Written by attorney Oliver Max Gardner III

The Uniform Residential Mortgage Note is Note a Negotiable Instrument Under the UCC

1. The Note is Not a Negotiable Instrument.

§ 25-3-104 Negotiable instrument

(a) Except as provided in subsections (c) and (d) [1], ‘negotiable instrument’ means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it:

(1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder;

(2) is payable on demand or at a definite time; and

(3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor.

§ 25-3-104(b) defines “Instrument" as a “negotiable instrument."

§ 25-3-106. Unconditional promise or order

(a) Except as provided in this section, for the purposes of G.S. 25-3-104(a), a promise or order is unconditional unless it states (i) an express condition to payment, (ii) that the promise or order is subject to or governed by another writing, or (iii) that rights or obligations with respect to the promise or order are stated in another writing. A reference to another writing does not of itself make the promise or order conditional.

(b) A promise or order is not made conditional (i) by a reference to another writing for a statement of rights with respect to collateral, prepayment, or acceleration, or (ii) because payment is limited to resort to a particular fund or source.

The Official Comment [2] to § 25-3-106 states that “[T]he rationale is that the holder of a negotiable instrument should not be required to examine another document to determine rights with respect to payment." [3]

(a) Unless otherwise provided in the instrument, (i) an instrument is not payable with interest, and (ii) interest on an interest-bearing instrument is payable from the date of the instrument.

(b) Interest may be stated in an instrument as a fixed or variable amount of money or it may be expressed as a fixed or variable rate or rates. The amount or rate of interest may be stated or described in the instrument in any manner and may require reference to information not contained in the instrument. If an instrument provides for interest, but the amount of interest payable cannot be ascertained from the description, interest is payable at the judgment rate in effect at the place of payment of the instrument and at the time interest first accrues.§ 25-3-112.

The purpose of § 25-3-106 is to “define when a promise or order fulfills the requirement in Section 3-104(a) that it be an ‘unconditional’ promise or order to pay."

Pursuant to § 25-3-106(a), if the “promise or order states an express condition to payment," it is not a negotiable instrument. (Example: Promissory Note from John Doe states, “I promise to pay $1 to Jane Doe if she conveys title to Southfork to me." The promise is not an instrument [4] because there is an express condition to payment. But, if John Doe’s Promissory Note states, “In consideration of Jane Doe’s promise to convey title to Southfork I promise to pay $1 to the order of Jane Doe," that is an instrument if § 25-3-104 is otherwise satisfied.)

Other than those limited permissions, a note must contain all of its material terms, and not require the holder “to examine another document to determine rights with respect to payment." § 25-3-106. However, subsection (b)(i) permits reference to a separate writing for information with respect to collateral, prepayment, or acceleration. Likewise, “a statement of rights and obligations concerning collateral, prepayment, or acceleration does not prevent the note from being an instrument if the statement is in the note itself." § 25-3-104(a)(3) and § 25-3-108(b). When an instrument “makes express reference to an outside agreement, transaction or document, the effect on the negotiability of the instrument will depend on the nature of the reference." Booker v. Everhart, 294 N.C. 146 (N.C. 1978). “To incorporate a separate document by reference is to declare that the former document shall be taken as part of the document in which the declaration is [**922] made, as much as if it were set out at length therein." Schenkel & Shultz, Inc. v. Hermon F. Fox & Assocs., P.C., 362 N.C. 269 (N.C. 2008), citing Booker.

California Courts have recognized that “[s]everal contracts relating to the same matters, between the same parties, and made as parts of substantially one transaction, are to be taken together." See, Huckell v. Matranga (1979) 99 Cal. App.3d 471 [160 Cal. Rptr. 177]; Central Savings Bank of Oakland v. Coulter, 72 Cal. App. 78 (3rd District Court of Appeal, 1925), pet. Sup.Ct. rev. den. 1925, [holding that a note and a deed of trust, although two instruments, form parts of one transaction and must be read and construed together.]

Likewise, “[I]t is well-established in Texas law that separate instruments executed at the same time, for the same purpose, and in the course of the same transaction are to be considered as one instrument, and are to be read and construed together. In re Rangel, 408 BR 650, 670-671 (Bankr. S.D. Tex. 2009).

The question, therefore, is whether here the note and deed of trust contain terms which render them non-negotiable. The answer is “yes."

The plain meaning of N.C.G.S. § 25-3-104 that the Note, with three limited exceptions, may not contain any undertaking “in addition to the payment of money."

However, paragraph 4 (Borrower’s Right to Prepay) of the form Multistate Fixed Rate Note – Single Family – Fannie Mae/Freddie Mac, provides: “When I make a Prepayment, I will tell the Note Holder in writing that I am doing so." This renders the note non-negotiable. As explained by Professor Ronald Mann more than a decade ago:

This sentence appears to constitute an “undertaking…to do a[n] act in addition to the payment of money." Professor Mann argued that “the rules of negotiability apply only to promises to pay money, not to other, non-monetary undertakings", such as the act of giving written notice, which is an act “in addition to the payment of money," and that was sufficient to render the note nonnegotiable. For historical reasons codified in section 3-104(a)(3) of the U.C.C., “a promissory note cannot be an instrument if it contains such an undertaking: the rules of negotiability apply only to promise to pay money, not to other, non-monetary undertakings. Sending a notice certainly is an act ‘in addition to the payment of money,’ and the note’s language seems to constitute an ‘undertaking’ to perform that act (albeit only on certain conditions). Accordingly, it seems unlikely that the Fannie Mae/Freddie Mac form qualifies as negotiable." [5]

“[T]he doctrine of expressio unius est exclusio [alterius] (‘expression of one thing is the exclusion of the other’) is still the rule in North Carolina[.]" Branch Banking & Trust Co. v. Chi. Title Ins. Co., 711 S.E.2d 751, 759 (N.C. Ct.App. 2011) citing In re Appeal of Appalachian Student Housing Corp., 165 N.C.App. 379, 388, 598 S.E.2d 701, 706 (2004); see also Pritchard v. Steamboat Co., 169 N.C. 457, 460-61, 86 S.E. 171, 173 (1915) (expressio unius est exclusio alterius applied in interpreting deed). Since the undertaking to send a written notice when making a prepayment is not expressly provided for in N.C.G.S. § 25-3-106(a)(ii) and (iii), this responsibility which the Debtor assumed when he signed the Note makes the Note non-negotiable.

(ii) Additional Undertakings.

Apart from the condition requiring notice for prepayment, the Fannie Mae/Freddie Mac Note contains other provisions which make it non-negotiable. The Note recites in paragraph 10 (Uniform Secured Note), “[i]n addition to the protections given to the Note Holder under this Note, a Mortgage, Deed of Trust or Security Deed (“the Security Instrument"), dated the same date as this Note, protects the Note Holder from possible losses that might result if I do not keep the promises which I make in this Note. That Security Instrument describes how and under what conditions I may be required to make immediate payment in full of all amounts I owe under this Note."

In describing those conditions, the Note requires the Borrower to perform the following undertakings:

Ø Obtain the Lender’s prior written consent to transfer a beneficial interest in the property;

Ø Submit to the Lender information the Lender determines reasonably necessary to evaluate any potential transferee; and

Ø Pay a fee to Lender for the privilege of transferring the property.

These additional undertakings make clear that the Note Borrowers signed is non-negotiable.

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