Horne executed a $100,000 note in favor of R. C. Clark. On the back of the instrument was a restriction stating that the note
Horne executed a $100,000 note in favor of R. C. Clark. On the back of the instrument was a restriction stating that the note could not be transferred, pledged, or otherwise assigned without Horne’s written consent. As part of the same transaction between Horne and Clark, Horne gave Clark a separate letter authorizing Clark to pledge the note as collateral for a loan of $50,000 that Clark intended to secure from First State Bank. Clark did secure the loan and pledged the note, which was accompanied by Horne’s letter authorizing Clark to use the note as collateral. First State contacted Horne and verified the agreement between Horne and Clark as to using the note as collateral. Clark defaulted on the loan. When First State later attempted to collect on the note, Horne refused to pay, arguing that the note was not negotiable as it could not be transferred without obtaining Horne’s written consent. Is the instrument negotiable? Explain.
The transfer of the note was conditioned on the holder obtaining Person H's written consent. This limitation, although it appeared only on the back of the tool, was part of the instrument and destroyed its flexibility. Furthermore, that flaw could not be overcome by the accompanying letter from Person H to Person C. In order to facilitate the transfer of note, the party receiving the note may be able to determine its validity and flexibility from the face of the note. Thus, the note may be assigned to Company F and may be governed by the law of assignments.
Here, the settlement may be done for Company F, even though the note in question may not be considered as a negotiable tool. In order for a note to be classified as negotiable tool, one must be able to ascertain that it is negotiable, from the tool itself without any reference to other documents under certain conditions. The note executed by Person H failed to meet the requirements of flexibility because the pledge to pay was not due to order.