Rogers and Blythe sold land to Holly Hill Acres, Ltd. Holly Hill Acres, Ltd. used a promissory note and a purchase money mortgage as consideration for the transaction. The note contained language “This note with interest is secured by a mortgage on real estate made by the maker in favor of said payee. The terms of said mortgage are by reference are made a part hereof.” Subsequently, Rogers and Blythe used the note and mortgage to secure their own loan from Charter Bank of Gainesville. Within a few months, Rogers and Blythe stopped paying their loan to Charter. Charter sued to recover from Holly Hill’s note and mortgage.
Negotiable instruments are an important component of transactions between unrelated parties when doing business. Negotiable instruments are regulated by Article 3 of the UCC. Article 3 requires a document must meet certain criteria in order to be classified as a negotiable instrument. The instrument must be in writing, permanent and portable, signed by the maker, and it must be an unconditional promise to pay. It has to state a fixed sum of money and not require any additional undertaking besides the payment. It also has to be payable on demand or at a definite time and be payable to order or bearer. If these conditions are met, the holder of the negotiable instrument can transfer their interest in the instrument to a third party. The third party taking the negotiable instrument from the holder becomes the holder in due course. The promissory note in this case stated above contained language that referenced the other mortgage. Because the note referenced the other mortgage, it does not pass the test for not requiring any additional undertaking besides payment and is therefore not a negotiable instrument and not enforceable under Article 3 of the UCC. Because the document is determined to not be a negotiable instrument, the holder cannot transfer their interests to another party as holder in due course.
I researched the case on the Just Answer Business Law website retrieved November 14, 2014, http://www.justanswer.com/business-law/6ec9s-reference-agreement-holly-hill-acres-ltd-holly.html. I found that the court on appeal agreed with my conclusion that the note was non-negotiable due to the reference of the mortgage and “therefore Charter was not the Holder in Due Course and Holly Hills was entitled to raise against Charter any defenses which could be raised between Holly Hills and other parties, including fraud.”