Secured Transactions, Professor Sparks, Spring 2014
v 3 Types of Documents à
1. Promissory Note
a. Creates the repayment obligation
2. Security Agreement (Loan Agreement)
a. Creates the security interest – creates the secured party’s right to the collateral
3. Financing Agreement
a. Notice document that must be filed in public records under Art. 9
Negotiable Instrument v. Just a Contract
NOTE à
· An agreement that creates debt, but is NOT a negotiable instrument is a perfectly legal contract, but with a negotiable instrument you get more protection –
o Easier to collect
o Free from all contract defenses of debtor
· Courts construe negotiable instruments NARROWLY
· Should be simple, so document in fungible and can be transferred and assigned
o No specific conditions attached to it
· Negotiable instruments are the background of securitization
· Maker (debtor) à Payee à Holder (HDC?)
· HDC is usually an issue in commercial loan rather than in private loans
o Private loans, like car loans, usually contain a clause that the buyer of this note (holder) cannot be a HDC – bc it would be unfair to the consumer
· HDC – “Carrier without baggage”
§ Check is perfect example
v § 3-104: Negotiable Instrument
a) 1Except as provided in subsection (c) and (d), 2a “negotiable instrument” means an unconditional promise to pay OR order to pay 3a fixed amount of money, 4with or without interest or other charges described in the promise or order, IF IT à
1) 5is payable to bearer OR to order at the time it is issued or first comes into possession of a holder;
2) 6is payable on demand OR at a definite time; AND
3) 7does not state any other undertaking OR instruction by the person promising or ordering payment to do any act in addition to the payment of money, 8BUT the promise OR order MAY contain –
i. an undertaking or power to give, maintain, or protect collateral to secure payment,
ii. an authorization or power to the holder to confess judgment OR realize on OR dispose of collateral, OR
iii. a wavier of the benefit of any law intended for the advantage OR protection of an obligor
b) “Instrument” means negotiable instrument.
c) An order that meets all of the requirements of subsection (a), except paragraph (1), and otherwise falls within the definition of “check” in subsection (f) IS a negotiable instrument and a check.
d) A promise OR order other than a check is NOT an instrument IF, at the time it is issued OR first comes into possession of a holder, it contains a conspicuous statement, however expressed, to the effect that the promise or order is not negotiable OR is not an instrument governed by this Article.
· An unconditional promise or order à
o § 3-106(a)(i)
§ Under 3-104(a), a promise or order is unconditional UNLESS it states
i. an express condition to payment,
a. ex: “I promise to pay $100,000 to the order of John Doe if he conveys titled to Blackacre to me” (exp. Cond. To payment)
b. BUT, ex: “In consideration of John Doe’s promise to convey title to Blackacre, I promise to pay $100,000 to the order of John Doe” – (this is an implied condition and would not violate this section)
ii. that the promise or order is subject to OR governed by another record, OR
a. ex: “subject to” OR “incorporated”
b. BUT, 3-106(b)(i) à Reference to another record for a statement of rights w/ respect to collateral, prepayment, or acceleration is okay!
i. 3-106(b)(ii) à payment CAN be limited to resort to a particular fund or source
iii. that rights or obligations with respect to the promise or order are stated in another record.
§ *A reference to another record does of itself make the promise or order conditional.
· To pay a fixed amount of money à
o 3-107
§ Can be foreign money
o 3-112
§ Can include interest
· Payable to the bearer or order at the time it is issued or first comes into possession of a holder à
o 3-109(a) – A promise is payable to bearer IF it à
§ 3-109(a)(1)
· States that it is payable to bearer OR to the order of bearer OR otherwise indicates that the person in possession of the promise or order is entitled to payment
§ 3-109(a)(2)
· Does not state a payee at all, OR
§ 3-109(a)(3)
· States it is payable to or to the order of cash OR otherwise indicates it is not payable to an identified person
o 3-109(b) à
§ A promise or order that is NOT payable to bearer is payable to order IF IT is payable (i) to the order of an identified person OR (ii) to an identified person or order. A promise or order that is payable to order is payable to the identified person.
· Is payable on demand OR at a definite time
o 3-108(a) à “payable on demand”
§ (i) Could state it is payable on demand or at sight, or otherwise indicates that it is payable at the will of the holder, OR
§ (ii) Does not state anytime of payment
o 3-108(b) à “payable at a definite time”
§ could be payable on a elapse of a definite period of time after sight or acceptance, OR at a fixed date or dates, OR at a time or times readily ascertainable at the time the promise or order is issued
§ Subject to the rights of (i) prepayment, (ii) acceleration, (iii) extension at the option of the holder, OR (iv) extension to a further definite time at the option of
to terms of the selling of the note to them from the creditor –
§ COURT SAID Holder was essentially involved in the transactions itself thus, cannot be HDC (cts split on this, but general disfavor of taking advantage of consumers)
v Debtor’s Defenses Allowed Against HDC (Real Defenses)
o 3-305
§ (b) says that those defenses in (a)(1) are the only defenses allowed against a holder in due course
· (a)(1) à
o Infancy,
o Duress,
o Lack of legal capacity
o Illegality of the transaction which, under other law, nullifies the obligation of the obligor (maker) – state law (C.L.)
§ Have to look at state law to see if it nullifies or voids the contract
o Fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms, OR
o Discharge of the obligor in insolvency proceedings
v Representative Signatures
o Signatures
§ 3-401(a)
· You are NOT liable on an instrument UNLESS you sign it OR your representative/ agent signs it
· If a person signs as a representative, the represented person is bound by the signature as if they signed it themselves
o Representative Signatures
§ 3-402(b)(1): If the signature unambiguously shows it is a signature on behalf of the represented person, the individual signing is not liable
§ 3-402(b)(2): IF the representative signature does not unambiguously show a representative signature, OR the represented person is not identified in the instrument, THEN the representative IS LIABLE on the instrument to a holder in due course that took the instrument without notice that the representative was not personally liable on the instrument
· UNLESS à representative proves original parties did NOT intend the representative to be liable on the instrument
o Unauthorized Signatures
§ 3-403(a): An unauthorized signature is ineffective unless the signature is in favor of a person who in good faith pays the instrument or take it for value
§ 3-403(b): If the signature of more than one person is required to bind a represented party, the signature of the organization is unauthorized if one signature s lacking
