An entrepreneur seeks to borrow
$2,000,000 from a lender to finance a new business. The debt is to be evidenced
by a promissory note. Because the entrepreneur has a limited credit history,
the lender requires that the entrepreneur find someone to co-sign the note. The
entrepreneur persuades a friend to co-sign, and the loan is completed. The note
requires repayment of “principal plus all agreed-upon interest” after one year.
Due to the lender’s oversight, the note does not specify the exact interest
rate. The note does provide that the entrepreneur and the co-signer are jointly
and severally liable for the debt.
The note also contains a provision allowing
the lender to sell the note to a third party, with notice to the entrepreneur. A
few months after the note is executed, the lender sends the following email to
the entrepreneur: “I am preparing to sell the note to a banker in the next two
weeks. I will keep you updated.” A week
later, a banker calls the entrepreneur, expressing interest in purchasing the
note and asking questions about the entrepreneur’s business. The entrepreneur
hears nothing further about the sale, but assumes that the note has been sold.
At the end of the one-year term, the
lender demands payment from the entrepreneur in the amount of $2,200,000, which
represents the principal loan amount plus 10 percent interest. The entrepreneur
refuses to pay, believing that the lender has sold the note to the banker, and is
thus not entitled to payment. The entrepreneur also believes that the interest
rate was verbally set at five percent, not 10 percent, which would require
payment of only $2,100,000.
The lender files suit against the
entrepreneur in federal district court, seeking to enforce the note. The court
has both personal and subject-matter jurisdiction. Under applicable law, the
elements of the lender’s claim are: (1) the entrepreneur signed the note, (2)
the lender owns the note, and (3) the entrepreneur owes the lender $2,000,000
in principal plus $200,000 in interest under the note’s terms. In response, the
entrepreneur contends that (1) the lender no longer owns the note, and (2) in
any event, the interest rate was five percent, which means that the most the
lender could recover would be $2,000,000 in principal plus $100,000 in
After discovery, and before trial, the
lender files a motion for summary judgment. The judge denies the motion,
finding that there are genuine issues of material fact regarding the ownership
of the note and regarding the interest rate. The case is tried to a jury, and
both sides present evidence on these issues. The jury finds that the lender
does in fact own the note. The jury also finds that the parties verbally agreed
to set the interest rate at five percent. The jury therefore awards the lender
$2,100,000, and the judge enters judgment on the verdict.
After the time to appeal this judgment
passes, the lender then files suit against the co-signer in federal district
court. The lender again alleges that the lender owns the note, and that the
interest rate is 10 percent. The co-signer responds that the lender sold the
note, and that the interest rate is five percent. In addition, the co-signer
claims that the entrepreneur misrepresented the transaction, which should
relieve the co-signer of any obligation under the note. Assume that the second suit
is not barred by claim preclusion, also known as res judicata. Assume further that applicable law does not regard a co-signer
on a note as being in privity with the primary obligor.
- Before trial in the first lawsuit, could the lender have appealed the judge’s denial of the lender’s motion for summary judgment? Explain.
- In the second lawsuit, can the lender keep the co-signer from disputing that the lender owns the note? Explain.
- In the second lawsuit, can the co-signer keep the lender from disputing that the interest rate is five percent? Explain.