A situation may arise in which, post-default, a borrower will make, and a lender will accept, partial payments on the debt. For instance, the borrower may be buying time until it can either bring the promissory note current or pay it off. The question becomes – what are the consequences of accepting such payments? Mark Line Industries, Inc. v. Murillo Modular Group, Ltd., 2013 U.S. Dist. LEXIS 13434 (N.D. Ind. 2013) (rtclick, save target as for .pdf) addresses this set of circumstances.
The payments. The parties to the Mark Line litigation entered into a promissory note in the principal amount of $743,000, with a maturity date (due date) of November 15, 2009. The Maker/Payor did not pay the balance of the promissory note by the maturity date. However, the Payee/Holder received a partial payment of nearly $80,000 in January, 2010 and applied that payment to the principal and interest due. In April, 2010, via a third party, a second payment in the amount of $317,000 was made to the Holder/Payee. Despite accepting the payments, the Holder/Payee proceeded with its collection case against the Maker/Payor.
The defense. The Maker/Payor’s only argument in the case was that, by accepting the partial payments, the parties modified their agreement to allow the Maker/Payor to continue to make partial payments. Essentially, the Maker/Payor contended that the promissory note had not actually matured and that the Holder/Payee could not claim a default.
Modification rules. In Indiana, a contract modification may be implied from the parties’ conduct. As such, a modification need not be in writing. For a finding of a contract modification, however, the conduct must have differed in some way from the terms of the original contract.
No modification. Importantly, the promissory note in Mark Line contained language in which the parties explicitly agreed that the Holder/Payee could accept partial payments without impacting its ability to demand full payment. The note stated “[a]cceptance of partial payments by Payee will not alter the rights for the remaining balance due under this Note.” By keeping partial payments, the Holder/Payee “was doing exactly what it had negotiated to do in the promissory note.” The Court granted summary judgment to the Holder/Payee accordingly.
One of the takeaways from Mark Line is to check the language of the promissory note when there are questions about a particular party’s rights. I think most promissory notes contain anti-waiver language similar to that in the Mark Line note, but before accepting any partial or post-default payments, check to be sure. Without such language, lenders may open the door for an argument that they have waived the prior payment default.