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An entrepreneur seeks to borrow $2,000,000 from a lender to finance a new business. The debt is to be evidenced by a promissory note. Because the entrepreneur has a limited credit history, the lender requires that the entrepreneur find someone to co-sign the note. The entrepreneur persuades a friend to co-sign, and the loan is completed. The note requires repayment of “principal plus all agreed-upon interest” after one year. Due to the lender’s oversight, the note does not specify the exact interest rate. The note does provide that the entrepreneur and the co-signer are jointly and severally liable for the debt.
The note also contains a provision allowing the lender to sell the note to a third party, with notice to the entrepreneur. A few months after the note is executed, the lender sends the following email to the entrepreneur: “I am preparing to sell the note to a banker in the next two weeks. I will keep you updated.” A week later, a banker calls the entrepreneur, expressing interest in purchasing the note and asking questions about the entrepreneur’s business. The entrepreneur hears nothing further about the sale, but assumes that the note has been sold.
At the end of the one-year term, the lender demands payment from the entrepreneur in the amount of $2,200,000, which represents the principal loan amount plus 10 percent interest. The entrepreneur refuses to pay, believing that the lender has sold the note to the banker, and is thus not entitled to payment. The entrepreneur also believes that the interest rate was verbally set at five percent, not 10 percent, which would require payment of only $2,100,000.
The lender files suit against the entrepreneur in federal district court, seeking to enforce the note. The court has both personal and subject-matter jurisdiction. Under applicable law, the elements of the lender’s claim are: (1) the entrepreneur signed the note, (2) the lender owns the note, and (3) the entrepreneur owes the lender $2,000,000 in principal plus $200,000 in interest under the note’s terms. In response, the entrepreneur contends that (1) the lender no longer owns the note, and (2) in any event, the interest rate was five percent, which means that the most the lender could recover would be $2,000,000 in principal plus $100,000 in interest.
After discovery, and before trial, the lender files a motion for summary judgment. The judge denies the motion, finding that there are genuine issues of material fact regarding the ownership of the note and regarding the interest rate. The case is tried to a jury, and both sides present evidence on these issues. The jury finds that the lender does in fact own the note. The jury also finds that the parties verbally agreed to set the interest rate at five percent. The jury therefore awards the lender $2,100,000, and the judge enters judgment on the verdict.
After the time to appeal this judgment passes, the lender then files suit against the co-signer in federal district court. The lender again alleges that the lender owns the note, and that the interest rate is 10 percent. The co-signer responds that the lender sold the note, and that the interest rate is five percent. In addition, the co-signer claims that the entrepreneur misrepresented the transaction, which should relieve the co-signer of any obligation under the note. Assume that the second suit is not barred by claim preclusion, also known as res judicata. Assume further that applicable law does not regard a co-signer on a note as being in privity with the primary obligor.