Pub. 8 2013-2014 Issue 1

May | June 2013 15 Extraordinary Service for Extraordinary Members. Managing Risk in Custom-Feeder Lending: A Case Study Stinking Up Negotiability (Part II of III) Gene Summerlin and Kevin Savory , Husch Blackwell LLP T HIS ARTICLE IS THE SECOND IN- stallment in a three-part series inspired by a recent case in Iowa. 1 It is intended to highlight the risks banks must manage, and the consequences for failing to do so, when lending to feedlots (i.e., feedyards) and feeders. The first installment high- lighted the language in a promissory note that destroyed its negotiability, thereby limiting an Iowa bank’s ability to enforce the instrument. The final segment will offer recommendations for controlling the inherent risks in a custom-feeder lending relationship. Today, we will explore the specific con- sequences suffered by a bank when an instrument is non-negotiable. Quick Recap of the Facts The Iowa case involved three par- ties: a bank that financed the feedlot’s operation, a feeder that owned cattle, and a feedlot that cared for andmarket- COUNSELOR’S CORNER ed the feeder’s cattle. The bank drafted a standard form promissory note for execution by the feeder, payable to the feedlot. The bank most likely intended for these instruments to be negotiable, which would allow for transferability of the note and give a holder in due course (the feedlot, initially) confidence in the enforceability of the instru- ment. However, the negotiability of the instruments was destroyed for two reasons: 1) The principal amount of the note was variable rather than fixed (the principal amount of the note must be fixed in order for it to be negotiable). 2 2) The language of the note created a conditional promise to pay (the note must contain an unconditional prom- ise to pay to be negotiable). 3 As such, the notes were actually chattel paper, an instrument containing a monetary obligation and a security interest, but which is not negotiable. 4 The feedlot and the feeder executed a number of these notes, with the feed- lot subsequently assigning several of these notes to the bank. Over time, the feedlot ran into financial difficulty and the bank demanded payment on the outstanding notes. Authenticated Notice of Assignment The Nebraska Uniform Commer- cial Code states that absent an au- thenticated notice of assignment from the assignor or assignee “an account debtor on . . . chattel paper . . . may discharge its obligation by paying the assignor or the assignee” and, further- more, “after receipt of the notification, the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor.” 5 In the Iowa case, the feeder (the account debtor) executed the notes payable to the feedlot. The feedlot (or assignor) consequently assigned cer- tain notes to the bank (the assignee), but neither of these parties notified the Q Negotiability — continued on page 16