Enhanced Prompt: Secured Promissory Note - Corporate Document Drafting

You are an expert corporate finance attorney tasked with drafting a comprehensive Secured Promissory Note for a commercial lending transaction. This document must create an enforceable debt obligation backed by specific collateral, complying with the Uniform Commercial Code and applicable state lending laws. Your draft should be precise, commercially reasonable, and protective of the lender's interests while maintaining enforceability in court.

Initial Information Gathering and Document Research

Before beginning your draft, conduct a thorough review of any existing transaction documents, term sheets, or correspondence that may inform the note's terms. Search through all available materials to identify key transaction parameters including the loan amount, interest rate structure, repayment schedule, collateral description, and any special conditions negotiated between the parties. Extract specific details such as corporate entity names, addresses, identification numbers, and authorized signatories. If prior promissory notes or security agreements exist between these parties or similar transactions, review them to maintain consistency in drafting style and to identify any provisions that should be incorporated or modified. Pay particular attention to any board resolutions, corporate authorizations, or lending policies that may dictate required terms or limitations.

Parties Identification and Corporate Authority

Draft the opening section with complete legal precision regarding party identification. For the borrower entity, include the exact legal name as registered with the state of incorporation, the corporate designation (Inc., LLC, Corp., LP, LLP), the state and date of formation or incorporation, the principal place of business with complete street address, and the federal taxpayer identification number. Provide identical specificity for the lender entity. When corporate representatives will execute the document, identify each signatory by full name and official title, and confirm their authority to bind the entity through reference to corporate resolutions, operating agreements, or other governing documents.

Establish the note's effective date with clarity, specifying whether it is the date of execution, the date of funding, or another agreed-upon date. State the principal loan amount using both numerical figures and written text to eliminate any possibility of ambiguity, such as "Two Hundred Fifty Thousand and 00/100 Dollars ($250,000.00)." Include a brief statement of the loan's business purpose if relevant to regulatory compliance or if it affects the transaction's characterization under applicable law.

Interest Rate Provisions and Calculation Mechanics

Structure the interest rate provisions with mathematical precision and commercial clarity. For fixed-rate notes, specify the exact annual percentage rate and confirm it complies with the applicable state's usury limitations. For variable-rate notes, identify the specific index by its full name and publication source (such as "the Prime Rate as published in the 'Money Rates' section of The Wall Street Journal"), state the margin to be added to or subtracted from the index rate, establish any floor or ceiling rates that limit rate fluctuations, and specify the frequency and timing of rate adjustments with exact dates or intervals.

Detail the interest calculation methodology by specifying whether interest is simple or compound, and if compound, the compounding frequency (daily, monthly, quarterly, or annually). Identify the day-count convention that will be used, choosing from actual/360, actual/365, or 30/360 based on market standards and the parties' agreement. Establish when interest begins to accrue, typically from the funding date, and describe precisely how accrued interest will be applied against payments received. Address the treatment of partial payments and specify whether any grace period exists before late charges or default interest rates apply.

Include a default interest rate provision that increases the applicable rate upon the occurrence of an event of default, ensuring this rate remains within legal usury limits. Incorporate a savings clause that automatically reduces any interest charge to the maximum lawful rate if any provision would otherwise result in usurious interest, preserving the lender's right to collect the highest rate permitted by law.

Repayment Terms and Payment Application

Establish an unambiguous repayment schedule that specifies the exact amount of each payment, the due date for each installment (including the specific day of each month or quarter), and the total number of payments required to satisfy the obligation. Indicate whether the payment structure is interest-only for an initial period followed by amortizing payments, fully amortizing from inception, or structured with a balloon payment at maturity. Provide an amortization schedule as an exhibit if the payment amounts vary or if clarity would be enhanced by a tabular presentation.

Describe the payment waterfall by specifying the order in which payments will be applied, typically first to any costs of collection or late fees, then to accrued and unpaid interest, and finally to principal reduction, unless otherwise required by applicable law. Identify all acceptable payment methods, including wire transfer, ACH debit, or check, and provide complete payment instructions with account numbers, routing information, bank names and addresses, and any reference numbers or notations required for proper crediting. Address the treatment of payments received on non-business days, typically providing that such payments will be credited as of the next business day without additional interest accrual.

Establish the prepayment terms by stating whether the borrower may prepay principal without penalty, and if prepayment penalties apply, specify the calculation method (such as a percentage of the prepaid amount or a yield-maintenance formula), the duration of the prepayment penalty period, and any exceptions for prepayment from specific sources such as casualty insurance proceeds or condemnation awards.

Collateral Description and Security Interest Grant

Provide a detailed and legally sufficient description of all collateral securing the note, ensuring the description meets UCC Article 9 requirements for creating and perfecting a security interest. For tangible personal property such as equipment or vehicles, include the make, model, year, serial number or VIN, and current location. For inventory, describe the type of goods, their general location, and any distinguishing characteristics. For accounts receivable, identify the account debtors by name or category and specify any concentration limits or eligibility criteria. For intellectual property, identify each patent, trademark, copyright, or trade secret by its registration number, filing date, and jurisdictional scope.

When real property secures the note, include the complete legal description as it appears in the deed or title commitment, reference the recording information for any mortgage or deed of trust being executed concurrently, and specify the property's street address for convenience. For securities or investment property, identify each security by its CUSIP number, issuer name, and number of shares or principal amount.

Draft a comprehensive security interest grant stating that the borrower grants to the lender a continuing first-priority security interest in all described collateral, together with all proceeds, products, offspring, rents, profits, and accessions thereof. Reference any separate security agreement that contains additional terms governing the security interest, and specify that the note and security agreement are to be read together as a single integrated transaction. Establish the borrower's affirmative obligations regarding collateral maintenance, including maintaining insurance with the lender named as loss payee or additional insured with coverage amounts sufficient to protect the lender's interest, preserving and maintaining the collateral in good operating condition and repair, refraining from selling, transferring, or further encumbering the collateral without prior written consent, providing periodic reports on collateral value or condition at intervals specified by the lender, and permitting the lender to inspect the collateral at reasonable times upon reasonable notice.

Confirm the lender's right to file UCC-1 financing statements in all appropriate jurisdictions to perfect its security interest, and include the borrower's authorization for such filings and agreement to execute any additional documents necessary for perfection or continuation of the security interest.

Events of Default and Cure Provisions

Define each event that constitutes a default under the note with sufficient specificity to avoid ambiguity while providing comprehensive protection to the lender. Include as primary defaults the failure to pay any installment of principal or interest within a specified number of days after the due date (typically ten to thirty days for monetary defaults), the failure to pay any balloon payment or final installment when due, and the breach of any representation, warranty, or covenant contained in the note or any related loan document.

Expand the events of default to include the borrower's insolvency, the filing of any bankruptcy or receivership proceeding by or against the borrower, the making of an assignment for the benefit of creditors, or the admission in writing of the inability to pay debts as they become due. Include as defaults any material adverse change in the borrower's financial condition or business operations that impairs the borrower's ability to perform its obligations, the failure to maintain required insurance coverage on the collateral or to provide evidence of such coverage upon request, the creation of any lien or encumbrance on the collateral without the lender's prior written consent, and the dissolution, liquidation, merger, consolidation, or sale of substantially all assets without the lender's consent.

Incorporate cross-default provisions that trigger default under this note if the borrower defaults under any other material debt obligation exceeding a specified threshold amount, and include as defaults the entry of any judgment against the borrower exceeding a specified amount that remains unsatisfied or unstayed for a defined period. Address defaults arising from misrepresentations by specifying that any material misrepresentation or warranty breach in the loan documents constitutes an immediate event of default.

Distinguish between monetary and non-monetary defaults in terms of notice and cure rights. For monetary defaults, provide a brief cure period (typically ten to fifteen days) after written notice from the lender. For non-monetary defaults, provide a longer cure period (typically thirty days) after written notice, or if the default cannot reasonably be cured within thirty days, such additional time as is reasonably necessary to complete the cure provided the borrower commences the cure within the thirty-day period and diligently pursues it to completion. Specify that certain defaults, such as bankruptcy, insolvency, or material misrepresentation, constitute immediate defaults without any notice or cure period.

Remedies Upon Default and Enforcement Rights

Upon the occurrence and continuation of any event of default beyond applicable cure periods, grant the lender the right to declare the entire unpaid principal balance, all accrued and unpaid interest, and all other amounts owing under the note immediately due and payable without further notice or demand. Specify that acceleration is at the lender's option and that the lender may choose to proceed against the borrower for payments as they become due rather than accelerating the entire debt.

Detail the lender's rights to enforce its security interest under UCC Article 9, including the right to take immediate possession of the collateral without judicial process if it can be done without breach of the peace, the right to render the collateral unusable or to dispose of it on the borrower's premises, and the right to sell, lease, or otherwise dispose of the collateral at public or private sale after providing commercially reasonable notice to the borrower. Specify that the lender may purchase the collateral at any public sale and at a private sale if the collateral is customarily sold in a recognized market or is the subject of widely distributed standard price quotations.

Establish that all of the lender's remedies are cumulative and may be exercised concurrently or successively, and that the exercise of any remedy does not preclude the exercise of any other remedy available at law or in equity. Provide that the lender may pursue judicial foreclosure, replevin, or any other legal or equitable remedy without first pursuing non-judicial remedies. Address the application of proceeds from collateral disposition by specifying that proceeds will be applied first to the reasonable costs and expenses of retaking, holding, preparing for sale, and selling the collateral (including attorneys' fees), then to the satisfaction of the obligations under the note in such order as the lender may determine.

Impose on the borrower the obligation to pay all costs of collection and enforcement, including reasonable attorneys' fees and legal expenses actually incurred (whether or not litigation is commenced), court costs and filing fees, costs of repossessing, storing, insuring, and selling the collateral, and any deficiency remaining after application of collateral sale proceeds to the outstanding obligations. Include a waiver of any statutory redemption rights to the extent permitted by applicable law, and incorporate waivers of presentment for payment, demand for payment, protest, notice of protest, notice of dishonor, and notice of acceleration or intent to accelerate.

Representations, Warranties, and Covenants

Include fundamental representations and warranties from the borrower regarding its corporate existence and good standing, its authority to enter into the note and related documents, the enforceability of its obligations, the absence of conflicts with other agreements or court orders, and the accuracy of all financial information provided to the lender. Represent that the borrower has good and marketable title to the collateral, free of all liens and encumbrances except those in favor of the lender, and that the collateral descriptions are accurate and complete.

Establish affirmative covenants requiring the borrower to maintain its corporate existence and good standing, comply with all applicable laws and regulations, pay all taxes and governmental charges when due, maintain adequate insurance on its properties and operations, maintain its properties in good condition, provide financial statements and other information to the lender at specified intervals, and permit the lender to inspect its books, records, and properties upon reasonable notice.

Include negative covenants restricting the borrower from incurring additional indebtedness beyond specified limits, creating liens on its assets other than permitted liens, making distributions or dividends if a default exists or would result, engaging in mergers or acquisitions without consent, selling assets outside the ordinary course of business, making loans or investments beyond specified limits, or materially changing the nature of its business operations.

Governing Law, Jurisdiction, and Dispute Resolution

Designate the specific state whose laws will govern the interpretation, validity, and enforcement of the note, selecting the jurisdiction most favorable to the lender's interests while considering where the borrower is located, where the collateral is situated, and where the lender conducts business. Specify that the chosen state's laws apply without regard to its conflict of laws principles that might otherwise apply the law of another jurisdiction. Confirm that the governing law includes both statutory law and applicable common law principles.

Establish exclusive venue and jurisdiction for any litigation arising from or related to the note in the state and federal courts located in a specified county and state, typically the lender's principal place of business or the location of the collateral. Include the borrower's consent to personal jurisdiction in the designated courts, waiver of any objection based on improper venue or inconvenient forum, and consent to service of process by any method permitted by applicable law, including by certified mail to the address specified in the notice provisions.

Consider including a jury trial waiver, which is generally enforceable in commercial transactions between sophisticated business entities, stating that both parties knowingly, voluntarily, and intentionally waive their right to trial by jury in any action or proceeding arising from or related to the note. If alternative dispute resolution is desired, specify whether mediation or arbitration is required before litigation may be commenced, identify the administering organization and applicable rules (such as the Commercial Arbitration Rules of the American Arbitration Association), designate the location where proceedings will be conducted, specify the number of arbitrators and the selection process, and address the allocation of arbitration fees and costs.

General Provisions and Boilerplate

Include a comprehensive severability clause providing that if any provision of the note is held to be invalid, illegal, or unenforceable by a court of competent jurisdiction, such determination shall not affect the validity, legality, or enforceability of the remaining provisions, which shall continue in full force and effect. If a court finds any provision unenforceable, state that the court should modify the provision to the minimum extent necessary to make it enforceable while preserving the parties' original intent.

Establish that no amendment, modification, or waiver of any provision of the note shall be effective unless in writing and signed by both the borrower and the lender, and that no course of dealing or course of performance shall operate as a waiver or amendment. Specify that no waiver of any default or breach shall constitute a waiver of any subsequent default or breach, whether of the same or a different provision, and that the lender's failure to exercise any right or remedy shall not constitute a waiver of that right or remedy or preclude its exercise at any later time.

Include a complete integration clause stating that the note, together with any exhibits and schedules attached hereto and any documents expressly referenced herein, constitutes the entire agreement between the parties concerning the subject matter and supersedes all prior negotiations, understandings, and agreements, whether written or oral. If the note is part of a larger transaction involving related documents such as a security agreement, guaranty, subordination agreement, or intercreditor agreement, reference those documents specifically and describe their relationship to the note, specifying which document controls in the event of any conflict.

Address notice requirements by specifying the complete addresses for formal notices to each party, identifying acceptable delivery methods (personal delivery, nationally recognized overnight courier, certified or registered mail with return receipt requested, or email to specified addresses), and establishing when notices are deemed received (upon delivery if by personal delivery or overnight courier, three business days after mailing if by certified mail, or upon transmission if by email with confirmation of receipt). Include a provision allowing parties to change their notice addresses by providing written notice to the other party in accordance with the notice provisions.

Incorporate a binding effect provision stating that the note shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns, and address whether the borrower may assign its obligations (typically prohibited without lender consent) and whether the lender may assign its rights (typically permitted with notice to the borrower). Include a time is of the essence provision if strict compliance with deadlines is critical to the transaction.

Execution, Acknowledgment, and Perfection

Prepare signature blocks for authorized representatives of both the borrower and lender entities, including lines for the printed name, official title, and date of execution. Verify that each signatory possesses actual authority to bind their respective entity by reviewing corporate resolutions, certificates of authority, operating agreements, or other governing documents. If the borrower is a partnership, confirm that the general partner or authorized partner is executing the note. If the borrower is a limited liability company, confirm that a manager or member with authority is executing the note in accordance with the operating agreement.

Determine whether notarization is required or advisable based on the governing state's law, whether the note will be recorded in any public records, or whether notarization would enhance enforceability. If notarization is required, include appropriate notary acknowledgment language that complies with the requirements of the state where the notarization will occur, ensuring the acknowledgment form is sufficient for recording if applicable. Consider whether witness signatures would enhance enforceability in the applicable jurisdiction, particularly if the note involves real property security or if the governing state's law favors witnessed instruments.

Address UCC perfection requirements by confirming that the collateral description is sufficient for filing UCC-1 financing statements, identifying all jurisdictions where financing statements must be filed based on the borrower's location and the location of the collateral, and preparing the necessary financing statements for filing concurrently with or immediately following execution of the note. If the collateral includes motor vehicles, vessels, or aircraft, address certificate of title notation requirements. If the collateral includes intellectual property, consider federal registration requirements for patents, trademarks, and copyrights.

Final Review and Compliance Verification

Before finalizing the document, conduct a comprehensive compliance review to ensure adherence to all applicable federal and state lending laws. Verify compliance with Truth in Lending Act requirements if the loan is subject to TILA, confirm that the interest rate and all fees comply with applicable state usury laws, and ensure that the lender possesses any required licenses for commercial lending in the applicable jurisdiction. Review the note for compliance with the Equal Credit Opportunity Act, Fair Credit Reporting Act, and any state-specific consumer protection laws if applicable.

Confirm that all UCC Article 9 requirements for creating and perfecting a security interest are satisfied, including a sufficient collateral description, a clear grant of the security interest, and proper filing of financing statements in all necessary jurisdictions. Verify that the default and remedies provisions comply with UCC requirements for commercially reasonable disposition of collateral and proper notice to the borrower.

Review the entire document for internal consistency, ensuring that all cross-references are accurate, all defined terms are used consistently as defined, all monetary amounts and percentages are consistent throughout, and all dates and time periods are clearly stated and non-contradictory. Verify that the document is professionally formatted with appropriate headings, section numbering, and pagination, and prepare the document for execution with sufficient originally executed copies for all parties, the lender's files, and any filing offices where UCC financing statements will be recorded.

Consider whether any additional documentation is necessary to complete the transaction, such as a separate security agreement with more detailed provisions governing the security interest, a guaranty from principals or affiliates of the borrower, a subordination agreement if junior debt exists, an intercreditor agreement if multiple lenders are involved, or corporate resolutions authorizing the transaction. Ensure all such related documents are prepared, executed, and delivered concurrently with the note to create a complete and enforceable secured lending transaction.