Breach of Contract With Which Promissory Note Was Inextricably Intertwined Creates Defense to Payment of the Note

On January 21, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Zamore, Zamore & Zamore v. Aloyts, 2014 NY Slip Op. 50139(U), denying a motion for summary judgment in lieu of complaint for payment of a promissory note.

Zamore was "an action to recover monies owed on a promissory note" related to an earlier dispute over the failed sale of co-op shares. The court denied the plaintiff's motion for summary judgment in lieu of a complaint. While the case had several complicating factors, here we focus on the narrow question of the plaintiff's entitlement to summary judgment on their promissory note. The court explained:

Since the note was obtained as a purchase money note in connection with the Contract of Sale and the entry into the leases for the intended purpose of building and operating a medical office, which was interfered with and frustrated and never occurred, the breach of the lease is inextricably intertwined with the amounts owed under the note. Therefore, with respect to plaintiff's action to enforce the note, the court must make reference to the Contract of Sale, the lease for the basement space, and the actions taken by plaintiff's general partner, Zamore, which, defendants assert, constituted bad faith.

It is true that a breach of a related contract is generally not a defense to nonpayment of an instrument for money only. However, where the note and the contract are inextricably intertwined as part of the same transaction, a breach of the related contract may create a defense to payment on the note. Thus, while generally the breach of a related contract cannot defeat a motion for summary judgment on an instrument for money only, that rule does not apply where the contract and instrument are intertwined.

(Internal quotations and citations omitted) (emphasis added).

This decision shows an important exception to the rules regarding the enforceability of promissory notes.