Tom is out of luck.

The delivery of a series of postdated checks to a creditor usually is evidence that the debtor admits there was no problem in the service rendered or product received at the time of the execution of the checks.

That's the good part.

The bad part, as this case illustrates, is that if the second check is returned unpaid by the bank because of insufficient funds or because the account has been closed, you are not going to be able to sue on all of the checks.

You could sue on the one check that was returned unpaid. But to sue for the balance due, you would have to wait until the last check is returned unpaid. (A suit may be started on the underlying debt for services rendered, but the services would have to be proven, and the debtor would have a wider latitude to assert defenses.)

A better way to protect your interest would be to use promissory notes. While these notes are quite similar to checks and are negotiable in the same sense that a check is negotiable, they have some distinct advantages. In each note you can provide that in the event one note is not paid on, all of the notes will mature and become due and payable.

Thus, under the above circumstances, the moment the second note was returned unpaid by the bank, you would have the right to accelerate all the remaining notes and sue immediately on the $6,500 balance.

Attorney's fees can be provided for in the notes, enabling you to collect a certain percentage of the face amount of the balance due in the event the matter is referred to an attorney. In those states that do not allow a fixed percentage, reasonable attorney fees may be allowed. Forms for the notes can be obtained in most stationery stores or from your attorney.

Promissory notes can be prepared in a series, with each maturing, for example, on the first day of the month. Or they can be in the form of a single note (called an installment payment note) providing for a series of payments. Business loans from banks payable on a monthly or a quarterly basis are typically executed on installment payment notes.

For more on promissory notes, check out our article 8 Ways to Strengthen a Promissory Note, which we have on open access.

Thanks to by Arthur Winston, Attorney at Law, for this analysis.

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