Requirements for Negotiation. 1601 Partners, Ltd., executed a promissory note in the amount of $1,650,000. As collateral for the loan represented by the note, 1601 Partners executed a deed of trust (a mortgage) for certain property owned by 1601 Partners. The note stated that "the terms, agreements and conditions of
Requirements for negotiation
This case was decided under the unrevised Article 3, but the result under the revised Article 3 would likely be the same. The court held that the note was not negotiable. The court pointed out that UCC 3-105(2) of the unrevised Article 3 (UCC 3-106(a) of the revised Article 3) "provides that a promise is not unconditional if the instrument ‘states that it is subject to or governed by any other agreement.' * * * Courts hold that when an instrument incorporates by reference the terms of another document the instrument becomes ‘subject to or governed by' another agreement * * * , and the promise contained within the instrument, therefore, is rendered conditional." The court reasoned that "[m]ere reference to a note being secured by a mortgage, of course, is common commercial practice and does not affect the negotiability of the note. The language within the note executed by 1601 Partners, however, exceeds the outer bounds of ‘mere reference,' as it explicitly purports to incorporate the terms of the Deed of Trust."
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