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Necessity of Consideration for Valid Promissory Note in Ohio

Author: LegalEase Solutions 

INTRODUCTION

You have asked us to research whether the presence of consideration is necessary to find the existence of a valid, enforceable promissory note in Ohio.  These issues require discussion of:

  1. Applicable Ohio state case law
  2. Ohio

QUESTION PRESENTED

Is consideration essential in order for a Negotiable Instrument to be held valid and enforceable under Ohio law?

BRIEF STATEMENT OF FACTS

Plaintiff sold his business (a motorcycle shop) to the defendant, and also promised to be available to assist defendant with any issues/questions that might arise, for the year following the sale.  Defendant signed a promissory note in favor of the plaintiff for $35,000.

Plaintiff subsequently made himself available to help defendant (appeared at the store every day for 3-4 months, was never utilized, and ultimately told defendant he could call whenever necessary), as promised, but defendant never made use of his services, despite his attempts to render them.

Defendant has paid nothing on the $35,000 note, and is claiming that the note fails for lack of consideration.

DISCUSSION

NEGOTIABLE INSTRUMENT

O.R..C. Ann. 1303.03  (2005)

  • 1303.03. (UCC 3-104) Negotiable instrument

“  (A) Except as provided in divisions (C) and (D) of this section, “negotiable instrument” means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it meets all of the following requirements:

(1) It is payable to bearer or to order at the time it is issued or first comes into possession of a holder.

(2) It is payable on demand or at a definite time.

(3) It does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain any of the following:

(a) An undertaking or power to give, maintain, or protect collateral to secure payment;

(b) An authorization or power to the holder to confess judgment or realize on or dispose of collateral;

(c) A waiver of the benefit of any law intended for the advantage or protection of an obligor.

(B) “Instrument” means a negotiable instrument.

(C) An order that meets all of the requirements of divisions (A)(2) and (3) of this section and otherwise falls within the definition of “check” is a negotiable instrument and a check.

(D) A promise or order other than a check is not an instrument if, at the time it is issued or first comes into possession of a holder, it contains a conspicuous statement, however expressed, to the effect that the promise or order is not negotiable or is not an instrument governed by this chapter.”

Thus, an instrument containing an unconditional promise to pay the bearer either at a definite time or on demand is a negotiable instrument. A negotiable instrument has all the valid ingredients of a contract. Therefore like a contract a negotiable instrument is also required to have valid consideration unless the holder is a holder in due course. A promissory note is one of a class of negotiable instruments defined in O.R.C. 1303.01 et seq.

According to R.C. 1303.36(B), “a plaintiff producing the instrument is entitled to payment if the plaintiff proves entitlement to enforce the instrument under Section 1303.31 of the Revised Code, unless the defendant proves a defense or claim in recoupment.” All a plaintiff need show to recover on a promissory note is a (1) valid signature of the party to be obligated, (2) consideration for the note, and (3) a failure of the maker to establish a valid defense to the note. Schlup v Intermark Int’l. Inc., 1989 Ohio App. LEXIS 1306; 9th Dist. No. 13900 (1989).

A promissory note is considered a contract as a matter of law. Ceroni v Suffield United Church of Christ, 2003 Ohio 5707; 11th Dist. No. 2002-P-0103 (2003). Thus, it is subject to all contract defenses. Betrand v Lax, 2005 Ohio 3261 (2005).

WHO CAN ENFORCE A NEGOTIABLE INSTRUMENT

O.R.C. Ann. 1303.31  (2005)

  • 1303.31. (UCC 3-301) Person entitled to enforce instrument

“(A) “Person entitled to enforce” an instrument means any of the following persons:

  • The holder of the instrument;”

In the case at bar the plaintiff, as the clear holder of the promissory note, is lawfully entitled to have the note enforced and receive full payment from the defendant.

CONSIDERATION

Consideration is an essential ingredient of a negotiable instrument. Consideration, in order to be valid, must be lawful and have some value. Though its value may differ for different people it must have value in the eyes of law. Mere uttering of a promise does not constitute consideration. The act of uttering of promises does not supply the actual consideration for the bargain. It is the content of the promise or the actual anticipated performance which supplies consideration for the bargain. Coca Bottling Corp v Koysdar, 43 Ohio St. 2d 186 (1975).

There must be mutuality of assent and some form of legal detriment arising out of the instrument just as in the case of a valid contract.

O.R.C. Ann. 1303.33  (2005)

  • 1303.33. (UCC 3-303) Value and consideration

“(A) An instrument is issued or transferred for value if any of the following apply:

(1) The instrument is issued or transferred for a promise of performance, to the extent the promise has been performed.

(2) The transferee acquires a security interest or other lien in the instrument other than a lien obtained by judicial proceeding.

(3) The instrument is issued or transferred as payment of, or as security for, an antecedent claim against any person, whether or not the claim is due.

(4) The instrument is issued or transferred in exchange for a negotiable instrument.

(5) The instrument is issued or transferred in exchange for the incurring of an irrevocable obligation to a third party by the person taking the instrument.

(B) “Consideration” means any consideration sufficient to support a simple contract. The drawer or maker of an instrument has a defense if the instrument is issued without consideration. If an instrument is issued for a promise of performance, the issuer has a defense to the extent performance of the promise is due and the promise has not been performed. If an instrument is issued for value as stated in division (A) of this section, the instrument is also issued for consideration.”

In the case at bar the plaintiff not only sold his business to defendant but was also available for assistance to the defendant, initially by paying daily visits to the shop, and later by reaffirming his availability over the phone. The plaintiff has performed his part of the promise. The defendant, however, has not performed his part of the promise, as evidenced by his failure to make any payment on the note. The defendant cannot claim nonperformance/failure of consideration on the part of the plaintiff.  The plaintiff made himself available at all times to render services/assistance. The promissory note cannot in hindsight be made conditional on whether or not the defendant ultimately made use of those services.

SUFFICIENCY OF CONSIDERATION

Although the complete absence of consideration from a contract is sufficient to permit its cancellation, once the presence of such consideration is shown, a court will not inquire into the adequacy of the consideration except in cases of fraud or unfair treatment. Valuable consideration may consist of either a detriment to the promisee or a benefit to the promisor. Software Clearing House v Intrac Inc., 66 Ohio App. 3d 163 (1990).

A promise of one party to refrain from prosecuting or pursuing a legal right to collect a debt which is due and owing is sufficient consideration given in exchange for a promissory note. Farkas v Bernard, 1996 Ohio App. LEXIS 1953 (1996).  In Druso et al v Bank One of Columbus, 124 Ohio App. 3d 125. (1997), an agreement to forbear collecting on an obligation to repay until after the lawsuit was held to constitute sufficient consideration.

Again, absence of consideration to support a contract is sufficient to permit its cancellation, and valuable consideration may be either a detriment to the promisee or a benefit to the promisor.  Nevertheless, courts will not inquire into the adequacy of consideration, unless the absence of consideration was such as to constitute fraud or unfair treatment.  17 Ohio Jurisprudence 3d 512, Contracts, Section 79.

In Mooney v Green, 4 Ohio App. 3d 175 (1982), appellees did not allege fraud or unfair treatment in their answer and did not set forth any such averments with particularity.  Therefore, the court held that it was not sufficient for appellees to attempt to prove inadequacy of consideration, in the absence of fraud. Quoting Cincinnati v St. Paul Mercury Indemn. Co. 165 N.E.2d 798, 799(Ohio App. 1959):

We do not have in this case the question of the right to recover on an implied contract.  This contract was, so far as the matters before us are concerned, properly prepared and signed by the contracting parties.  There is no claim that it was void for want of consideration or mutuality; as a matter of fact, there was consideration, but the appellant now says there was not enough consideration.  In such a situation we believe the general rule of law with respect to the adequacy of consideration must prevail.  That rule is that consideration is not insufficient merely because it is inadequate, and unless there is a showing of fraud, the contract, which the parties have lawfully entered into, is valid.”

In Mooney supra, the court held that, the consideration was presented and is in the record.  Therefore, in the absence of fraud, that consideration was sufficient, as a matter of law, to support the contract and make it binding upon the signatories.   See also, Sun Bank v. Feldman, 1995 Ohio App. LEXIS 2370 (1995).

“When signatures are admitted or established, production of the instrument entitles a holder to recover on it unless the defendant establishes a defense.” O.R.C. 1303.36(B). Among those defenses that may be established to defeat a holder’s claim is a failure of consideration. O.R.C. 1303.44. Failure of consideration is the neglect or refusal of one party to a contract to perform as agreed by both parties at the time they contracted. Toledo Trust Company v Justen, Lucas App. No. CV 85- 0902 (May 23, 1986), unreported. “Valuable consideration within the contractual relationship created by a promissory note may consist of a benefit to the promisor or a loss or detriment to the promisee.” Sur-Gro Plant Food Co. v Morgan , 29 Ohio App. 3d 124, 129 (1985);  SFSA v Professional, 1988 Ohio App. LEXIS 4517 (1988).

In Sur-Gro Plant Food v Morgan et al, 29 Ohio App. 3d 124 (1985), the court discussed the essentials of a valuable consideration.  “Valuable consideration within the contractual relationship created by a promissory note may consist of a benefit to the promisor or a loss or detriment to the promisee. This principle is applicable in a situation where an individual executes a note, payable to another party, for and in behalf of a third party who receives the actual benefit from the payee. Eaton Natl. Bank & Trust Co. v Harmon Preble App. No. CA83-03-007, unreported, at page 10 (Dec. 5, 1983).  Furthermore, in Klamo v Hobbs, Butler App. No. CA83-02-019, unreported (Aug. 10, 1983), the court held that the promise of one party to forbear from prosecuting or pursuing the legal right to collect a debt which is due and owing is sufficient consideration given in exchange for a promissory note. Such was the situation in Sur-Gro, with Sur-Gro agreeing to forbear from collecting the debt owed by Fred Morgan in exchange for the note and mortgage given by Harry and Bertha Morgan.

In the case at bar there is no denying the existence of consideration, nor its sufficiency. The plaintiff, in addition to parting with his business, invested his time by making himself available to the defendant to assist for an entire year following the sale.

ACCEPTANCE OF SIGNATURE

O.R.C. 1303.30 [UCC 3-301] provides that the holder of an instrument may enforce payment of it. However, R.C. 1303.37(A) [UCC 3-401] provides that no person is liable on an instrument unless his signature appears thereon.

When signatures are admitted, production of the instrument entitles the holder to recover on it unless the defendant establishes a defense.  O.R.C. 1303.36(B); Leedy v Ellsworth Construction Co., 9 Ohio App. 2d 1 (1966).  Likewise, the maker of an instrument engages that he will pay the instrument according to its tenor at the time of his engagement.  O.R.C. 1303.49 [UCC 3-413(1)].

Valuable/valid consideration to support the contractual relationship created by a promissory note may consist of either a benefit to the promisor or a loss or detriment to the promisee.  Sur-Gro supra. Furthermore, a signed promissory note constitutes prima facie evidence of the amount due, and a claim of lack of consideration is an affirmative defense which must be proved by a preponderance of the evidence.

In the presence of undisputed evidence that one party suffered a loss or detriment by transferring something of value in exchange for a note, such consideration will be held valid.. William Schlup v Intermark Intl., 1989 Ohio App. LEXIS 1306 (1989).

When the signature on a note is admitted, and the holder produces the note, the holder is entitled to recover unless an affirmative defense is established by a preponderance of the evidence.  Morgan v Dye, 1998 Ohio App. LEXIS 5945 (1998).

Where the signatures on a note are admitted, the production of the instrument entitles the holder to recover unless a defense is established. A signed note constitutes prima facie evidence of the amount due, and a claim of a lack of consideration for such note is an affirmative defense which must be proved by a preponderance of the evidence. Farkas v Bernard, 1996 Ohio App. LEXIS 1953 (1996).

Liability in situations involving negotiable instruments such as promissory notes is established once the instrument is completed and signed.  At that point, the signer or maker engages that he will pay the instrument according to its tenor and his liability thereon becomes prima facie absolute.  See U.C.C. § 187.  Hence, a holder need not establish any further written evidence of an obligation in order to prevail in an action on a promissory note. Chardon Savings Bank v Joe Auto Sales, 1981 Ohio App. LEXIS 14010 (1981).

In the case at bar the plaintiff is in possession of a signed promissory note from the defendant, which constitutes prima facie evidence of the defendant owing him the amount written on the note. The defendant’s claims that consideration is lacking, has failed, or is insufficient consideration cannot succeed.  Therefore, the plaintiff is entitled to full payment on the promissory note.

Some typical defenses to claims of valid consideration have been outlined in the Ohio Revised Code/Uniform Commercial Code:

O.R.C. Ann. 1303.35  (2005)

  • 1303.35. (UCC 3-305) Defenses and claims in recoupment

“(A) Except as stated in division (B) of this section, the right to enforce the obligation of a party to pay an instrument is subject to all of the following:

(1) A defense of the obligor based on any of the following:

(a) Infancy of the obligor to the extent it is a defense to a simple contract;

(b) Duress, lack of legal capacity, or illegality of the transaction that, under other law, nullifies the obligation of the obligor;

(c) Fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms;

(d) Discharge of the obligor in insolvency proceedings.

(2) A defense of the obligor set forth in a section of this chapter or a defense of the obligor that would be available if the person entitled to enforce the instrument were enforcing a right to payment under a simple contract;”

None of these defenses appear available to assist defendant in his attempt to avoid liability on the promissory note.  The plaintiff sold his business to the defendant, promised to be available to assist in the course of the business for a term of one year after the sale, and diligently made himself available for the same purpose.  The fact that the defendant never made use of those services is immaterial.

Defendant is not discharged from his obligation to pay the plaintiff pursuant to the terms of the signed promissory note.  The consideration attendant to this agreement is valid, and the note is enforceable by the plaintiff.

CONCLUSION

A promissory note can be said to be governed by the same rules of law that govern the essential requirements of a contract.  Thus, consideration is an essential requirement of a promissory note just as with any other contractual situation.  Consideration, in order to be valid, need not necessarily be something measurable in monetary units, though it should represent something of value.  Courts have held the promise to forbear certain legal rights to be valid consideration.  Any thing or act that requires investment of time, money, efforts or detriment of some sort is considered valid consideration for a promissory note.  In the instant matter, the sale of the plaintiffs’ business, his subsequent promise to be available for service or assistance, and his overt and diligent attempts to render that service, all amount to valid consideration.  The plaintiff is entitled to payment on the promissory note, and the defendant cannot elude his obligation to pay.