The Importance of Documenting Business Agreements

In advising business clients, I find they often have “understandings” with people they do business with that are not completely or accurately documented in writing. The parties involved often “agree” to extend deadlines or change terms and never update (or document at all) these agreements, or sometimes they just don’t want to confront the other party when the terms of the agreement are not being met.

The South Dakota Supreme Court recently issued an opinion that highlights the importance of documenting business transactions and understandings. In Mealy v. Prins et al, 2019 S.D. 57, Loretta and Terrence Mealy and their corporation loaned nearly $1.2 million to Bruce and Corrine Prins for the operation of the Prinses’ guest and game ranch business. Over the course of nearly ten years, the Prinses executed 55 different promissory notes for the loans made by Mealys to Prinses. Some notes had due dates and some were due on demand; however the Prinses did not make payments on any of the notes and Mealys did not immediately attempt to enforce the debts.

The Court found the six year statute of limitations on the enforcement of promissory notes with specific due dates (“time notes” under SDCL 57A-3-108(b)) was applicable. Thus, Mealys’ delay in attempting to collect on the notes, rendered 48 of the 55 promissory notes unenforceable, resulting in recovery by the Mealys of less than 20% of the amount originally loaned to the Prinses.

The Court’s opinion does not get into the details of the history of the relationship between the parties, but one might guess that the relationship did not immediately turn adversarial – the Mealys continued to make additional loans to the Prinses for several years, although no payments were being made. Perhaps the Mealys verbally “agreed” to extend the due dates or perhaps they simply failed to raise the issue with the Prinses, thinking they were protected by the previously-executed promissory notes. Once the due dates were reached on various promissory notes, the notes should and could have been reviewed. If the Mealys and Prinses were still on good terms, an agreement could have been entered into to protect the Mealys’ interests by agreeing to extend the due dates of the notes in exchange for the continued lending, thus protecting the Mealys’ interests in being able to collect on all of the notes. Without such an agreement documenting the extension of the loans, and by taking no action, the Mealys lost their rights to enforce many of the notes.

These are the types of transactions that are important to review with your attorney on a regular basis, in order to be sure that your “agreement” actually continues to be reflected in the written documents and so you understand your rights. Failure to do so can be expensive.

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