Can a Promissory Note Be Voided for Fraud By Filing a Release of Obligation?

Holders of promissory notes can release them for any reason. Promissory notes can also be legally abrogated, or nullified, for several reasons, including fraud. While filing a release of obligation document releases the promissory note maker from any future responsibility or liability for the debt, abrogation of the promissory note for reasons such as fraud do not.

Promissory Note

A promissory note is a document that states that an individual or business promises to pay another individual or business a certain amount of money. Personal checks are simple forms of promissory notes. Other promissory notes, such as treasury bonds, are investments. An investor buys a bond at a discounted price and then after the bond matures, the treasury will pay the investor the face value of the bond upon its redemption.

Some promissory notes, though, are debts such as loans or IOUs. Companies or organizations that need to raise money will sell promissory notes to investors and promise to pay the investor a fixed return on the investment plus annual interest.

Fraud

At its most basic level, fraud is type of deception. If a fraud has been committed, then someone has been misled or lied to. According to the U.S. Securities and Exchange Commission, the problem of fraudulent promissory notes is rampant. In typical cases of fraud, independent life insurance agents are persuaded by a fraudster to sell their customers promissory notes. The fraudster agrees to give the agent a 20 percent to 30 percent commission on each sale. Customers purchase the promissory notes hoping to earn a high return with no risk. Some promissory notes falsely say they are insured or guaranteed, but since the customer knows the agent, the customer usually does not question this. The fraudster then either runs off with all the money or pays the agent his commission and absconds with the rest. Sometimes, fraudsters will implement Ponzi schemes where revenue from new sales of promissory notes is used to pay interest on older promissory notes. The end result, though, is that the customer never gets his investment back.

Release of Obligation

A release of obligation is a legal document that cancels or annuls an agreement. It is used in the case of real estate transactions where both the buyer and seller agree to terminate the sale and purchase of a property. It is also used by divorced couples, where, for instance, an ex-spouse receiving alimony releases the ex-spouse who had been paying the alimony from his obligation to pay any future alimony.

A release of obligation is also used to abrogate promissory notes. In the case of promissory notes, there does not need to be mutual consent. The party who holds the promissory note may at any point and for any reason release the maker of the note from his obligation to repay the debt. A release of obligation might happen, for instance, in the case of an adult child who borrowed money from a parent via a promissory note, and the parent decides to release the child from his obligation to make repayment.

Can a Promissory Note Be Voided for Fraud By Filing a Release of Obligation?

A promissory note cannot be voided for fraud by filing a release of obligation. A release of obligation does not imply anything other than the holder of the promissory note wishes that the debtor be released from his debt. While promissory notes will become null and void if fraud is discovered, that does not mean that the fraudster is off the hook. The investor has every right to file criminal charges against the fraudster, and, depending upon the type of promissory note, the local attorney general and/or the Securities and Exchange Commission might file their own charges against the fraudster.