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Dimitry K., Esq.
Dimitry K., Esq., Attorney
Category: Business Law
Satisfied Customers: 41220
Experience:  Run my own successful business/contract law practice.
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I have two promissory notes that are in default. However, there

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I have two promissory notes that are in default. However, there is more to the story. The money was loaned to an individual who represented that they would be repaid at 15% interest every six months. The notes were rolled over including the interest at the end of each six month period until a $250,000 loan grew to approximately $875,000. As it turns out, the borrower defaults because the third party to the transaction, the end user of the funds, was not legitimate and, as it turns out, was running a ponzi scheme. My borrower now claims that due to the fraud he must default on the promissory note. What legal rights do I have? Does it matter if the end user was duped now I'm duped?
Submitted: 7 years ago.
Category: Business Law
Expert:  Dimitry K., Esq. replied 7 years ago.
Thank you for the question.

I just want to make this clear:

You = A
Borrower = B
Note User = C

A loaned to B without knowledge of C. B used the funds or provided the funds for C. C defaulted. Now B defaults and blames C, and refuses to pay A. Is that correct?

My apologies on the symbols, I just want to make sure I have all the parties properly identified.


Dimitry Alexander Kaplun, Esq.
Customer: replied 7 years ago.
Yes, you are correct. A was told by B that C needed funds to transact a merchandising arrangement with a clothing manufacture and NASCAR. C tells B that the whole thing was a hoax, a ponzi scheme. Now B tells A that C will not pay B so B defaults on the promissory note with A.
Expert:  Dimitry K., Esq. replied 7 years ago.
Hmmm. That may be problem. Here's why:

1. If B can prove that A knew of C's need, then B can argue that she was just the middle-man and the ultimate holder/user of the funds was C, regardless in whose name the note actually existed. As such it would be C who would be responsible to A, as A knew that the money was never intended for B.

2. However most of the time, B remains fully liable for the debt, as the breach to her does not concern the original party to the contract, A. In that case A has the right to bring suit against B (B can attach or subrogate her claim to C but that is B's issue and not A's) and demand payment. A can demand interest, attorney fees, court costs, and "acceleration" of the note if it has had a payout period once the note gets defaulted.

I hope I was able to assist you.


Dimitry Alexander Kaplun, Esq.
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