of the note, (3) the defendant is the maker of the note, and (4) a certain balance is due and owing on the note. Scott v. Commercial Servs. of Perry, Inc., 121 S.W.3d 26, 29 (Tex. App.—Tyler 2003, pet. denied). If no genuine issue of material fact exists as to any of these elements, the plaintiff is entitled to summary judgment as a matter of law. See Tex. R. Civ. P. 166a(c). The lender can establish existence of the notes by attaching true and correct copies of the notes as exhibits to its motion and filing a sworn affidavit in verification of the copies. A photocopy of a promissory note, attached to an affidavit in which the affiant swears that the photocopy is a true and correct copy of the original note, is proper summary judgment proof which establishes the existence of the note. Johnson, 610 S.W.2d 143; Town N. Nat'l Bank v. Broaddus, 569 S.W.2d 489, 490 (Tex. 1978); Blankenship v. Robins, 899 S.W.2d 236, 238 (Tex. App.—Houston [14th Dist.] 1994, no writ). If the documents show that the plaintiff is the legal owner of the note and that a balance is owed, then the debtor must raise a fact issue as to one of the elements, and must do so by sworn testimony (and verified pleadings).

It is our guess that the lawyers discussing the "produce the note" claims do not practice in Texas. If you are an Austin or Texas lender with a "produce the note" debtor, give us a call at 512-472-2300.