Owe Money on a Promissory Note? Make Sure You’re Paying the Right Person.

A recent case in the Court of Special Appeals of Maryland dealt with the issue of what happens when a debtor makes payments on a promissory note to someone who is not the payee or the agent of the payee. The facts of the case are as follows. In 1998, the debtor, 2019 Brandwine, LLC, entered into a contract to purchase a piece of real property from the owner, Dr. Edward H. Saunders, and executed a promissory note to pay Dr. Saunders monthly payments over a several year period. In 2002, Dr. Saunders died and his long time girlfriend, Francina Mitchell, allegedly told the principal of the debtor that he could make payments to her directly. At this point, Dr. Saunders’ estate had no appointed or designated representatives, and none was appointed for over a year. Before a designated representative of the Estate was appointed, the debtor sent Ms. Mitchell twenty payments of $5,000 each. Ms. Mitchell then placed the money in a joint bank account that she had held with Dr. Saunders, and used some of the money to pay the debts of the Estate and some of the money for her personal expenses.

In making its analysis, the Court held steadfast to the rule of law that a payment on a negotiable instrument must be made to the rightful holder of the negotiable instrument or his/her agent. Just because another individual holds themselves out to be an agent of the holder of a note, or appears to be an agent based on the circumstances, does not mean that a payment made to such a person can act to discharge the original debt.

In this particular case, Ms. Mitchell used a majority of the payments for the benefit of the Estate. The Court ruled that such amounts should be applied to paying off the promissory note, because otherwise the Estate would be unjustly enriched by receiving a “double” payment. However, any sums that Ms. Mitchell used for her personal benefit could not be used to offset the amounts the debtor owed under the promissory note, as Ms. Mitchell was not the legal agent of the Estate, and those amounts were not used for the benefit of the Estate. While the debtor could have pursued those sums in a separate lawsuit against Ms. Mitchell, Ms. Mitchell was not a party to this particular lawsuit.

This case is important to any person currently making payments on a negotiable instrument to someone who is not the original holder of that instrument. The Court suggested that the proper action in this instance would have been for the debtor to place its scheduled payments on the note in an escrow account and wait for a designated representative of the Estate to emerge, rather than simply pay an individual who is associated with the deceased and may or may not be an agent of the Estate.

Mitchell J. Rothenberg
Rothenberg@bowie-jensen.com