NEGOTIABILITY: THE DOCTRINE AND ITS APPLICATION IN U.S.

COMMERCIAL LAW

CHAPTER II
REQUISITES OF NEGOTIABILITY: IS THE INSTRUMENT NEGOTIABLE?
If we are to create a genre of promise upon which to bestow the attributes of negotiability, how can such promises be identified? The tests of negotiability embodied in Part 1 of UCC Article 3 reflect, in large part, the case law development of several hundred years. Negotiability was available to certain types of instruments containing specific language. In some sense, the decision as to what language was necessary, what permissible, and what impermissible depended upon the purpose of the instrument and its reception by the market. The tests codified in the NIL, the original Article 3 and its revision reflect an ecclectic combination of formality and utility. In part, such imprecision is necessary because of the type of instruments to be governed differs considerably. The case law reflected in the statutes reflects, in part, an instrument intended to circulate as currency (a simple draft or bill of exchange or note); in part, checks; and, in part, intracate promises to pay which are undergirded by extensive assurances of repayment. The United Kingdom Bills of Exchange Act and the U.S. Uniform Negotiable Instruments Law, modeled largely on the British Act, both adopted a test which contained elements of formality. Comparative law provides a most useful insight into the nature of negotiability at this juncture. Compared to the system used in the civilian countries, the U.S. and U.K. tests appear almost functional. For an interesting compromise between the two systems, it would be useful to examine the work of the United Nations Commission on International Trade Law as embodied in the Convention on International Bills of Exchange and International Promissory Notes. The approach taken in Article 3 is to delimit its scope by means of positive and negative requirements embodied in the definition of a negotiable instrument. As a result, the initial analytical step in any problem involving Article 3 is in determining whether the instrument at issue is negotiable; an exercise which is definitional in character. In applying these rules, it is necessary to determine which provisions are mandatory, which are permissible, and which are impermissible. While this determination is usually easy with respect to simple promises or orders used in a currency-like fashion, it is much less so with respect to more complex promises. In order to resolve the issues involved in such undertakings in a principled fashion, it is necessary to understand the reason for the particular statutory requirement. In this process, it is inevitable that its soundness is assessed as well. As a result, it is sometimes necessary to determine whether certain requirments are wisely specified with great precision and whether the definitional requirements should be applied formally or with respect to their purpose. As the demands for instruments change from time to time, these questions can become most pressing.

A. NEGOTIABLE INSTRUMENTS: A DEFINITIONAL EXERCISE

1. a.) Signed Writings Is it necessary that a negotiable instrument be in writing?

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(1) Is an oral undertaking otherwise negotiable enforceable? Could it be enforceable under principles of estoppel? (2) If the above undertaking were recorded on tape would it be enforceable? (3) If the undertaking was contained on a computer disk would it be enforceable? (4) If something were to satisfy the business records exception, would it qualify as a writing? Is this requirment, then, simply evidentiary? (5) Is there an element of permanance? In 17 Bank Security Report 2 (1988), checks were reported to be turning up in Chicago which dissolved within hours of the time they were deposited and before they were microfilmed. b.) Is it necessary that a negotiable instrument be signed? (1) (2) c.) 2. Is a letterhead a signature? The printed name on a check?

Should the provisions regarding a signed writing be liberally or strictly construed?

Payable to Order or to Bearer a.) Is the following undertaking negotiable?

Pay to _____________________________ Three Thousand and xx/100 Bank Ten Somewhere

$3,000.00 dollars

John Doe 52-221-764-32

b.) The following instrument was the subject of litigation in Lincoln First Bank v. Bank of New York (In Re Levine), 23 Bankr. 410 (Bankr. S.D.N.Y. 1982), affd, 24 Bankr. 804 (Bankr. S.D.N.Y. 1982): Know all men by these presents, that Morris M. Levine and Barbara R. Levine ... hereinafter designated as the obligor, does hereby acknowledge the obligor to be justly indebted to David Mykoff and Joan Mykoff ... hereinafter designated as the obligee, in the sum of FIFTY FOUR THOUSAND dollars ... which sum said obligor does hereby covenant to pay the said obligee, and the executors, administrators, successors or assigns of the obligee, on September 2nd, 1977, with interest thereon to be computed from the date hereof at the rate of eight (8%) per centum per annum and to be paid on the 2nd day of October, 1976, next ensuing and monthly thereafter.

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NEGOTIABILITY: THE DOCTRINE AND ITS APPLICATION IN U.S. COMMERCIAL LAW

In analyzing the priority to be given this bond in an insolvency proceeding, it was necessary to determine whether or not it was supported by consideration. Since it was given in exchange for an antecedent debt, the consideration would not support it unless it were determined to be negotiable. The courts conclusion that it was not negotiable is as explained as follows: Is the Bond A Negotiable Instrument? If the bond in question were a negotiable instrument, the lack of legal consideration supporting it would not affect Bankers Trusts secured status as assignee of the mortgage. New Yorks Uniform Commercial Code (U.C.C.) Section 3-408states in pertinent part: 3-408. Consideration Want or failure of consideration is a defense as against any person not having the rights of a holder in due course (Section 3-305), except that no consideration is necessary for an instrument or obligation thereon given in payment of or as security for an antecedent obligation of any kind. The use of the word instrument in the statute means a negotiable instrument, N.Y.U.C.C. Section 3-102(1)(e). Thus, an antecedent debt is sufficient consideration for the execution of a negotiable instrument, even if the holder of the instrument does not have the rights of a holder in due course. Here, the assignee does not have the rights of a holder in due course 2 and therefore would ordinarily be subject to the defense of want or failure of consideration (N.Y.U.C.C. Section 3-306(c)); however, if the bond is a negotiable instrument, N.Y.U.C.C. Section 3-408 would resolve any problem regarding the consideration. 3 In light of the foregoing, it is crucial to determine the character of the mortgage bond which was endorsed over and assigned to Bankers Trust. A negotiable instrument is one that meets the standards set out in N.Y.U.C.C. Section 3-104. 4 It is section 3104(1)(d) that is of concern here; a writing, to be negotiable, must be payable to order or to bearer (see N.Y.U.C.C. Section 3-110 and Section 3-111). The mortgage bond in question does not contain such language,5 and therefore cannot be a negotiable instrument. 6 In the case of In re Devesons Estate, 158 Misc. 868, 287 N.Y.S. 98 (Surr.Ct.1936), the court addressed the issue of whether an ordinary mortgage bond, payable to the obligee, his executors, administrators, or assigns, accompanied by real estate security, is a negotiable instrument. (This language is identical to that used in the subject mortgage bond). Citing the former Negotiable Instruments Law, Section 20(4) (now incorporated in the N.Y.U.C.C.), which was in accord with the U.C.C. requirement that the instrument be payable to order or bearer, the court concluded, (t)hus, by statute, a mortgage bond, as in the instant case, becomes nonnegotiable. 287 N.Y.S. at 101. In Enoch v. Brandon, 249 N.Y. 263, 265-6, 164 N.E. 45, 46 (1928) the court stated: True, to become negotiable an instrument need not follow any precise language ... But it must conform to the definition specified in Section 20. (Section 20 of the N.I.L., now U.C.C. Section 3-104). In the face of a command so explicit we must adhere to the design of the Legislature .... We turn, therefore, to the more serious question. The statute deals with the form of the instrument-with what a mere inspection of its face should disclose. It must contain an unconditional promise to pay a fixed sum, on demand, or at a fixed or determinable future time, to order or to bearer. Only if it fulfills these requirements is it negotiable. The fact that the Mykoffs endorsed the bond with the words payable to the order of Bankers Trust Company without recourse does not change the inherent character of the bond. (N)o intention, no agreement, may make negotiable an instrument which the statute declares to be non-negotiable. Enoch v. Brandon, 164 N.E. at 46. See also, Felin Associates, Inc. v. Rogers, 38 A.D.2d 6, 326 N.Y.S.2d 413 (Sup.Ct.A.D. 1st Dept.

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1971). Accordingly, it must be concluded that the subject mortgage bond is not a negotiable instrument, and that N.Y.U.C.C. Section 3-408 cannot operate to excuse the lack of legal consideration. The bond which the Levines executed and gave to the Mykoffs, evidencing their promise to pay an antecedent debt is unenforceable, and therefore the accompanying mortgage falls with it. Since the assignee, Bankers Trust, holds an unenforceable bond and mortgage (its position can be no better than that of its assignor), its claim is rendered unsecured. Note that the decision was governed by the original Section 3-104 and 3-110. Do you agree with the court? c.) 3. a.) b.) If an instrument lacks order/bearer language, but is otherwise negotiable, is it enforceable? See former Section 3-805. Promise or Order "Pay to Bearer" Is this an order? Is this undertaking negotiable? Why?
"Waterville, Kans., Dec. 31, 1924." G.W. Shearer, Waterville Kans.,: I owe you $4683.34, money advanced on 'Shearer Cottage Camp' Colorado Springs, Colo. Mrs. Rena Shearer.

c.)

Is this language negotiable? Why? You are hereby irrevocably authorized to pay to the order of Tom Jones $10,000. /s/Sam Shoe

d.)

Is there an operative legal difference between a promise and an order? What if the drawer is the payee? the drawee? Is it a draft or a note? What difference does it make?

B.

MANDATORY, PERMISSIBLE & IMPERMISSIBLE PROVISIONS IN NEGOTIABLE INSTRUMENTS

In order to determine whether an instrument is negotiable, all necessary provisions must be present and no impermissible provisions may be present. While the rules are reasonably clear, some are less easily applied. 1. 2. 3. What are the mandatory requirments for negotiability? Is consideration necessary for an instrument to be negotiable? a.) Is this instrument negotiable? Why?

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NEGOTIABILITY: THE DOCTRINE AND ITS APPLICATION IN U.S. COMMERCIAL LAW

Dear Sirs, As an inducement to you to extend credit to and to otherwise deal with Thomas C. Creasy, Jr. and/or Margaret W. Creasy (hereinafter called Borrower), and in consideration thereof, the undersigned hereby absolutely and unconditionally guarantees to you and your successors and assigns the due and punctual payment of any and all notes, drafts, debts, obligations and liabilities, primary or secondary (whether by way of endorsement or otherwise), of borrower, at any time, now or hereafter, incurred with or held by you, together with interest, as and when the same become due and payable, whether by acceleration or otherwise, in accordance with the terms of any such notes, drafts, debts, obligations or liabilities or agreements evidencing any such indebtedness, obligation or liability including all renewals, extensions and modifications thereof. The undersigned is your debtor for all indebtedness, obligations and liabilities for which this Guaranty is made, and you shall also at all times have a lien on all stocks, bonds and other securities of the undersigned at any time in your possession and the same shall at your option be held, administered and disposed of as collateral to any such indebtedness, obligation or liability of the borrower, and you shall also at all times have the right of setoff against any deposit account of the undersigned with you in the same manner and to the same extent that the right of setoff may exist against the Borrower. It is understood that any such notes, drafts, debts, obligations and liabilities may be accepted or created by or with you at any time and from time to time without notice to the undersigned and the undersigned hereby expressly waives presentment, demand, protest,and notice of dishonor of any such notes, drafts, debts, obligations and liabilities or any other evidence of any such indebtedness, obligation or liability. You may receive and accept from time to time any securities or other property as a collateral to any such notes, drafts, debts, obligations and liabilities, and may surrender, compromise, exchange and release absolutely the same or any part thereof at any time without notice to the undersigned and without in any manner affecting the obligation and liability of the undersigned hereby created. This obligation and liability on the part of the undersigned shall be a primary and not a secondary obligation and liability, payable immediately upon demand without recourse first having been had by you against the Borrower or any person, firm or corporation; ... The aggregate amount of the principal of all indebtedness, obligations and liabilities at any one time outstanding for which the undersigned shall be liable as herein set forth shall not exceed the sum of $35,000.00. This agreement shall inure to the benefit of you, your successors and assigns, and the owners and holders of any of the indebtedness, obligations and liabilities hereby guaranteed, and shall remain in force until a written notice revoking it has been received by you; but such revocation shall not release the undersigned from liability to you, your successors or assigns, or the owners and holders of any of the indebtedness obligations and liabilities hereby guaranteed, for any indebtedness, obligation or liability of the Borrower which is hereby guaranteed and then in existence or from any renewals or extensions thereof in whole or in part, whether such renewals or extensions are made before or after such revocation.1 SIGNATURES: THOMAS C. CREASY, JR./ MARGARET W. CREASY

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b.) The following decision was rendered under prior Section 3-106. Is this decision sound? Is the rule sound and is it continued? Review the current code to determine its application. Taylor V. Roeder 234 Va. 99, 360 S.E.2d 191 (1987) In the second case, Richard L. Saslaw and others, on December 31, 1979, borrowed $22,450 from VMC evidenced by a 12-month note secured by deed of trust on Fairfax County land. This note also bore interest at 3% over Chase Manhattan Prime adjusted monthly. Interest was to be payable quarterly beginning April 1, 1980. In November 1980, Virender and Barbara Puri entered into a contract to purchase from Saslaw, et al., the land subject to the last-mentioned deed of trust. The Puris designated the same Frederick Taylor, Jr., as their settlement attorney. Taylors title examination revealed VMCs deed of trust. Taylor again requested a pay-off figure from VMC. At settlement, Saslaw objected to the figure, communicated with VMC and received VMCs agreement to an adjusted figure. Taylor paid the adjusted amount to VMC. Again, Taylor failed to receive the cancelled Saslaw note, and the Saslaw deed of trust was not released. Cecil Pruitt, Jr., was a trustee of a tax-exempt employees pension fund. He invested some of the pension funds assets with VMC, receiving as collateral pledges of certain secured notes that VMC held. The Saslaw note was pledged and delivered to him on January 25, 1980; the Olde Towne note was pledged and delivered to him on September 12, 1980. No notice was given to the makers, or to Taylor, that the notes had been transferred, and all payments on both notes were made to and accepted by VMC. VMC received and deposited in its account sufficient funds to pay both notes in full, but never informed Pruitt of the payments and made no request of him for return of the original notes. In February 1982, VMC defaulted on its obligation to Pruitt for which both notes had been pledged as collateral. In May 1982, VMC filed a bankruptcy petition in federal court.

Opinion by: Russell The dispositive question in this case is whether a note providing for a variable rate of interest, not ascertainable from the face of the note, is a negotiable instrument. We conclude that it is not.

The facts are undisputed. VMC Mortgage Company (VMC) was a mortgage lender in Northern Virginia. In the conduct of its business, it borrowed funds from investors, pledging as security the notes secured by deeds of trust which it had obtained from its borrowers. Two of these transactions became the subject of this suit. Because they involve similar facts and the same question of law, they were consolidated for trial below and are consolidated in a single record here pursuant to former Rule 5:23. In the first case, Olde Towne Investment Corporation of Virginia, Inc., on September 11, 1979, borrowed $18,000 from VMC, evidenced by a 60-day note secured by a deed of trust on land in Fairfax County. The note provided for interest at three percent (3.00%) over Chase Manhattan Prime to be adjusted monthly. The note provided for renewal at the same rate of interest at the option of the makers up to a maximum of six (6) months in sixty (60) day increments with the payment of an additional fee of two (2) points. The note was renewed and extended to November 11, 1980, by a written extension agreement signed by Olde Towne and by VMC. In May 1981, Frederick R. Taylor Jr., as trustee for himself and other parties, entered into a contract to buy from Olde Towne the land in Fairfax County securing the $18,000 loan. Taylors title examination revealed the VMC deed of trust. He requested the payoff figures from VMC and forwarded to VMC the funds VMC said were due. He never received the cancelled Olde Towne note, and the deed of trust was not released.

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Learning that the properties securing both notes had been sold, Pruitt demanded payments from the respective original makers as well as the new owners of the properties, contending that he was a holder in due course. The makers and new owners took the position that they had paid the notes in full. Pruitt caused William F. Roeder, Jr., to qualify as a substituted trustee under both deeds of trust and directed him to foreclose them. Taylor and the Puris filed separate bills of complaint against Roeder, trustee, seeking to enjoin the foreclosure sales. The chancellor entered a temporary injunction to preserve the status quo and heard the consolidated cases ore tenus. By letter opinion incorporated into a final decree entered February 3, 1984, the chancellor found for the defendant and dissolved the injunctions. We granted the complainants an appeal. The parties have agreed on the record that foreclosure will be withheld while the case is pending in this court. Under the general law of contracts, if an obligor has received no notice that his debt has been assigned and is in fact unaware of the assignment, he may, with impunity, pay his original creditor and thus extinguish the obligation. His payment will be a complete defense against the claim of an assignee who failed to give him notice of the assignment. Evans v. Joyner, 195 Va. 85, 88, 77 S.E.2d 420, 422 (1953). Under the law of negotiable instruments, continued in effect under the Uniform Commercial Code, the rule is different: The makers are bound by their contract to make payment to the holder. See Trustees of Internal Imp. Fund v. Lewis, 34 Fla. 424, 428, 16 So. 325, 326-327 (1894); Hobgood v. Sylvester, 242 Or. 162, 167, 408 P.2d 925, 927 (1965); Perkins v. Hall, 123 W.Va. 707, 716, 17 S.E.2d 795, 801 (1941); Code 8.3-413. Further, a holder in due course takes the instrument free from the makers defense that he has made payment to the original payee, if he lacks notice of the payment and has not dealt with the maker. Code 8.3-305. Thus, the question whether the notes in this case were negotiable is crucial. Code 8.3-104(1) provides, in pertinent part: Any writing to be a negotiable instrument within this title must . . . (b) contain an unconditional promise or order to pay a sum certain in money . . .

The meaning of sum certain is clarified by Code 8.3106: (1) The sum payable is a sum certain even though it is to be paid (a) with stated interest or by stated installments; or (b) with stated different rates of interest before and after default or a specified date; or (c) with a stated discount or addition if paid before or after the date fixed for payment; or (d) with exchange or less exchange, whether at a fixed rate or at the current rate; or (e) with costs of collection or an attorneys fee or both upon default. (2) Nothing in this section shall validate any term which is otherwise illegal. Official Comment 1, which follows, states in part: It is sufficient [to establish negotiability] that at any time of payment the holder is able to determine the amount then payable from the instrument itself with any necessary computation . . . The computation must be one which can be made from the instrument itself without reference to any outside source, and this section does not make negotiable a note payable with interest at the current rate. Code 8.3-107 provides an explicit exception to the four corners rule laid down above by providing for the negotiability of instruments payable in foreign currency. We conclude that the drafters of the Uniform Commercial Code adopted criteria of negotiability intended to exclude an instrument which requires reference to any source outside the instrument itself in order to ascertain the amount due, subject only to the exceptions specifically provided for by the U.C.C. See Salomonsky v. Kelly, 232 Va. 261, 264, 349 S.E.2d 358, 360 (1986). The appellee points to the Official Comment to Code 8.3-104. Comment 1 states that by providing criteria for negotiability within this Article, (adopted in Virginia as within this title) 8.3-104(1) leaves open the possibility that some writings may be made negotiable by other statutes or by judicial decision. The Comment continues: The same is true as to any new

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type of paper which commercial practice may develop in the future. The appellee urges us to create, by judicial decision, just such an exception in favor of variable-interest notes. Appellants concede that variable-interest loans have become a familiar device in the mortgage lending industry. Their popularity arose when lending institutions, committed to long-term loans at fixed rates of interest to their borrowers, were in turn required to borrow short-term funds at high rates during periods of rapid inflation. Variable rates protected lenders when rates rose and benefitted borrowers when rates declined. They suffer, however, from the disadvantage that the amount required to satisfy the debt cannot be ascertained without reference to an extrinsic source - in this case the varying prime rate charged by Chase Manhattan Bank. Although that rate may readily be ascertained from published sources, it cannot be found within the four corners of the note. Other courts confronted with similar questions have reached differing results. See e.g., A. Alport & Son v. Hotel Evans, Inc., 65 Misc.2d 374, 376-377, 317 N.Y.S.2d 937 939-940 (1970) (note bearing interest at bank rates not negotiable under U.C.C.); Woodhouse, Drake and Carey, Ltd. v. Anderson, 61 Misc.2d 951, 307 N.Y.S.2d 113 (1970) (note providing for interest at 8 1/2% or at the maximum legal rate was not usurious. Inferentially, the note was negotiable.); Farmers Production Credit Assn v. Arena, 145 Vt. 20, 23, 481 A.2d 1064, 1065 (1984) (variableinterest note not negotiable under U.C.C.). The U.C.C. introduced a degree of clarity into the law of commercial transactions which permits it to be applied by laymen daily to countless transactions without resort to judicial interpretation. The relative predictability of results made possible by that clarity constitutes the overriding benefit arising from its adoption. In our view, that factor makes it imperative that when change is thought desirable, the change should be made by statutory amendment, not through litigation and judicial interpretation.1
1 In 1981 the legislature of Tennessee amended its version of U.C.C. 3-106 to provide that variable interest notes will be negotiable. Tenn. Code Ann. 47-3-106(1)(f) and (g).

Accordingly, we decline the appellees invitation to create an exception, by judicial interpretation, in favor of instruments providing for a variable rate of interest not ascertainable from the instrument itself. In an alternative argument, the appellee contends that even if the notes are not negotiable, they are nevertheless symbolic instruments which ought to be paid according to their express terms. Those terms include the makers promises to pay to VMC Mortgage Company or order, and in the event of default, to make accelerated payment at the option of the holder. The emphasized language, appellee contends, makes clear that the makers undertook an obligation to pay any party who held the notes as a result of a transfer from VMC. Assuming the abstract correctness of that argument, it does not follow that the makers undertook the further obligation of making a monthly canvass of all inhabitants of the earth in order to ascertain who the holder might be. In the absence of notice to the makers that their debt had been assigned, they were entitled to the protection of the rule in Evan v. Joyner in making good faith payment to the original payee of these nonnegotiable notes. Accordingly, we will reverse that decree and remand the case to the trial court for entry of a permanent injunction against foreclosure. Reversed and remanded. DISSENT: COMPTON, J., dissenting. The majority views the Uniform Commercial Code as inflexible, requiring legislative action to adapt to changing commercial practices. This overlooks a basic purpose of the Code, flexibility and adaptability of construction to meet developing commercial usage. According to Code 8.1-102(1), the UCC shall be liberally construed and applied to promote its underlying purposes and policies. One of such underlying purposes and policies is to permit the continued expansion of commercial practices through custom, usage and agreement of the parties. 8.1-102(2)(b). Comment 1 to this section sets out clearly the intention of the drafters:

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This act is drawn to provide flexibility so that, since it is intended to be a semipermanent piece of legislation, it will provide its own machinery for expansion of commercial practices. It is intended to make it possible for the law embodied in this Act to be developed by the courts in light of unforeseen and new circumstances and practices. However, the proper construction of the Act requires that its interpretation and application be limited to its reason. The majoritys rigid interpretation defeats the purpose of the code. Nowhere in the UCC is sum certain defined. This absence must be interpreted in light of the expectation that commercial law continue to evolve. The 8.3-106 exceptions could not have been intended as the exclusive list of safe-harbors, as the drafters anticipated unforeseen changes in commercial practices. Instead, those exceptions represented, at the time of drafting, recognized conditions of payment which did not impair negotiability in the judgement of businessmen. To limit exceptions to those existing at that time would frustrate the continued expansion of commercial practices by freezing the Code in time and requiring additional legislation whenever unforeseen and new circumstances and practices evolve, regardless of custom, usage, and agreement of the parties. The rule requiring certainty in commercial paper was a rule of commerce before it was a rule of law. It requires commercial, not mathematical, certainty. An uncertainty which does not impair the function of negotiable instruments in the judgement of businessmen ought not to be regarded by the courts . . . The whole question is, do [the provisions] render the instruments so uncertain as to destroy their fitness to pass current in the business world? Cudahy Packing Co. v. State National Bank of St. Louis, 134 F. 538, 542, 545 (8th Cir. 1904). Instruments providing that loan interest may be adjusted over the life of the loan routinely pass with increasing frequency in this state and many other as negotiable instruments. This Court should recognize this custom and usage, as the commercial market has, and hold these instruments to be negotiable.

The majority focuses on the requirement found in Comment 1 to 8.3-106 that a negotiable instrument be self-contained, understood without reference to an outside source. Our cases have interpreted this to mean that reference to terms in another agreement which materially affect the instrument renders it nonnegotiable. See e.g., McLean Bank v. Nelson, Admr, 232 Va. 420, 350 S.E.2d 651 (1986) (where note was accepted pursuant to a separate agreement, reference considered surplusage and the note negotiable); Salomonsky v. Kelly, 232 Va. 261, 349 S.E.2d 358 (1986) (where principal sum payable as set forth in a separate agreement, all the essential terms did not appear on the face of the instrument and the note was nonnegotiable). The commercial market requires a self-contained instrument for negotiability so that a stranger to the original transaction will be fully apprised of its terms and will not be disadvantaged by terms not ascertainable from the instrument itself. For example, interest payable at the current rate leaves a holder subject to claims that the current rate was established by one bank rather than another and would disadvantage a stranger to the original transaction. The rate which is stated in the notes in this case, however, does not similarly disadvantage a stranger to the original agreement. Anyone coming into possession could immediately ascertain the terms of the notes; interest payable at three percent above the prime rate established by the Chase Manhattan Bank of New York City. This is a third-party objective standard which is recognized as such by the commercial market. The rate can be determined by a telephone call to the bank or from published lists obtained on request. Associated East Mortgage Co. v. Highland Park, Inc., 172 Conn. 395, 406, 374 A.2d 1070, 1076 (1977); see Constitution Bank and Trust Company v. Robinson, 179 Conn. 232, 425 A.2d 1268 (1979). Accordingly, I believe these notes are negotiable under the Code and I would affirm the decision below.

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c.)

The following is a sample of a variable rate provision: ADJUSTABLE RATE NOTE THIS NOTE CONTAINS A PROVISION ALLOWING FOR CHANGES IN MY INTEREST RATE. IF MY INTEREST RATE INCREASES, MY MONTHLY PAYMENTS WILL BE HIGHER. IF MY INTEREST RATE DECREASES, MY MONTHLY PAYMENTS WILL BE LOWER. ... 2. INTEREST Interest will be charged on that part of principal which has not been paid beginning on the date I receive principal and continuing until the full amount of principal has been paid. Beginning on the date I receive principal, I will pay interest at a yearly rate of 10% . The interest rate that I will pay will change in accordance with Section 4 of this Note. The interest rate required by this Section and Section 4 of this Note is the rate I will pay both before and after any default described in Section 7(B) of this Note. PAYMENTS (A) Time and Place of Payments I will pay principal and interest by making payments every month. I will make my monthly payments on the 1st day of each month beginning on Jan. 1, 1990.I will make these payments every month until I have paid all of the principal and interest and any other charges described below that I may owe under this Note. My monthly payments will be applied to interest before principal. If on ________, _______I still owe amounts under this Note, I will pay those amounts in full on that date, which is called the maturity date. I will make my monthly payments at above address or at a different place if required by the Note Holder. (B) Amount of My Initial Monthly Payments My initial monthly payments will be in the amount of U.S. $_____________. This amount may change to reflect changes in the interest rate that I must pay. The Note Holder will determine my monthly payments in accordance with Section 4 of this Note. INTEREST RATE AND MONTHLY PAYMENT CHANGES (A) Change Dates The interest rate I will pay may change on the 1st of Jan. , 1991, and on that day of the month every six months thereafter. Each date on which my interest rate could change is called a Change Date. (B) The Index Beginning with the first Change Date, my interest rate will be based on an Index. The Index is the weekly average yield on United States Treasury securities adjusted to a constant maturity of 5 years, as made available by the Federal Reserve Board. The most recent Index figure available as of 45 days before each Change Date is called the Current Index. If the Index is no longer available, the Note Holder will choose a new index which is based upon comparable information. The Note Holder will give me notice of its choice. 4. 3.

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(C) Calculation of Changes Before each Change Date, the Note Holder will calculate my new interest rate by adding two percentage points ( 2 % ) to the Current Index. The sum will be my new interest rate in full the principal I am expected to owe on the Change Date in substantially equal payments by the maturity date at my new interest rate. The result of this calculation will be the new amount of my monthly payment. (D) Effective Date of Changes My new interest rate will be become effective on each Change Date. I will pay the amount of my new monthly payment beginning on the first monthly payment date after the Change Date until the amount of my monthly payment changes again. (E) Notice of Changes The Note Holder will mail or deliver to me a notice before each Change Date. The notice will advise me of (i) the new interest rate on my loan as of the Change Date; (ii) the amount of my monthly payment following the Change Date; (iii) any additional matters which the Note Holder is required to disclose; and (iv) the title and telephone number of a person who will answer any question I may have regarding the notice. d.) Does this language render an undertaking non-negotiable?

with interest at the current rate with interest with interest at the highest lawful rate after maturity 2 e.) Is this instrucment payable to order or bearer or both?
Richmond, VA. I promise to pay to the order of bearer the sum of $10,000. /s/John Doe

to the order of TOM TANK or the bearer? to the order of Tom Tank and BEARER? to ____________ or order? f) Assuming that the instrument is payable to order as issued but indorsed by the payee, pay to Tom Doe, does it lose its negotiability through the failure of the payee/indorser to include order/bearer language in the indorsement?

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g.)

Is the following undertaking negotiable?

THE 1ST BANK AND TRUST COMPANY No. Arlington, Virginia $ 10,000.00

This certifies that there have been deposited with THE 1ST BANK AND TRUST COMPANY, the sum of Ten Thousand Dollars payable to John Doe in current funds with interest (for the actual number of days from date to maturity on a 360-day year basis) at the rate of __ per cent per annum upon the 1st day of July 19 90 upon surrender of this certificate. Joe Schmoe Authorized Signature

What about these undertakings? I promise to pay to the order of Tom Tank or the bearer the sum of $10,000, /s/Sam Shoe I promise to pay to the order of Tom Tank and bearer the sum of $10,000, /s/Sam Shoe 4. a.) b.) c.) d.) Is consideration necessary in order to enforce a negotiable instrument? Should it be? Why? Is this requirement of a fixed amount of money mandatory or permissive? Can a negotiable instrument be payable in gold? Why? Can an instrument be payable in ECUs? in SDRs?

e.) In his article on the U.N. Convention on International Bills and Notes, Professor Spanogle suggests that, among other things, such an instrument must contain a date and must name the payee, U.N. Convention on International Bills and Notes, 25 U.C.C. L.J. 99, (1992). Do you agree? Are there any other requirements? See Appendix L.

249 N.Y. 263; 164 N.E. 45 ANDREWS, J. The question before us is whether certain bonds are negotiable instruments. If so, the purchaser in due course from a thief may retain them. The Manitoba Power Company issued a series of bonds. It promised to pay the bearer of each on November 1, 1941, a certain sum at a certain place, with interest. They are said to be all equally secured by and entitled to the benefits and subject to the provisions of a trust mortgage. They may be redeemed at 105 per cent and interest at certain dates. The obligor must create a sinking fund to provide for their purchase or redemption and the principal may become due in advance of maturity in case of default under the mortgage; all as provided in the mortgage to which reference is hereby made for a description of the property

Enoch v. Brandon

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NEGOTIABILITY: THE DOCTRINE AND ITS APPLICATION IN U.S. COMMERCIAL LAW

mortgaged and pledged, the nature and extent of the security, the rights of the holders of the bonds with respect thereto, the manner in which notice may be given to such holders, and the terms and conditions upon which said bonds are issued and secured. The bonds may be registered in the usual way and except where registered they are to be treated as negotiable and all persons are invited by the Company to act accordingly. At times this last provision might aid in the construction of doubtful clauses contained in the instrument before the court. It at least shows that the parties intended to omit anything that might impair negotiability. But no such statement will make negotiable a bond not in the form provided by our statute. Whether the result was or was not fortunate it is too late to argue that the Legislature did not refer to bonds in its all inclusive definitions of negotiable paper. True, to become negotiable an instrument need not follow any precise language. (Negotiable Instruments Law [Cons. Laws, ch. 38], sec. 29.) But it must conform to the definition specified in section 20. In the face of a command so explicit we must adhere to the design of the Legislature (Amer. Nat. Bank v. Sommerville, 191 Cal. 364.) At times contract rights may be enforced or some theory of estoppel adopted, but no intention, no agreement, may make negotiable an instrument which the statute declares to be non-negotiable. We turn, therefore, to the more serious question. The statute deals with the form of the instrument -- with what a mere inspection of its face should disclose. It must contain an unconditional promise to pay a fixed sum, on demand, or at a fixed or determinable future time, to order or to bearer. Only if it fulfills these requirements is it negotiable. If it does, no collateral agreement affects its character. If in the bond or note anything appears requiring reference to another document to determine whether in fact the unconditional promise to pay a fixed sum at a future date is modified or subject to some contingency, then the promise is no longer unconditional. What that document may provide is immaterial. Reference to the paper itself said to be negotiable determines its character. (Old Colony Trust Company v. Stumpel, 247 N.Y. 538.)

Provisions other than those required by section 20 may be contained in a bond or note without impairing its negotiability. There may be included, among other things, a statement of the transaction giving rise to the instrument (sec. 22) or a statement as to collateral security. (Sec. 24.) And it may refer to a trust mortgage, or to an agreement as to the collateral which fixes the remedies of the parties with respect thereto. (Chelsea Bank v. Warner, 202 App. Div. 499.) The rule itself is not a difficult one. The trouble, as often happens, lies in its application to particular facts. There is no infallible test as to whether there is a modification of the promise. Because of differences in the words used, or in the arrangement of paragraphs, sentences or clauses, each instrument must be interpreted by itself. Only then may we solve the question as to its character. Three cases in this State will serve as an illustration. In McClelland v. Norfolk Southern R.R. Co. (110 N.Y. 469) the bond itself showed that the promise to pay was a conditional one. It was to become payable upon the terms and with the effect mentioned in the trust mortgage. In Hibbs v. Brown (190 N.Y. 167) the precise form of the bond involved does not appear in the printed case and exceptions. It did, however, contain a clause referring to the deed of trust for a statement of the rights of the bondholders and of the securities and property securing the payment of the bonds, and we said that this clause had only to do with procedure under the trust indenture. In Old Colony Trust Company v. Stumpel (247 N.Y. 538) the note stated that it was subject to the terms of a conditional sales agreement. Here by no possibility did the clause relate to security. Necessarily it had to do with the terms of payment. Do then the references in these particular bonds to the trust mortgage modify the promise to pay; do they subject it to some possible condition or contingency described elsewhere, or do they merely determine the rights and remedies of the holder under the mortgage? We must consider the instrument as a whole, not wresting any one phrase from its context and concentrating our attention upon it alone. Further, where the meaning is doubtful, we must adopt the construction most favorable to the bondholder.

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CHAPTER 2: REQUISITES OF NEGOTIABILITY - IS THE INSTRUMENT NEGOTIABLE?

The bonds are part of an issue of $7,500,000, all equally secured by and entitled to the benefits and subject to the provisions of the trust mortgage. Then, speaking of possible redemption, of acceleration of payment, of a sinking fund and of notice, it continues all as provided in the trust mortgage to which reference is hereby made for a description of the property mortgaged and pledged, the nature and extent of the security, the rights of the holders of the bonds with respect thereto, the manner in which notice may be given to such holders, and the terms and conditions under which said bonds are issued and secured. We hold that here there is no modification of the promise to pay, made in explicit terms. The provisions all have to do with the trust mortgage. They refer to the rights conferred by it upon the bondholders and limit and explain those rights. They are so linked together as to indicate that the obligor was speaking solely of the security. A purchaser scanning the bonds would have the same thought. It would never occur to him that when November 1, 1941, arrived, because of something contained in the mortgage he might be unable to collect the amount due him. He would interpret the statement that the bonds were secured by and entitled to the benefits and subject to the provisions of the mortgage, as meaning that a foreclosure or other relief might be had thereunder only subject to its provisions. He would see that reference to it is also made to determine the terms and conditions under which the bonds are issued and secured. Again it would mean to him as it means to us, that only by turning to the mortgage might he discover the precise nature of the lien he is to ob-

tain. He would see that the bonds were to be issued not only upon the general credit of the corporation, but upon the faith of some collateral mortgage. To it he must go if further knowledge as to this security is desired. Some minor matters are also to be considered. There is the possibility of the acceleration of the date when the bonds are due if there is default under the mortgage. Such a possibility does not make them nonnegotiable. (Higgins v. Hocking Valley Ry. Co., 188 App. Div. 684; Chicago Railway Equipment Company v. Merchants Bank, 136 U.S. 268, 284; Mackintosh v. Gibbs, 81 N.J.L. 577; Schmidt v. Pegg, 172 Mich. 159; White v. Hatcher, 135 Tenn. 609.) A note is payable at a determinable future time if payable on or before a fixed date. (Sec. 23.) And in one case acceleration of payment in case of default is expressly recognized. (Sec. 21.) The same thing is true of the privilege given the obligor to redeem at 105 per cent before the bonds became due. That does not limit its absolute promise to pay on November 1, 1941. The bonds are payable to bearer or if registered to the registered holder. This does not affect their negotiability. (Dickerman v. Northern Trust Company, 176 U.S. 181.) Nor does the provision requiring the obligor to create a sinking fund. The judgment of the Appellate Division should be reversed and that of the Trial Term affirmed, with costs in this court and in the Appellate Division. CARDOZO, Ch. J., CRANE, LEHMAN, KELLOGG and OBRIEN, JJ., concur; POUND, J., dissents.Judgment accordingly.

QUESTIONS
1.) In U.S. v. Farrington, 172 F. Supp. 797 (C.D. Mass. 1959), the court held that the following clause rendered a note conditional notwithstanding the absence of any provision in the loan agreement that would compromise the negotiability of the note: ... having deposited with this obligation as collateral security, Assigned Government Contracts This note evidences a borrowing made under and is subject to the terms of loan agreement dated Jan. 3, 1952 between the undersigned and the payee thereof and should the market value of the same, in the judgment of the holder or holders hereof, decline, we promise to furnish satisfactory additional collateral on demand.

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NEGOTIABILITY: THE DOCTRINE AND ITS APPLICATION IN U.S. COMMERCIAL LAW

Can this decision be reconciled with Enoch? 2.) The mortgage bond in Lincoln First Bank v. Bank of New York, supra, contained the following clause:

IT IS HEREBY EXPRESSLY AGREED, that the said principal sum shall at the option of the obligee become due on the happening of any default or event by which, under the terms of the mortgage securing this bond, said principal sum may or shall become due and payable; also, that all of the covenants, conditions and agreements contained in said mortgage are hereby made part of this instrument. Does this language affect the negotiability of the instrument? 3.) Does the following clause affect negotiability?

a. This note with interest is secured by a mortgage on real estate of even date herewith, made by the maker hereof in favor of the said payee, and shall be construed and enforced according to the laws of the State of Florida. The terms of said mortgage are by this reference made a part hereof. 3 b. hereof.2d c. half...2e d. Reference is made to the Purchase and Security Agreement for additional rights of the holder This promised payment for ownership in Casper project when/if option is exercised for 2nd A check, on the memorandum line;

JUST TO HOLD FOR THE SECURITY OF FUTURE BUSINESS2f 4.) Are either of the following clauses negotiable? a.
"No. ____ $5,000.00 February , 19___ after date; for value received, I promise to pay to the order of Mellow Music, Inc., Five thousand and no/100-------- Dollars Payable at From Cigarette Commissions, of, _____________ with interest thereon at the rate of ______ per cent, per annum from _______ until fully paid. Interests payable semiannually. The maker and endorser of this note fruther agree to waive demand, notice of non-payment and protest, and in case suit shall be brought for the collection hereof, or the same has to be collected upon demand of an attorney, to pay reasonable attorney's fees for making such collection. Deferred interest payments to bear interest from maturity at ___ per cent, per annum, payable semi-annually. Due On Demand 19 __ Lester Siegel Pres. (Seal) Lester Seigal d/b/a Jester Rest. (Seal)

b Without regard to the foregoing, payments of principal on January 1, 1987, and June 1, 1987, will be made from the proceeds, if any, of the sale of kangaroo belts under that agreement between maker and the Tie Me Kangaroo Down Belt Company, Ltd. Any amounts not paid shall accumulate to the next payment date provided, however, that the balance shall be paid in full on January 1, 1988, from the general revenue of the maker and not limited to any particular fund.4

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CHAPTER 2: REQUISITES OF NEGOTIABILITY - IS THE INSTRUMENT NEGOTIABLE?

5.) If an instrument which otherwise complies with Section 3-104 contains the following clause--This instrument is not negotiable--would it be commercial paper under prior Article 3? Same result under revision?

Cheltenham National Bank v. Snelling

326 A. 2d 557 (Pa. Super. 1974) HOFFMAN, Judge: This appeal is from an order of the Court of Common Pleas of Montgomery County dismissing appellants petition to open and set aside a confessed judgment. We must determine whether a clause allowing judgment to be confessed at any time renders the instrument nonnegotiable; if so, we must determine whether principles of equitable estoppel preclude the appellant from asserting defenses against the appellee, the present holder of the instrument. The complex facts of this case may be summarized as follows: On August 14, 1969, Goodway Copy Centers, Inc. (Goodway) and appellant entered into a franchise arrangement whereby Goodway promised to locate, establish, equip and manage 100 copy centers within a period of seven years. In return, appellant agreed to purchase the centers as completed. Shortly thereafter, appellant transferred all his right in this venture to International Development Corp. (IDC), of which appellant was the sole shareholder. Goodway was represented in these negotiations by Mr. Donald Wolk. In December, 1969, Mr. Wolk applied to Cheltenham National Bank (Cheltenham) for a loan. Appellant did not participate in any negotiations. Appellant testified that Mr. Wolk told him that Cheltenham would require a promissory note as a prerequisite to granting the loan. On February 27, 1970, appellant executed a demand note to the order of Goodway in the amount of $150,000.1 Cheltenham was aware that the purpose of the loan was to enable Goodway to purchase five copy centers. Cheltenham never saw the master agreement between appellant and Goodway but did possess a copy of Goodways prospectus and appellants financial statement. On March 24, 1970, Goodway assigned appellants note to Cheltenham and the bank approved the loan application. $132,000 was deposited into a Goodway account and $18,000 was deposited into accounts held by IDC. Appellant paid the interest on the loan for the first year. In March, 1971, Cheltenham demanded that Goodway make a principal payment on the loan, and on July 20, 1971, made the same demand of appellant. In late November, 1971, there was a meeting attended by appellant, Mr. Wolk, and Mr. Monroe Long, President of Cheltenham. Mr. Long testified that a repayment schedule was agreed to at that meeting. Appellants testimony is in conflict, but a letter from appellant to Mr. Long, dated December 15, 1971, states: I feel confident that a substantial payment can be made sometime prior to the end of December. In March, 1972, appellant pledged almost 19,000 shares of Snelling & Snelling stock to Cheltenham as collateral. No payments of principal were ever made. Eventually, Goodway sold all of its business other than the venture with appellant to another firm. The completed centers that appellant had purchased from Goodway during the interim were closed by an Internal Revenue Service levy. In August, 1972, appellant filed suit against Goodway in Federal District Court. On April 6, 1973, Cheltenham confessed judgment on the promissory note assigned to it by Goodway. On May 16, 1973, appellant filed a Petition to Open Judgment. Appellee filed an Answer to this Petition and extensive depositions were taken and transcribed. On December 31, 1973, the lower court heard oral arguments. On the basis of the depositions, briefs, and argument, the court denied appellants Petition to Open Judgment on the grounds that Cheltenham was the holder in due course of a negotiable instrument and alternatively, (e)ven if the plaintiff were not a holder in due course of the note, by reason of defendants conduct and actions he has estopped himself from asserting any defenses he may have as to Goodway Copy Centers, Inc. against this plaintiff. This appeal is taken from the denial of said petition.

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In its Petition to Open and Set Aside Confessed Judgment, appellant asserts that Goodway procured the Master Agreement by fraudulent misrepresentations and that Goodway was in breach of said agreement. These defenses are personal and will not prevail against a holder in due course.2 Appellant contends, however, that Cheltenham cannot be a holder in due course because the instrument assigned to it contained a clause authorizing confession of judgment at any time, and was therefore a nonnegotiable note. Thus, appellant claims that Cheltenham is merely an assignee whose rights rise no higher than those of its assignor. The Uniform Commercial Code, section 3112, provides that (1) the negotiability of an instrument is not affected by . . . (d) a term authorizing a confession of judgment on the instrument if it is not paid when due. (Emphasis added). Thus, a confession of judgment clause is authorized by the Code Only if the instrument is not paid when due. If the clause allows judgment to be confessed at a time prior to a default, the clause renders the instrument nonnegotiable. Funds for Business Growth, Inc. v. Maraldo, 443 Pa. 281, 278 A.2d 922 (1971), involved a confession of judgment clause in a nonnegotiable note. The Court stated at 283, 278 A.2d at 923: Appellee had recorded the note on January 20, 1961, immediately after its execution on January 19, 1961, so that judgment was confessed against all parties prior to any default. . . . Section 3112(1) (d)(12A P.S.) provides that negotiability is not affected by a term in the instrument that permits confession of judgment if it is not paid when due. This has been held to mean that a note which authorizes confession of judgment at any time before or after maturity, as is the case here, is a nonnegotiable instrument. The instrument in question provides in pertinent part: And to secure the payment of said amount we hereby authorize, . . . any Attorney of any Court of Record to appear for us in such Court, . . . At any time before or after maturity and confess a judgment . . . (Emphasis added). Appellee argues that the instrument is negotiable because it is a demand note and is thus immediately due and payable after its making. Appellee asserts, therefore, that the words before maturity are mere surplusage and have no effect on negotiability. However, the crucial language in the instrument is the words

at any time. The significance of these words is that confession of judgment is authorized whether or not a default has occurred. Under appellees interpretation, Cheltenham could have confessed judgment immediately upon receiving the instrument without ever demanding payment.3 Holding the note negotiable under this interpretation is at odds with both the language of Section 3-- 112(1)(d) and applicable precedent. In Smith v. Lenchner, 204 Pa.Super. 500, 205 A.2d 626 (1964), this Court held that a demand note having a confession of judgment clause authorizing confession at any time was nonnegotiable: Prior to the enactment of the Code, a note containing a warrant of attorney to confess judgment at any time was held to be a nonnegotiable instrument . . . . This rule was applied to a demand note . . . . The same result has been reached in cases subsequent to the enactment of the Code. 204 Pa.Super. at 505, 205 A.2d at 629. Under the law of this Commonwealth, the note assigned to Cheltenham was nonnegotiable and Cheltenham took it subject to any defenses appellant could assert against Goodway. In order to successfully petition to open a confessed judgment, one must act promptly and aver a meritorious defense, Wenger v. Ziegler, 424 Pa. 268, 226 A.2d 653 (1967); however, (a) petition to open judgment is addressed to the sound discretion of the court and is an appeal to the courts equitable powers. Wenger, supra, at 273, 226 A.2d at 655. Courts have always recognized that equitable estoppel may bar a meritorious defense even in contract-assignment cases. See, e.g., Northwestern National Bank v. Commonwealth, 345 Pa. 192, 27 A.2d 20 (1942). Therefore, even though the note is nonnegotiable, if the facts warrant an equitable estoppel, appellant is precluded from asserting defenses against an assignee. The essential elements of an equitable estoppel as related to the party claiming the estoppel are: (1) lack of knowledge and of the means of knowledge of the truth as to the facts in question; (2) reliance upon the conduct of the party estopped; and (3) action based thereon of such a character as to change his position prejudicially. United States National Bank in Johnstown v. Drabish, 187 Pa.Super. 169, 144 A.2d 640 (1958).

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The record reveals that Cheltenham was unaware at the time it assumed the note that Goodway may have procured its contract with appellant by means of fraudulent misrepresentation or that Goodway may have been in breach of contract. Cheltenham was merely a lender who assumed a promissory note in return for approving a loan; it was not a Contract assignee. In fact, Cheltenham never saw the contract between appellant and Goodway until after judgment had been confessed. It is true that Cheltenham was aware of the purpose of the loan and knew that an arrangement between Goodway and appellant existed. Section 3304(4)(b) of the Code provides, however, that: (4) Knowledge of the following facts does not of itself give the purchaser notice of a defense or claim . . . (b) that it was issued or negotiated in return for an executory promise or accompanied by a separate agreement, unless the purchaser has notice that a defense or claim has arisen from the same terms thereof. (Emphasis added). There was no reason for Cheltenham to be put on notice of any defenses from the mere fact of the separate agreement. The Bank had a copy of Goodways prospectus and a copy of appellants financial statement. Cheltenham was also aware of Mr. Snellings personal reputation in the business community. On that basis, consistent with its policies, Cheltenham loaned Goodway and IDC $150,000 and received appellants promissory note in return. The second element of equitable estoppel is reliance. The facts show that Cheltenham began demanding principal payments as early as March 1971. Letters from appellant to Cheltenham dated August 4, 1971, and December 15, 1971, contain promises from appellant to institute a schedule in order to repay the loan in full.4 Cheltenham relied on these letters to forebear from confessing judgment at those times. The March, 1972 pledge of Snelling & Snelling stock induced further reliance on the part of Cheltenham. The Bank could reasonably view appellants conduct as indicative of a bona fide intent to repay. In United States National Bank in Johnstown v. Drabish, supra, a petition to open judgment was denied. The facts presented in this case are similar: the note was given for the purpose of raising money; the bank was only a lender and not a contract assignee;

and the bank was unaware of any possible defenses that the maker could assert against the original holder of the instrument. These facts distinguish the present case from those decisions which granted petitions to open judgment. For example, in Fidelity Trust Co. v. Gardiner, 191 Pa.Super. 17, 155 A.2d 405 (1959), the entire factual situation was permeated with fraud. The appellant had been dealing with an imposter and there was sufficient evidence to put the bank-assignee on notice of that fact. See also, Bittner v. McGrath, 186 Pa.Super. 477, 142 A.2d 323 (1958) (Plaintiff clearly aware of the existence of defenses against his assignor); Standard Furnace Co., Inc. v. Roth, 102 Pa.Super. 341, 156 A. 600 (1931) (Bank a contract assignee as well as a lender). There are no circumstances in the present case which would have imposed a duty on Cheltenham to make further inquiries. Cheltenham waited more than three years from the time it obtained the note until it confessed judgment. This delay has resulted in a prejudicial change in Cheltenhams position. At the time judgment was finally confessed, Goodway had sold all of its assets, IDC was virtually inactive, and the Snelling & Snelling stock pledged as collateral was considerably reduced in value. The difficulty of obtaining repayment is self-evident from the state of affairs existing at the time judgment was confessed. We hold that the note in question is nonnegotiable, but that appellant is barred by principles of equitable estoppel from asserting any defenses he may have. Therefore, the order of the court below is affirmed. Under the Uniform Commercial Code, Instruments payable on demand include those payable at sight or on presentation and those in which no time for payment is stated. 12A P.S. Section 3108. A demand note is due and payable immediately at the option of the holder. Master Homecraft Co. v. Zimmerman, 208 Pa.Super. 401, 222 A.2d 440 (1966).
1

Under 12A P.S. Section 3305, a holder in due course takes the instrument free from all personal defenses of any party to the instrument with whom he has not dealt, but takes the instrument subject to five specifically delineated real defenses. 12A P.S. Section 3 306 provides that if one is not a holder in due course, he
2

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takes the instrument subject to, Inter alia, all contract defenses and the defenses of want or failure of consideration. The official comment to Section 3112(1)(d) states: The use of judgment notes is confined to two or three states, and in others the judgment clauses are made illegal or ineffective either by special statutes or by decision. Thus, close judicial scrutiny is essential.
3

time to time depending on the availability of funds at that particular time. (Emphasis added). The December 15, 1971 letter states in pertinent part: As a follow-up to our meeting of several weeks ago between yourself, Mr. Wolk and I, at which time we felt strongly that some type of payment could be made on the principal on the outstanding loan to International Development Corporation . . . . As the situation now exists, I feel confident that a substantial payment can be made sometime prior to the end of December. While this deviates somewhat from our original commitment, I would feel that you would be in a position to go along with this slight delay of several weeks. (Emphasis added).

On August 4, 1971, appellant wrote to Mr. Long: This will acknowledge receipt of your recent letter concerning the $150,000 loan to International Development Corporation. We have been remiss in setting up a definite repayment plan covering the reduction of the principal, and I appreciate your consideration and understanding in this matter.
4

We will institute, beginning with the month of August, a regular repayment schedule which will continue on a monthly basis until such time as the entire loan is repayed. This amount will fluctuate from

QUESTIONS
1. Va. Statute 8.01-433.1 (1992) provides:

No judgement shall be confessed upon a note, bond, or other evidence of debt pursuant to a confession of judgement provision contained therein which does not contain a statement typed in boldface print of not less than eight point type on its face: IMPORTANT NOTICE THIS INSTRUMENT CONTAINS A CONFESSION OF JUDGEMENT PROVISION WHICH CONSTITUTES A WAIVER OF IMPORTANT RIGHTS YOU MAY HAVE AS A DEBTOR AND ALLOWS THE CREDITOR TO OBTAIN A JUDGEMENT AGAINST YOU WITHOUT ANY FURTHER NOTICE. This Section shall only apply to notes, bonds, or other evidences of debt containing confession of judgement provisions entered into after January 1, 1993. Does the absence of this provision affect the negotiability of a note containing a confession of judgement clause subject to Virginia law? 2. Are confession of judgment clauses permissible in any type of commercial paper? Which? Should they be? See H. Ward Classen, Robert K. Rowell, & James C. Wine, A Survey of the Legality of Confessed Judgement Clauses in Commercial Transactions, 47 The Business Lawyer 729 (1992).

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3. When did the note in the Cheltenham case become due? Can a demand note containing a pro confesso clause ever be negotiable? Is the absence of a provision stating when a judgment clause can be confessed the same as an express provision permitting confession as of any term? 4. Does the current Article 3 resolve this issue?

5. Company X , a U.S. company, agreed to purchase exchange currencies with Company Y, a Swiss company. As part of this arrangement, Company X transferred U.S. $6.9 million into Company Y's accounts in fulfillment of it undertaking. Company Y, however, had been declared insolvent. What law governs? See Koreag, Controles el Revision S.A. v. Refco F/S Associates, Inc. 961 F.2d 341 (2nd Cir. 1992).

DREW, Justice. This petition for certiorari, based on a question certified to us by the District Court of Appeal, Third District, is directed to a decision of that court dated June 15, 1965 and reported as Michael v. Schekter in 176 So.2d 581. The respondent executed a note for $8000.00 payable to Charles Donner but with the due date left blank. Thereafter the note was assigned to petitioner who made demand for payment. This was refused and petitioner brought suit. Respondent interposed defenses based on an alleged parol agreement by which the note was not to mature until some indefinite time in the future determined by certain other ventures of the maker and payee. The petitioner moved for summary judgment which was granted. The respondent appealed to the District Court of Appeal which reversed the trial judge and certified the case to us as passing upon a question of great public interest.

184 So. 2d 641 (Fla. 1966) It is said that this is a case of first impression in Florida. In view of the plain, unambiguous language of the statute, this is understandable. The New Hampshire Supreme Court in Merrimack River Savings Bank v. Higgins, 89 N.H. 154, 195 A. 369 (1937), in construing this identical Section taken from N.I.L., correctly disposed of the question in this terse observation: The statute states no exceptions or qualifications to the demandable character of such an instrument, and no policy is perceived by which any are implied by it. The law is intended to be a fully developed codification, of static fixation. It seeks definiteness and completeness, avoiding uncertainty and elasticity. (Emphasis supplied.)

Schekter v. Michael

If a person executes and delivers a promissory note in which no time for payment is expressed, he is The question posed is: charged with knowledge it is payable on demand. The decision of the District Court is quashed and the cause Whether a promissory note which is blank as to is remanded to that court for entry of a judgment afdue date becomes, by application of Sec. 674.09(2), firming the summary judgment of the trial court. F.S., a demand note thereby barring the admission into evidence of a contemporaneous parol agreement which THORNAL, C.J., and THOMAS, OCONNELL, would vary the demand character of the instrument? CALDWELL and HOBSON (Ret.), JJ., concur. The law is a part of every contract made in this State. Therefore, when this note was executed and delivered (April 19, 1960) the provisions of Section 674.09, Florida Statutes 1959, F.S.A., became as much a part of the note as if it had been written on the face of it. This was tantamount to stamping across the face of the note No time for payment appearing hereon, this note is payable on demand. ERVIN, J., dissents with opinion. Editors Note: Fla. Stat. 674.09(1959) was based on Section 7 of the Uniform Negotiable Instrument Law, the predecessor statute to U.C.C. Article 3, which provided that an instrument is payable on demand...in which no time for payment is expressed....

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QUESTIONS
1. Should the parol evidence rule apply to the question of whether an instrument is negotiable? Did the instrument in Schekter contain an integration clause? Is such a clause necessary for application of the parol evidence rule? What is the effect of 3-117? 2. Is the requirement that a note be payable on demand or at a definite time mandatory? 3. Assume a note contains the following clause: Payee may accelerate at will at which point the full balance shall be due and owing. Is the note negotiable? Assume that the payee accelerates in order to damage makers credit and force maker into bankruptcy so as to have access to the makers property even though maker is not in default. Does this use of the clause affect the negotiability of the note?5 4. Is the following undertaking negotiable? If not, can it be rendered so? I promise to pay the sum of $5,000.00 payable upon the death of Y (Y being a specific person). /s/ MAKER 5. The United Nations Commission on International Trade Law (UNCITRAL) has drafted a Convention on International Negotiable Bills of Exchange and International Promissory Notes. The text of that Convention merits careful examination for the comparative insights it provides into the Article 3 system. For a summary of this Convention, see Appendix B. Note For a helpful treatment of legal analysis by one of the leading drafters of the UCC, Professor Karl Llewellyn, see Appendix C. His remarks should be most useful in enabling you to discern between sound and unsound argument and between strong and weak argument. Are they the same? What is a technically perfect case? Why doesnt Llewellyn think it is enough? ENDNOTES 2d. See, First Federal Sav. & Loan Asso. v. Gump & Ayers Real Estate, Inc., 771 P.2d 1096, 105 Utah Adv. Rep. 27, 8 U.C.C. Rep. Serv.2d (Callaghan) 720. 2e. See, Northwestern Nat. Bank v. Shuster,307 N.W.2d 767, 32 U.C.C. Rep. Serv. (Callaghan) 585 (Minn. 1981). 2f. See, Carador v. Sana Travel Service, Ltd., 700 F.Supp 787, 8 U.C.C. Rep Serv.2d (Callaghan) 752 (S.D.N.Y. 1988). 1. See Branch Banking & Trust Co. v. Creasy, 301 N.C. 441, 269 S.E. 2d 117 (1980).

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CHAPTER 2: REQUISITES OF NEGOTIABILITY - IS THE INSTRUMENT NEGOTIABLE?

2. See Universal C.I.T. Credit Corp. v. Ingel, 347 Mass. 119, 196 N.E. 2d 847 (1964). 3. See Holly Hills Acres, Ltd. v. Charter Bank of Gainesville, 314 So. 2d 209 (Fla. Dist. Ct. App. 1975). 4. See Rothenberg v. Mellow Music, Inc., 291 So. 2d 234 (Fla. Dist. Ct. App. 1974) 5. See Opinion of the Attrney Gerneral of Iowa, No. 65-7, July 9, 1965, 3 U.C.C. Rep. Serv. 183. 6. Manhattan Co. v. Morgan, 242 N.Y. 38, 150 N.E. 594 (1926).

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