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Everything’s Negotiable – Except Negotiability
Author: Barry Johnson
Lending attorneys spend a great deal of time negotiating
language in loan documents. Sometimes it’s difficult for banking
clients to understand why we need to hold firm on one point or another, but a
recent court of appeals case from Dallas shows why small changes in loan
documents can have large impacts.The case is Bank of America v. Alta
Logistics, and deals with the “negotiability” of a promissory note.
“Negotiability” is a concept that’s hard for many lenders to understand. Negotiability is a concept rooted in the Uniform Commercial Code (UCC). If an “instrument” satisfies the test for “negotiability” under the UCC then the holder of that instrument is protected from what are called “personal” defenses to the instrument. The borrower can only assert what the UCC calls “real” defenses to the instrument. But negotiability has another more far reaching effect: Negotiable Instruments are subject to a six year statute of limitations (as opposed to the normal four year statute for contracts).
This distinction was at the center of the Alta Logistics case. Here the bank sued Alta more than five years after a promissory note matured. Alta responded saying that the four year – and not six year – limitations period applied and therefore the bank’s suit was brought one year too late. The Dallas Court of Appeals agreed. The court analyzed the note which was the basis of the suit and found that it did not qualify as “negotiable”. Once this conclusion was reached, the statute of limitations was a foregone conclusion and the court applied the shorter “contract” limitations period rather than the longer “negotiable instrument” period. The bank lost and the note was uncollectable.
Whether the instrument qualified as negotiable or not can have far reaching consequences. In addition to the statute of limitations negotiability affects the defenses that that a borrower can assert to a note. Lenders need to be careful when negotiating the terms of notes so as to preserve negotiability under the UCC. Like the title to this entry states: Everything’s negotiable – except negotiability.
For further information regarding this case, or other topics in lending and finance please contact bjohnson@settlepou.com
