Disputes related to promissory notes – or “EFLs”, “employee forgivable loans” – usually arise when a brokerage firm demands the repayment of the balance of a loan that the firm previously made to a securities professional as part of an employment package.  Under these arrangements, which are very common in the securities industry, the forgivable loan provisions of a professional’s employment contract provides that the remaining balance on the loan becomes immediately payable if the firm terminates the broker’s employment, or the broker chooses to leave the firm, within a certain period of time.  We represent securities professionals in not only defending against these claims, but in evaluating and advising our clients concerning the potential for counterclaims that may be asserted against the claimant firm in response.  Often in these cases the broker will file a counterclaim against the firm alleging that the firm breached promises that were made to the broker as an inducement to the broker to leave his or her previous firm.  Depending on the facts of any given case, there also may be other grounds for the assertion of counterclaims in response to a firm’s promissory note claim.

These claims are nearly always filed by firms as FINRA arbitration cases under FINRA’s Code of Arbitration Procedure for Industry Disputes, Rules 13100 through 13905.  In certain cases, FINRA arbitration panels have ruled in favor of brokers in avoiding, or reducing, any repayment obligation under the note and/or have found in favor of a broker on his or her counterclaim, so as to offset or reduce the broker’s repayment obligation.

FINRA Rule 13807 – entitled “Promissory Note Proceedings” – provides for an expedited process for the arbitration of cases involving a member firm’s claim that an associated person failed to repay money owed under a promissory note, particularly when the associated person does not file an answer to the firm’s statement of claim.  The Rule also governs the number of arbitrators who will be appointed to decide the dispute, with one arbitrator appointed in certain cases and a panel of three arbitrators appointed in other cases (e.g., if the associated person files a counterclaim for damages of more than $100,000).