Opinion ID: 678497
Heading Depth: 2
Heading Rank: 4

Heading: Due Negotiation

Text: The U.C.C. provides: 45 A negotiable document of title running to the order of a named person is negotiated by his indorsement and delivery. 46 N.Y.U.C.C. Sec. 7-501(1). Thus, with DBL Trading's indorsement and delivery to BNY, the certificates were negotiated to BNY. The U.C.C. also provides, however, as follows: 47 A negotiable document of title is duly negotiated when it is negotiated in the manner stated in this section to a holder who purchases it in good faith without notice of any defense against or claim to it on the part of any person and for value.... 48 N.Y.U.C.C. Sec. 7-501(4). There remains, therefore, the question whether BNY took the certificates with notice of Amoco's lease and, if so, whether notice of Amoco's lease deprives BNY of holder in due course status. 49 The definition of notice is set forth in Article 1 of the U.C.C.: A person has notice of a fact when 50 (a) he has actual knowledge of it; or 51 (b) he has received a notice or notification of it; or 52 (c) from all the facts and circumstances known to him at the time in question he has reason to know that it exists. 53 A person knows or has knowledge of a fact when he has actual knowledge of it. Discover or learn or a word or phrase of similar import refers to knowledge rather than to reason to know. The time and circumstances under which a notice or notification may cease to be effective are not determined by this Act. 54 N.Y.U.C.C. Sec. 1-201(25). The district court found that BNY did not have notice of a defense against the holding certificates. In so finding, however, the district court appeared to focus on the fact that the BNY official who accepted the holding certificates as collateral, Mr. Van Den Hogen, testified that he was never told that Amoco's leases overrode the bank's right to the platinum. Bank of New York, 831 F.Supp. at 265. That is the district court found that although BNY knew of the leases, it did not have notice of a defense against the holding certificates. 55 As White & Summers have observed, Article Seven is analogous in several basic respects to Article Three of the Code on commercial paper. 2 White & Summers, Uniform Commercial Code Sec. 21-1, at 133 (1988). Because Article 7 is analogous to Article 3 in basic respects, and because the requirement that a holder in due course take without notice serves the same purpose in Article 7 as it does in Article 3, we will determine whether knowledge that the holding certificates arose out of a lease agreement constitutes notice of a defense against the lease by considering the analogous situation under Article 3. 56 Under Article 3, notice that a negotiable instrument arose from an underlying contract will not in itself disqualify a holder as a holder in due course. N.Y.U.C.C. Sec. 3-304(4)(b) (McKinney 1991) (Knowledge of the following facts does not of itself give the purchaser notice of a defense or claim ... (b) that it was issued or negotiated in return for an executory promise or accompanied by a separate agreement, unless the purchaser has notice that a defense or claim has arisen from the terms thereof). Absent knowledge of a breach in the underlying agreement, the holder of a negotiable instrument qualifies as a holder in due course even if the holder took with knowledge of the underlying agreement. There was absolutely no evidence of a breach in the lease agreement at the time BNY took the holding certificates, let alone evidence that BNY was aware of such a breach. Absent evidence that BNY was aware of a breach in the underlying agreement, the fact that BNY may have been aware that the holding certificates arose out of lease agreements between DBL Trading and Amoco will not deprive BNY of the status of holder in due course. 57 We note that this approach is consistent with the approach adopted by proposed Article 2-A of the U.C.C., governing the lease of goods. New York recently adopted this new article. Although proposed Article 2-A does not govern this dispute, see note 4, supra, the fact that the approach commended by an application of the principles of Article 3 is consistent with the approach of proposed Article 2-A is significant. The proposed article codifies the general proposition that the creditor of a lessor takes subject to the lease. The article sets forth, however, exceptions to this general proposition. Most notably, a secured creditor who has perfected his interest before the lease becomes effective does not take subject to the lease. In this case, there was ample evidence that BNY had perfected its security interest in any documents within the possession of DBL Trading and that the leases did not become effective until Amoco, as a condition of its lease, delivered the holding certificates to DBL Trading. Furthermore, this approach is consistent with the policy and purposes of the U.C.C. as expressed in other provisions of Article 7. Specifically, the U.C.C. provides: 58 The obligations imposed by this Article on an issuer apply to a document of title regardless of the fact that ... 59 (c) the goods covered by the document were owned by the bailee at the time the document was issued.... 60 N.Y.U.C.C. Sec. 7-401. It would appear from this provision that even if Amoco owned the platinum outright, it could not, as the issuer of the holding certificates, avoid its obligations to surrender them. A fortiori, a lesser claim than ownership should not allow Amoco to escape its obligations. Thus, although Amoco had a possessory and utility interest in the platinum pursuant to its lease with DBL Trading, we predict that the courts of New York would not allow Amoco--as the issuer of the holding certificates--to hide behind that interest to avoid its obligations to release the platinum upon surrender of the certificates.