Negotiability of promissory notes in foreclosure cases: Ballast is not luggage.

• Author: Burgess, William H., III

The negotiability of promissory notes in mortgage foreclosure cases is the subject of extensive litigation in Florida courts. The central issue is what instructions or undertakings on a note destroy its negotiability. Arguing against the negotiability of the note has of late become an important defense against foreclosure. If the note is not negotiable, and the plaintiff is not the original maker of the note, the plaintiff cannot establish standing merely by possession of the original note endorsed in blank. The plaintiff must instead show it has the right to foreclose on the note through a series of assignments running in an unbroken line from the originator of the note to the plaintiff. This can be a cumbersome task when the foreclosure occurs years after the note was created and the note has passed through several hands. In some cases, this may be impossible for the plaintiff to accomplish due to gaps in record-keeping. (1)

Florida's Uniform Commercial Code

Negotiability of promissory notes is governed by Florida's Uniform Commercial Code, F.S. Ch. 670-80. (2) The code is intended to facilitate commerce within the state of Florida. F.S. [section]671.102(1) provides that the code shall be liberally construed to promote the following underlying purposes and policies:

(a) To simplify, clarify, and modernize the law governing commercial transactions.

(b) To permit the continued expansion of commercial practices through custom, usage, and agreement of the parties.

(c) To make uniform the law among the various jurisdictions. (3)

Except as otherwise prohibited, the code's provisions may be varied by agreement. (4)

The code is flexible. While the obligations of good faith, diligence, reasonableness, and care may not be disclaimed by agreement, the parties may determine the standards by which the performance of such obligations are to be measured if such standards are not manifestly unreasonable. Whenever the code requires an action to be taken within a reasonable time, a time that is not manifestly unreasonable may be fixed by agreement. (5) Likewise, the code's use of the phrase "unless otherwise agreed" or words of similar import does not imply that the effect of other provisions may not be varied by agreement. (6)

The code draws from longstanding historical experience. (7) F.S. [section]671.103 provides that, unless displaced by the particular provisions of the code, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause shall supplement its provisions. (8) The concept of "displacement" allows the code to abrogate common law rules without requiring unequivocal, explicit reference to the common law in each statutory section that effects a modification. (9) The result is that, although general principles of law and equity are applicable to supplement the provisions of the code, they will not prevail when in conflict with code provisions. (10)

The code provides a clear definition of negotiability. F.S. [section]673.1041(1) defines "negotiable instrument" as follows:

(1) Except as provided in subsections (3), (11) (4), (12) and (11), (13) the term "negotiable instrument" means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it:

(a) Is payable to bearer or to order at the time it is issued or first comes into possession of a holder;

(b) Is payable on demand or at a definite time; and

(c) Does 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, but the promise or order may contain:

1. An undertaking or power to give, maintain, or protect collateral to secure payment;

2. An authorization or power to the holder to confess judgment or realize on or dispose of collateral; or

3. A waiver of the benefit of any law intended for the advantage or protection of an obligor. (14)

Negotiability under the code does not preclude instructions or undertakings on a note, but encourages the proper use of them. While superfluous undertakings or instructions are generally discouraged, those that strengthen the obligation to pay but do not have independent value are not. The instructions or undertakings on a promissory note should, therefore, be interpreted in light of the purposes they serve. The test is that if an instruction or undertaking serves any of the purposes of simplification, clarification, modernization, expansion, and uniformity listed in [section]673.1041(1)(c), then by definition it does not adversely affect the negotiability of the note.

Law Merchant

The historic role and influence of the law merchant provides a broad context for understanding negotiability under the code. The law merchant is a body of private commercial law that developed in Europe and its trading areas over the past millenium. The law merchant reflects business practice and usage, and comprises objective and impartial laws that support and reinforce business practice and do not supercede it. Determinations under the law merchant originally were conducted through private, largely informal, merchant courts located in the commercial areas of seaports and trading centers. The law merchant was subsequently absorbed into English common law, which in the 14th century resulted in the codification of the Carta Mercatoria. By the 17th century, the merchant courts were absorbed into the official government courts of England. From England, the law merchant spread to the North American colonies and was partially codified in the statutory law of negotiable instruments and, later, in the Uniform Commercial Code. The law merchant and its progeny reflect the fact that the private sector is the primary source of law for the support of a market system. Customary law's authority to "govern" most commercial interaction is based on voluntary recognition of rules of obligation because of reciprocal gains from such recognition. Customary law promotes order in commercial activities, and so serves the public interest. (15)

Unconditionality

Generally stated, to be negotiable in a commercial sense, a promissory note "must be free from contingencies of conditions that would embarrass it in its course; for a memorandum to control it, though endorsed on it, would be incorporated with it and destroy it. But a memorandum which is merely directory or collateral, will not affect it." (16)

The obvious purpose of an instruction or undertaking in a promissory note must be taken as a whole to determine its meaning. (17) Thus it is that even when such instructions or undertakings are prohibitive, they may not always prove fatal to negotiability. Negotiability is not destroyed, for example, by language of instruction or undertaking that reflects pre-existing lawful authority, as such language adds nothing and is considered surplusage. (18) Directory language in a note will not alter a note's negotiability. (19) In a similar vein, an instruction or undertaking that is self-contradicting or creates an impossibility is treated as a nullity. (20)

Generally, a promise or order is conditional if the instrument states that it is subject to or governed by another agreement. (21) The law draws a distinction, however, between collateral instruments qualifying the terms of negotiable instruments and collateral instruments destroying the negotiability of negotiable instruments. (22) Mere recitals of the existence of a separate agreement or references to it for information do not affect negotiability. (23) A mortgage and note executed at the same time in one transaction are read together as one contract, but references in the note to the mortgage are not fatal to the negotiability of the note. (24) A loan modification that changes the principal, interest rate, and maturity date of the original note does not change the negotiability of the note, as such modifications involve no other undertakings aside from security for the note's repayment. (25) On the other hand, a note containing a statement that it was given for stock and is not transferable unless the certificate of stock was attached thereto is not negotiable. (26) A forfeiture clause dealing with matters beyond the payment of money will also render a note nonnegotiable. (27)

The policy of the law favors the free circulation of commercial paper, and the court should not hold any provision fatal to the negotiability of such paper which, by general usage of the business world, does not have that effect. (28) Conversely, a provision that does not favor free circulation-such as one that leaves the amount uncertain or conditional, or is so carelessly written as to be subject to alterations that do not arouse suspicion as to amount-would be fatal to negotiability. (29) "The negotiability of notes and drafts is favored in law, and, whenever the promise can be held unconditional without doing violence to the ordinary meaning of the language used, it will be so held." (30)

Certainty

In addition to unconditionality, certainty strikes at the core of negotiability of a note. Federal district Judge Charles Fremont Amidon put the rule of certainty in context in 1904 when he wrote:

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 functions of negotiable instruments in the judgment of business men ought not to be regarded by the courts. The fine phrase of Chief Justice Gibson ... that a negotiable instrument "is a courier without luggage," has been made to do much service in the discussion of this subject. The real question, however, is who shall determine what constitutes "luggage": the business world, or the judge in his library? In no...