Monday, January 23, 2012

Bank's Status as "Holder in Due Course" Under UCC

Excerpted from:

 BAILEY, VAUGHT, ROBERTSON AND CO. v. REMINGTON INVESTMENTS, INC.

888 S.W.2d 860 (1994)

BAILEY, VAUGHT, ROBERTSON AND COMPANY, Appellant,

v.

REMINGTON INVESTMENTS, INC., Appellee.

No. 05-93-00911-CV.

Court of Appeals of Texas, Dallas.

September 27, 1994.



B. Negotiable Instruments—Sum Certain Requirement

Article Three of the Texas Business and Commerce Code sets out the requisites for the negotiability of an instrument. See TEX.BUS. & COM.CODE ANN. § 3.104 (Tex. UCC) (Vernon 1968); Hinckley v. Eggers,587 S.W.2d 448, 450 (Tex.Civ.App.—Dallas 1979, writ ref'd n.r.e.). A negotiable instrument, such as a note, is a writing signed by the maker, containing an "unconditional promise to pay a sum certain in money, on demand or at a definite time, to order or to bearer." See TEX.BUS. & COM.CODE ANN. § 3.104. A variable-rate promissory note with an interest rate that is determined by reference to a bank's published prime rate is a promise to pay a sum certain and, if it meets the other requirements of negotiability, is a negotiable instrument. See TEX.BUS. & COM.CODE ANN. § 3.104; Amberboy v. Societe de Banque Privee,831 S.W.2d 793, 797 (Tex.1992). However, the term "bank's published prime rate" includes "only those rates which are public, either known to or readily ascertainable by any interested person." Amberboy, 831 S.W.2d at 797-98.

One reason for the "sum certain" requirement is to provide "commercial certainty" in the transfer of negotiable instruments. See Amberboy, 831 S.W.2d at 796. Commercial certainty serves one of the purposes of the law of negotiable instruments: to make negotiable instruments the functional equivalent of money. See id.

C. Holders in Due Course—Texas Law
To meet the technical requirements of Texas law for holder-in-due-course status, a holder of a negotiable instrument must (1) take the instrument for value, (2) in good faith, and (3) without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person. TEX.BUS. & COM.CODE ANN. § 3.302(a) (Tex.UCC) (Vernon 1968). If the holder acquires the instrument with notice that it is past due, the holder is not a holder in due course. See TEX.BUS. & COM.CODE ANN. § 3.302(a)(3) (Tex.UCC) (Vernon 1968).

D. Federal Holder-in-Due-Course Doctrine

The FDIC and its successors may be holders in due course under federal common law without meeting the technical state-law requirements for holder-in-due-course status. See NCNB Tex. Nat'l Bank v. Campise,788 S.W.2d 115, 118 (Tex.App.—Houston [14th Dist.] 1990, writ denied). The federal holder-in-due-course doctrine bars makers of negotiable instruments from asserting personal defenses to liability against the FDIC where the FDIC acquires the instrument by purchase and assumption from a troubled financial institution. See FDIC v. Byrne,736 F.Supp. 727, 730 (N.D.Tex.1990); Beach v. RTC,821 S.W.2d 241, 244 (Tex. App.—Houston [1st Dist.] 1991, no writ). The federal holder-in-due-course doctrine also precludes assertion of personal defenses against a transferee of the FDIC that acquires a negotiable instrument for value, in good faith, and without notice of any defense.See Byrne, 736 F.Supp. at 730. The federal holder-in-due-course doctrine does not apply regarding nonnegotiable instruments. See
[ 888 S.W.2d 865 ]

Sunbelt Savings, FSB v. Montross,923 F.2d 353, 356 (5th Cir.1991), opinion reinstated in part,944 F.2d 227, 228 (1991) (en banc); Stiles v. RTC,831 S.W.2d 24, 27 (Tex.App.—Dallas 1992), rev'd on other grounds,867 S.W.2d 24, 26 (Tex.1993); cf. Beach, 821 S.W.2d at 244 (doctrine did not apply to judgment transferred from FDIC).
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