Opinion ID: 683516
Heading Depth: 2
Heading Rank: 1

Heading: Negotiability and AITF's Status as a Holder in Due Course

Text: 19 To be negotiable under the NYUCC, an instrument must (1) be signed by the maker or drawer, (2) contain an unconditional promise or order to pay a sum certain in money and no other promise, order, obligation or power given by the maker or drawer except as authorized by [NYUCC Article 3], (3) be payable on demand or at a definite time, and (4) be payable to the payee's order or to the instrument's bearer. NYUCC Sec. 3-104(1). A purchaser of a negotiable instrument becomes a holder in due course if he takes the instrument (a) for value; and (b) in good faith; and (c) 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. NYUCC Sec. 3-302(1). Section 3-305 provides, subject to certain exceptions not pertinent here, that a holder in due course takes the instrument free from (1) all claims to it on the part of any person; and (2) all defenses of any party to the instrument with whom the holder has not dealt. Id. Secs. 3-305(1) and (2). 20 Defendants contend that AITF is not a holder in due course because (a) the promises reflected in Laminaciones's notes, being premised on Delta's satisfaction of several requirements before the notes could issue, were conditional, and the notes were therefore nonnegotiable; (b) AITF did not show that it purchased the notes in good faith; and (c) AITF did not show that it had no notice of Delta's breach. These contentions must be rejected.
21 The requirements for negotiability set out in Sec. 3-104(1) of the Code concern the form and content of the instrument itself. See, e.g., DH Cattle Holdings Co. v. Smith, 195 A.D.2d 202, 209-10, 607 N.Y.S.2d 227, 231-32 (1st Dep't 1994); see also NYUCC Sec. 3-105 cmt. 8 (holder of a negotiable instrument must be able to ascertain all of its essential terms from its face). While the indicia of negotiability must be visible on the face of the instrument, a note containing an otherwise unconditional promise is not made conditional merely because it refers to, or states that it arises from, a separate agreement or transaction. See NYUCC Secs. 3-105(1)(b), (c); id. cmt. 3 (reference to separate agreement does not limit terms of payment in the absence of any express statement to that effect). 22 Further, the Code provides that an instrument may subsequently become negotiable even though it lacks a prerequisite of negotiability at the time it is signed. Section 3-115(1) states: 23 When a paper whose contents at the time of signing show that it is intended to become [a negotiable] instrument is signed while still incomplete in any necessary respect it cannot be enforced until completed, but when it is completed in accordance with authority given it is effective as completed. 24 Id. Sec. 3-115(1). See also id. Sec. 3-304(4)(d) (purchaser's knowledge that an incomplete instrument was completed after signing but prior to purchase does not constitute notice of a defense or claim, unless the purchaser has notice of any improper completion). Thus, a condition precedent to the completion of a note does not preclude its ultimate negotiability, provided that the note is otherwise negotiable and is eventually completed in accordance with authority given. Id. Sec. 3-115(1). 25 Similarly, the failure of a condition that is not visible on the face of a completed promissory note does not make the note nonnegotiable; rather, the failure creates a defense that is available only against a holder who is not a holder in due course. See NYUCC Sec. 3-306(c) (non-due-course holder takes instrument subject to, inter alia, defense of nonperformance of condition precedent); Amirana v. Howland, 202 A.D.2d 783, 784, 609 N.Y.S.2d 96, 97-98 (3d Dep't 1994). 26 The district court correctly rejected defendants' contention that the promissory notes issued by Laminaciones were not negotiable. The 10 notes were signed by Laminaciones and by Altos Hornos; each note contained an unconditional promise to pay a precise sum to the order of Delta, and contained no other promise; and, after completion by defendants' agent Banco Bilbao, each note showed the precise date on which payment of the specified sum was due. Banco Bilbao had authority from defendants to fill in each note's maturity date upon presentation by Delta of evidence that all of the machinery called for by the contract had been shipped, and to set the due dates at specified intervals from the date of Delta's bill of lading. Upon Delta's presentation of the documentation required by defendants, the notes were completed by Banco Bilbao in accordance with this authority and thereby became fully effective. The notes themselves do not refer to any condition in the underlying equipment contract; nor is any necessary term determinable only by reference to an extrinsic fact that is not revealed on the face of the notes. Given the precise terms on the face of the notes, the mere reference to the bill-of-lading date did not impair the notes' negotiability.
27 If the maker of a negotiable instrument has shown the existence of a defense, a holder who wishes to cut off that defense by claiming holder-in-due course immunity has the ultimate burden of establishing by a preponderance of the total evidence that he purchased the instrument for value, in good faith, and without notice. See NYUCC Sec. 3-307(3) & cmt. 3. The holder's initial burden on the issues of notice and good faith, however, is a slight one that may be satisfied by his affidavit disclaiming any knowledge of the maker's defense when the notes were negotiated. First International Bank, Ltd. v. L. Blankstein & Son, Inc., 59 N.Y.2d 436, 444, 465 N.Y.S.2d 888, 892, 452 N.E.2d 1216, 1220 (1983). Such an affidavit, [w]hile necessarily conclusory in form, may nevertheless be enough to place on the maker the burden of coming forward with evidence sufficient to raise a genuine issue as to the holder's notice of defenses. Id. Since documentary proof as to notice will ordinarily be in the hands of the maker, the holder will be entitled to summary judgment based on such an affidavit unless the maker proffers evidence of facts that, if accepted, would establish the holder's notice of a valid defense. See id. 28 The purchaser of a note has notice of a claim or defense if, at the time he purchases the instrument, he has knowledge of the claim or defense or knowledge of such facts that his action in taking the instrument amounts to bad faith. NYUCC Sec. 3-304(7). In determining whether a party had notice, the New York Court of Appeals has held that this section, a nonuniform provision of the pre-1990 version of the UCC, requires application of  'a subjective test of actual knowledge rather than an objective test which might involve constructive knowledge.'  See Carrefour U.S.A. Properties Inc. v. 110 Sand Co., 918 F.2d 345, 347 (2d Cir.1990) (quoting Hartford Accident & Indemnity Co. v. American Express Co., 74 N.Y.2d 153, 162, 544 N.Y.S.2d 573, 578, 542 N.E.2d 1090, 1094-95 (1989)). Holders in due course are to be determined by the simple test of what they actually knew, not by speculation as to what they had reason to know, or what would have aroused the suspicion of a reasonable person in their circumstances.... Id. at 163, 544 N.Y.S.2d at 578, 542 N.E.2d at 1094; see also Carrefour U.S.A. Properties Inc. v. 110 Sand Co., 918 F.2d at 348-49; Chemical Bank v. Haskell, 51 N.Y.2d 85, 93, 432 N.Y.S.2d 478, 481, 411 N.E.2d 1339, 1341-42 (1980). 29 An equivalent standard governs the Code's requirement of good faith. That term is defined as honesty in fact in the conduct or transaction concerned. NYUCC Sec. 1-201(19). In evaluating a party's good faith, the inquiry is what [the holder] actually knew. Chemical Bank v. Haskell, 51 N.Y.2d at 92, 432 N.Y.S.2d at 480, 411 N.E.2d at 1341. If a holder did not have actual knowledge of some fact which would prevent a commercially honest individual from taking up the instruments, then its good faith [is] sufficiently shown. Id. 30 Within this framework, the district court correctly concluded that AITF had satisfied its burden of proving that it took the notes in good faith and without notice of any valid defenses. AITF supported its summary judgment motion with the affirmations of two of its assistant vice presidents, who had approved AITF's payment for the notes to Delta. Both officers stated that AITF had purchased the notes in good faith, paying $3,081,438.68 for them, and that neither they nor, to their knowledge, any other AITF employee or agent knew of any defenses that defendants might have had against Delta at the time AITF purchased the notes from Delta. This sufficed to meet AITF's initial burden of proving its good faith and its lack of actual notice of Delta's breach. 31 Defendants' contention that AITF purchased the notes with notice of Delta's breach was not supported by evidence sufficient to create a genuine issue to be tried. Although, as defendants argue, AITF was aware that the release of the notes to Delta was subject to a condition precedent, the awareness of the existence of a condition is insufficient to suggest an awareness that the condition was not fulfilled. Defendants also point to AITF's February 27, 1991 letter to Delta, which stated that AITF would not extend its agreement to purchase the notes beyond the April 12 date set by the commitment letter; they apparently argue that it can be inferred from the February 1991 letter that AITF knew Delta was having difficulty in meeting its obligations under the equipment contract. Even assuming that such an inference were justified, however, under New York law AITF had no responsibility to inquire whether Delta thereafter in fact performed. The facts cited by defendants thus failed to create any triable issue concerning AITF's actual knowledge at the time it purchased the notes. 32 In sum, we find no error in the district court's conclusion that AITF purchased the notes from Delta as a holder in due course.