Pub. 7 2012-2013 Issue 6

www.nebankers.org 12 Extraordinary Service for Extraordinary Members. bank to pay off the corresponding loan between the feedlot and the bank. Negotiable Instruments By design, negotiable instruments are transferrable and give a holder in due course confidence in the enforceability of the instrument. The maker of a negotiable instrument is unable to raise most defenses to the instrument against a holder in due course. Nebraska’s UniformCommercial Code defines a negotiable instrument, in part, as “an unconditional promise or order to pay a fixed amount of money . . .” 4 The Iowa bank’s standard-form note included language that violated both of these negotiability requirements. The Language of the Note The bank’s standard-form note stated in part: The undersigned . . . promise(s) to pay to the order of Feedlot . . . the principal sum of $______ or so much thereof as is disbursed and remains outstanding hereunder . . . as shown by the Feedlot’s liability record . . . 5 Perhaps contrary to the bank’s intention, the note was not a negotiable instrument because it did not contain an uncon- ditional promise to pay a fixed amount of money. Fixed Amount of Money The language in the note “or so much thereof as is dis- bursed and remains outstanding” was likely added because the bank advanced funds to the feedlot one feed bill at a time. As a result, it was possible that the full amount of the note would not be advanced to the feedlot. However, this language made the principal amount due on the note vari- able. To be a negotiable instrument, the promise or order must be for a fixed principal amount. 6 Unconditional Promise In addition to a variable principal amount, the promise to pay was conditional because the amount was determined by a writing other than the note. The Nebraska Uniform Commercial Code states that a promise is unconditional unless it states: the promise or order is subject to or governed by another writing, or . . . that rights or obligations with respect to the promise or order are stated in another writing. 7 A reference to “another writing” does not automatically make a note non-negotiable. However, the value of the note cannot be dependent upon “another writing.” The note in the Iowa case was “subject to or governed by” the “Feedlot’s liability record.” Additionally, the “rights or ob- ligations with respect to the promise or order” were stated in the “Feedlot’s liability record.” Any holder of the note was required to examine the “Feedlot’s liability record” to determine its value. Because the principal amount of the note was variable, and the promise was conditional upon the “Feedlot’s liability record,” 8 the negotiability of the note was destroyed. “Toto, I Have a Feeling We’re Not in Kansas Anymore.” When the note lost its negotiability, the Iowa bank was no longer a holder in due course. Under the Nebraska Uni- form Commercial Code, because the notes contained both a monetary obligation and a security interest, the notes were chattel paper. “Chattel paper means a record or records that evidence both a monetary obligation and a security interest in specific goods . . .” Z 1 The term “feedlot” is used in this series instead of “feedyard.” 2 Rolling Hills Bank & Trust v. Mossy Creek Farms Ltd. P’ship , No. 2-909/12-0489 (Iowa Ct. App., Jan. 9, 2013.) available at www.iowacourts.gov/court_of_appeals/Recent_ Opinions/20130109/2-909.pdf (last visited Feb. 28, 2013). 3 The original drafter of the note was unknown to the bank. 4 Neb. Rev. Stat. § 3-104(a) (2001) (emphasis added.) This series will cite to the relevant portions of the Nebraska Uniform Commercial Code, rather than the Iowa provisions cited in Rolling Hills. 5 Emphasis added. 6 Interest does not destroy the negotiability of a note and is specifically exempted under Neb. Rev. Stat. § 3-112(b) (2001). 7 Neb. Rev. Stat. § 3-106 (2001). 8 Further adding to the problem, the note did not define the phrase “Feedlot’s liability record” and the parties disagreed on the meaning of the term. For more information, contact Gene Summerlin at Husch Blackwell LLP at (402) 964-5014 or gene. summerlin@huschblackwell.com. Summerlin is a partner in Husch Blackwell’s Food and Agribusiness Industry group, where he concentrates his practice on civil litigation. In addition to serving as counsel in multiple litigation matters involving agricultural clients, Summerlin is general counsel for cattle breeding and crop associations. Andrew Weeks can be contacted at (402) 964-5165 or andrew.weeks@huschblackwell.com . Weeks concentrates his practice on civil litigation and provides litigation support to Husch Blackwell’s Food and Agribusiness Industry group. Q Negotiability — continued visit us online! www.nebankers.org www.nebankers.org