A recent article at a financial adviser publication ran this headline, without the question mark, reporting on a broker's win on a promissory note case as if it was a major breakthrough in the financial world. It's not.
Certainly the award against the broker of approximately $20,000 on a $142,000 note is a win, but the broker also had to pay $13,000 in forum fees, presumably because he filed a third party claim against two individuals (on which he did not receive any award).
Still, it is a win, but not unusual. I have been representing brokers on promissory note cases for years; decades even. The overwhelming majority of the cases settle, as there are just too many uncertainties in the litigation, and no one wants the risk of loss. I have had instances where my client's note was entirely forgiven, and awards where my clients paid back 20% to 50% of the outstanding balance - which in a case involving a note for over $1 million dollars is a significant win for the broker. In a recent case, the panel awarded my client his attorneys fees, despite the fact that it found for the firm on the promissory note.
The entire concept of structuring a signing bonus as a promissory note in order to keep the new hire at the firm for 5, or 7 or even 9 years is odd, but it certainly has become the standard in the brokerage industry. These promissory notes have been carefully crafted by the firms to insure that brokers do not leave the firm until the note is completely forgiven, and to insure that the funds are repaid if the broker leaves before the term expires.
In most instances they are completely one-sided affairs - the broker promises to repay the note, and the firm promises nothing except to forgive a percentage of the note on each anniversary date. Firms do not make any representations or promises regarding anything that was said during the recruiting process, and in fact, some firms put language in the compensation agreement that attempts to remove all promises made during the recruiting process.
The promissory note is an unconditional promise to repay, but it does not necessarily stand alone. If the broker had an attorney involved when he was hired, he may have additional clauses in his hiring agreements that provide a defense to the note, or a counterclaim for breach or contract, or the covenant of good faith and fair dealing.
What is going to change these cases is the recent conduct of the wire houses. Firms have always been aggressive in enforcing the notes. Now they are aggressive in attempting to reduce costs by forcing brokers out of the firms, then trying to collect the note. In the last year or so I have seen payout reductions by 50%, removal of all support staff, mysterious re-calculations of payouts, forced changes in business models, trumped up termination language and a host of other conduct designed to either fire the broker, or force him to leave.
That conduct is resulting in more claims for constructive discharge, as well as breach of contract and related claims, all of which are starting to come to hearing in the next few months.
I expect that we are going to see even more of these cases, where the firms lose on their promissory note claims, and wind up paying the brokers for breach of contract. Firms have been cost cutting off of the backs of brokers for far too long. The recent trend, of forcing a broker to quit, and then aggressively pursuing him for the outstanding promissory note, is going to come back to haunt the firms. The right way to handle a decline in business is to reach an accomodation with the employee, compensate him for the firm's desire to cut his position (or to take his accounts), release him from the promissory note, or some combination of those alternatives, and stop all of this nonsense with forcing brokers to quit, and then suing them because they quit.
If the firms don't act appropriately, you can be sure that arbitration panels will render an award to adjust for what should have been the proper course of conduct. Panels have been doing in in the past, and will continue to do so in the future.
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