2023 New Mexico Statutes › Chapter 55 - Uniform Commercial Code › Article 3 - Negotiable Instruments › Part 1 - GENERAL PROVISIONS AND DEFINITIONS › Section 55-3-106 - Unconditional promise or order.

(a) Except as provided in this section, for the purposes of Section 55-3-104(a) NMSA 1978, a promise or order is unconditional unless it states: (i) an express condition to payment; (ii) that the promise or order is subject to or governed by another record; or (iii) that rights or obligations with respect to the promise or order are stated in another record. A reference to another record does not of itself make the promise or order conditional.
(b) A promise or order is not made conditional: (i) by a reference to another record for a statement of rights with respect to collateral, prepayment or acceleration; or (ii) because payment is limited to resort to a particular fund or source.
(c) If a promise or order requires, as a condition to payment, a countersignature by a person whose specimen signature appears on the promise or order, the condition does not make the promise or order conditional for the purposes of Section 55-3-104(a) NMSA 1978. If the person whose specimen signature appears on an instrument fails to countersign the instrument, the failure to countersign is a defense to the obligation of the issuer, but the failure does not prevent a transferee of the instrument from becoming a holder of the instrument.
(d) If a promise or order at the time it is issued or first comes into possession of a holder contains a statement, required by applicable statutory or administrative law, to the effect that the rights of a holder or transferee are subject to claims or defenses that the issuer could assert against the original payee, the promise or order is not thereby made conditional for the purposes of Section 55-3-104(a) NMSA 1978; but if the promise or order is an instrument, there cannot be a holder in due course of the instrument.
History:
1978 Comp., § 55-3-106, enacted by Laws 1992, ch. 114, § 93; 2009, ch. 234, § 3.
OFFICIAL COMMENTS
UCC Official Comments by ALI & the NCCUSL. Reproduced with permission of the PEB for the UCC. All rights reserved.
1. This provision replaces former Section 3-105. Its purpose is to define when a promise or order fulfills the requirement in Section 3-104(a) [55-3-104 NMSA 1978] that it be an "unconditional" promise or order to pay. Under Section 3-106(a) [55-3-106 NMSA 1978] a promise or order is deemed to be unconditional unless one of the two tests of the subsection make the promise or order conditional. If the promise or order states an express condition to payment, the promise or order is not an instrument. For example, a promise states, "I promise to pay $100,000 to the order of John Doe if he conveys title to Blackacre to me." The promise is not an instrument because there is an express condition to payment. However, suppose a promise states, "In consideration of John Doe's promise to convey title to Blackacre I promise to pay $100,000 to the order of John Doe." That promise can be an instrument if Section 3-104 [55-3-104 NMSA 1978] is otherwise satisfied. Although the recital of the executory promise to Doe to convey Blackacre might be read as an implied condition that the promise be performed, the condition is not an express condition as required by Section 3-106(a)(i) [55-3-106 NMSA 1978]. This result is consistent with former Section 3-105(1)(a) and (b). Former Section 3-105(1)(b) is not repeated in Section 3-106 [55-3-106 NMSA 1978] because it is not necessary. It is an example of an implied condition. Former Section 3-105(1)(d), (e), and (f) and the first clause of former Section 3-105(1)(c) are other examples of implied conditions. They are not repeated in Section 3-106 [55-3-106 NMSA 1978] because they are not necessary. The law is not changed.
Section 3-106(a)(ii) and (iii) [55-3-106 NMSA 1978] carry forward the substance of former Section 3-105(2)(a). The only change is the use of "writing" instead of "agreement" and a broadening of the language that can result in conditionality. For example, a promissory note is not an instrument defined by Section 3-104 [55-3-104 NMSA 1978] if it contains any of the following statements: 1. "This note is subject to a contract of sale dated April 1, 1990 between the payee and the maker of this note." 2. "This note is subject to a loan and security agreement dated April 1, 1990 between the payee and maker of this note." 3. "Rights and obligations of the parties with respect to this note are stated in an agreement dated April 1, 1990 between the payee and maker of this note." It is not relevant whether any condition to payment is or is not stated in the writing to which reference is made. The rationale is that the holder of a negotiable instrument should not be required to examine another document to determine rights with respect to payment. But subsection (b)(i) permits reference to a separate writing for information with respect to collateral, prepayment, or acceleration.
Many notes issued in commercial transactions are secured by collateral, are subject to acceleration in the event of default, or are subject to prepayment, or acceleration does not prevent the note from being an instrument if the statement is in the note itself. See Section 3-104(a)(3) and Section 3-108(b) [55-3-104 and 55-3-108 NMSA 1978, respectively]. In some cases it may be convenient not to include a statement concerning collateral, prepayment or acceleration in the note, but rather to refer to an accompanying loan agreement, security agreement, or mortgage for that statement. Subsection (b)(i) allows a reference to the appropriate writing for a statement of these rights. For example, a note would not be made conditional by the following statement: "This note is secured by a security interest in collateral described in a security agreement dated April 1, 1990 between the payee and maker of this note. Rights and obligations with respect to collateral are [stated in] [governed by] the security agreement." The bracketed words are alternatives, either of which complies.
Subsection (b)(ii) addresses the issues covered by former Section 3-105(1)(f), (g), and (h) and Section 3-105(2)(b) [55-3-105 NMSA 1978]. Under Section 3-106(a) [55-3-106 NMSA 1978] a promise or order is not made conditional because payment is limited to payment from a particular source or fund. This reverses the results of former Section 3-105(2)(b). There is no cogent reason why the general credit of a legal entity must be pledged to have a negotiable instrument. Market forces determine the marketability of instrument of this kind. If potential buyers don't want promises or orders that are payable only from a particular source or fund, they won't take them, but Article 3 should apply.
2. Subsection (c) applies to traveler's checks or other instruments that may require a countersignature. Although the requirement of a countersignature is a condition to the obligation to pay, traveler's checks are treated in the commercial world as money substitutes and therefore should be governed by Article 3. The first sentence of Subsection (c) allows a traveler's check to meet the definition of instrument by stating that the countersignature condition does not make it conditional for the purposes of Section 3-104 [55-3-104 NMSA 1978]. The second sentence states the effects of a failure to meet the condition. Suppose a thief steals a traveler's check and cashes it by skillfully imitating the specimen signature so that the countersignature appears to be authentic. The countersignature is for the purpose of identification of the owner of the instrument. It is not an indorsement. Subsection (c) provides that the failure of the owner to countersign does not prevent a transferee from becoming a holder. Thus, the merchant or bank that cashed the traveler's check becomes a holder when the traveler's check is taken. The forged countersignature is a defense to the obligation of the issuer to pay the instrument, and is included in defenses under Section 3-305(a)(2) [55-3-305 NMSA 1978]. These defenses may not be asserted against a holder in due course. Whether a holder has notice of the defense is a factual question. If the countersignature is a very bad forgery, there may be notice. But if the merchant or bank cashed a traveler's check and the countersignature appeared to be similar to the specimen signature, there might not be notice that the countersignature was forged. Thus, the merchant or bank could be a holder in due course.
3. Subsection (d) concerns the effect of a statement to the effect that the rights of a holder or transferee are subject to the claims and defenses that the issuer could assert against the original payee. The subsection applies only if the statement is required by Statutory or administrative law. The prime example is the Federal Trade Commission Rule (16 C.F.R. Part 433) preserving consumers' claims and defenses in consumer credit sales. The intent of the FTC rule is to make it impossible for there to be a holder in due course of a note bearing the FTC legend and undoubtedly that is the result. But, under former Article 3, the legend may also have had the unintended effect of making the note conditional, thus excluding the note from former Article 3 altogether. Subsection (d) is designed to make it possible to preclude the possibility of a holder in due course without excluding the instrument from Article 3. Most of the provisions of Article 3 are not affected by the holder-in-due-course doctrine and there is no reason why Article 3 should not apply to a note bearing the FTC legend if the holder-in-due-course rights are not involved. Under Subsection (d) the statement does not make the note conditional. If the note otherwise meets the requirements of Section 3-104(a) [55-3-104 NMSA 1978] it is a negotiable instrument for all purposes except that there cannot be a holder in due course of the note. No particular form of legend or statement is required by Subsection (d). The form of a particular legend or statement may be determined by the other statute or administrative law. For example, the FTC legend required in a note taken by the seller in a consumer sale of goods or services is tailored to that particular transaction and therefore uses language that is somewhat different from that stated in Subsection (d), but the difference in expression does not affect the essential similarity of the message conveyed. The effect of the FTC legend is to make the rights of a holder or transferee subject to claims or defenses that the issuer could assert against the original payee of the note.
ANNOTATIONS
Repeals.
— Laws 1992, ch. 114, § 237 repealed former 55-3-106 NMSA 1978, as enacted by Laws 1961, ch. 96, § 3-106, relating to sum certain, effective July 1, 1992. Laws 1992, ch. 114, § 93, enacted a new section, effective July 1, 1992. For provisions of former section,
see
the 1991 NMSA 1978 on
NMOneSource.com
.
The 2009 amendment,
effective January 1, 2010, changed "writing" to "record".
Not conditional to direct charge of particular account.
— The inclusion in a check, order or bill of exchange of a direction to charge the amount to a particular account does not make it payable conditionally.
Hanna v. McCrory
, 1914-NMSC-047, 19 N.M. 183, 141 P. 996 (decided under former law).
Law reviews.
— For article, "Essential Attributes of Commercial Paper - Part I," see 1 N.M. L. Rev. 479 (1971).
Am. Jur. 2d, A.L.R. and C.J.S. references. —
11 Am. Jur. 2d Bills and Notes §§ 54, 72, 141, 147, 151.
Provision in draft or note directing payment "on acceptance" as affecting negotiability, 19 A.L.R.4th 1268.
10 C.J.S. Bills and Notes § 138.