Phil Curran was only too happy to sign the promissory note Bill Walton of Walton Building Supplies had prepared for him. Walton was providing $20,000 in building materials for Phil's home remodeling project, and Phil was securing the note with a mortgage on his house.

Two years later, however, Phil had lost his job, and he was in no position to pay off the note. He was bemoaning his situation with Nick Olson, his next-door neighbor, when Nick made an observation.

"I don't think this note you signed is any good," Nick told him.

"No good?" Phil replied hopefully.

"Look at what it says over your signature. It says 'I have fully read and I do clearly understand these conditions and terms.' I don't think that meets state law requirements."

Phil did some research and found that state law required that the cautionary language on notes read:

"CAUTION--IT IS IMPORTANT THAT YOU THOROUGHLY READ THE CONTRACT BEFORE YOU SIGN IT."

Does Phil have a case for abrogating this contract?

Make your decision and then click on "next" below for the answer and analysis.

No.

The court noted that the reason for requiring particular wording, type size, and placement immediately above the borrower's signature is to ensure that the borrower sees it, reads it, and follows its instructions. And it could not be denied that Walton violated these requirements.

But it does not follow, the court continued, that the note is rendered unenforceable by this violation.

Under the law, borrowers are entitled to compensation for the "actual damage suffered, claimed, and proved by them" as a result of the lender's having failed to provide the required cautionary statement. Since Phil could not provide any proof of damages, his claim was dismissed.

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Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter.