Opinion ID: 1187099
Heading Depth: 1
Heading Rank: 4

Heading: Negotiable Instruments Under Ordinary Contract Law

Text: Even though a note or instrument is not a negotiable instrument for Article 3 purposes, it may nevertheless be negotiable between the parties involved under ordinary contract law. Frank v. Hershey National Bank, 269 Md. 138, 306 A.2d 207 (1973). The Official Comments to § 3-119 which counsel have cited recognize this principle. E.G., U.C.C. § 3-119, Official Comment 3. The comments assert that even where an instrument is negotiable for Article 3 purposes the parties in any transaction are always bound by the totality of documents which are intended to form a contract between them, not just the terms set forth in one which happens to be a negotiable instrument. The same is true when the instrument does not meet Article 3 requirements. Frank, supra . As between Clark and Horne, Clark had a contract right to pledge Horne's note to Clark as security. Clark had a contract right to negotiate the note. Thus the note was negotiable for Clark's limited purposes even though it was not an Article 3 negotiable instrument. Before accepting Clark's pledge, First State verified by direct conversation with Horne that Clark had Horne's authority to pledge the note as the letter permitted. Horne in no way suggested that he had any offsetting defense to the validity of the note. Horne failed to notify First State that Clark had given him an offsetting note which was intended to nullify the effect of Horne's note to Clark should Clark default on his loan obligation secured by that note. U.C.C. § 3-104, Official Comment 2 states in part: While a writing cannot be made a negotiable instrument within this Article by contract or by conduct, nothing in this section is intended to mean that in a particular case a court may not arrive at a result similar to that of negotiability by finding that the obligor is estopped by his conduct from asserting a defense against a bona fide purchaser. Such an estoppel rests upon ordinary principles of the law of simple contract. We have long recognized the possibility of estoppel in appropriate cases. E.g., Dale J. Bellamah Corporation v. City of Santa Fe, 88 N.M. 288, 540 P.2d 218 (1975); Tome Land & Improvement Co. v. Silva, 83 N.M. 549, 494 P.2d 962 (1972); Porter v. Butte Farmers Mutual Insurance Company, 68 N.M. 175, 360 P.2d 372 (1961); Treadwell v. Henderson, 58 N.M. 230, 269 P.2d 1108 (1954); Martinez v. Cook, 56 N.M. 343, 244 P.2d 134 (1952); Chambers v. Bessent, 17 N.M. 487, 134 P. 237 (1913). These cases clarify that equitable estoppel results from a course of conduct which precludes one from asserting rights he otherwise might assert against one who has in good faith relied upon such conduct to his detriment. In the instant case the evidence clearly indicates that First State relied on the validity of Horne's note to Clark as a pledge to secure Clark's obligation to First State. First State not only required the pledge before loaning Clark the money, but was concerned enough to solicit verbal assurances from Horne prior to making the loan that the note was valid. Horne knew he had an offsetting note from Clark which would in effect invalidate or cancel his obligation under the pledged note, but he failed to tell First State the true state of affairs. First State relied in good faith on Horne's conduct  his failure to reveal material facts  to First State's detriment. As a matter of law Horne cannot assert any defenses he has against First State arising from the material facts he failed to reveal. Thus as a matter of law he cannot defend against the prima facie case made by First State and since there is no genuine issue as to any material fact regarding the genuineness of Horne's note and letter, summary judgment for First State against Horne was proper. Pharmaseal v. Goffe, 90 N.M. 753, 568 P.2d 589 (1977); Runyan v. Jaramillo, 90 N.M. 629, 567 P.2d 478 (1977); Skarda v. Skarda, 87 N.M. 497, 536 P.2d 257 (1975); Goodman v. Brock, 83 N.M. 789, 498 P.2d 676 (1972). The summary judgment of the district court is hereby affirmed for the stated reasons, although we reject the trial court's conclusion that the note in question was a negotiable instrument as contemplated by Article 3. IT IS SO ORDERED. SOSA and FEDERICI, JJ., concur.