Question

Irma issued a negotiable promissory note to her Certified Public Accountant (CPA) in return for the CPA’s promise to prepare and file her business taxes.  The CPA never prepared for filed Irma’s business taxes, but quickly negotiated the note to Ann, a holder in due course.

Meanwhile, Ann and Mary were involved in business negotiations and Ann offered to purchase business equipment from Mary. Ann offered, as part payment for the business equipment, the note issued by Irma.

By coincidence, Mary knew both Irma and the CPA, and the facts concerning the note and the unperformed accounting services. Despite this, Mary accepted a negotiation of the note from Ann.

Mary presented Irma with the promissory note and asked for payment on the note. Irma refused to pay. Mary eventually sued Irma to collect. What is the probable outcome?

Answer 1

Promissory notes are often issued in the course of business arrangements and financial transactions to record indebtedness and financial obligations

A promissory note is defined as a "written document in which a borrower agrees (promises) to pay back money to a lender according to specified terms". When the parties are in agreement and sign the promissory note, it becomes a legally binding instrument that obligates both parties to perform according to their agreement.

It needs to be noted that promissory note becomes payable only when all the terms of the note are complied with and then it is presented to the issuer.

In the existing case, Irma had issued promissory note to CPA with a condition to prepare and file her business taxes. Since CPA did not adhere to those requirements. The promissory note was never required to be paid by Irma as the service has not been given to her.

Further, CPA had passed the promissory note to get it encashed from Ann. There is a fault made by CPA here to take undue advantage.

Since Mary already knew the fact that CPA has not abided by the terms and continued to accept the promissory note, Irma is no where liable to pay the sum due to Mary. Mary in best case should recover her money from CPA as she knows him with help of Irma and Ann by filing a legal proceeding in the court as a promissory note is a legally binding instrument giving the power to sue in the court.