Sign On

One of the very pervasive and important terms used throughout the Uniform Commercial Code is the word ‘signed’. For example, under Section 2-201(1), the Statute of Frauds requires that a writing be ‘signed by the person against whom enforcement is sought;  Article 3 requires a ‘signature’, which by reference incorporates ‘signed’ in order for someone to be liable on an instrument; a signature may be the means used to satisfy the formal requirements of a letter of credit under Article 5; a signature is required to negotiate tangible documents of title under Article 7; a security agreement is enforceable under Section 9-203(b)(1)(2)(3)(A) if the debtor has ‘authenticated’ a security agreement, which means to ‘sign’ under Section 9-102(a)(7)(a).

The greatest importance however is found under Article 3, not because a signature means more per se, but because there are so many signatures which can be affixed to a negotiable instrument.  The last post mentioned four: maker, drawer, acceptor and indorser.  In addition to these basic liabilities, parties can sign an instrument ‘for accommodation’ under Section 3-419:

If an instrument is issued for value given for the benefit of a party to the instrument ("accommodated party") and another party to the instrument ("accommodation party") signs the instrument for the purpose of incurring liability on the instrument without being a direct beneficiary of the value given for the instrument, the instrument is signed by the accommodation party "for accommodation."  Section 3-419(a)

An accommodation party can sign as such in each of the capacities noted in the last post.  Hence, Section 3-419(b) states:

 An accommodation party may sign the instrument as maker, drawer, acceptor, or indorser and, subject to subsection (d), is obliged to pay the instrument in the capacity in which the accommodation party signs….

 Section 3-419(b)

Counting the basic liabilities of the parties discussed and the same number of potential liabilities under Section 3-419, we quickly see eight situations in which a signature can be called into question.  It is in fact, more probable that conditions precedent to the validity of an accommodation party exist than in a transaction in which there is no accommodation party. It is the combined reasons that no one is liable on a negotiable instrument unless ‘his signature appears thereon’ and the fact that there are so many potential signatures, which makes a deep discussion of ‘signed’ not only relevant, but essential.

The term itself is defined as follows:

"Signed" includes using any symbol executed or adopted with present intention to adopt or accept a writing  Section 1-201(b)(37)

In the many cases reviewed in which the meaning of ‘signed’ has been discussed,  none were found that came close to addressing the issue of ‘present intent to authenticate’ as regards to someone whose actual signature appeared on a writing and who thereafter tried to rescind its validity.  That however, does not deter me in discussing this point because it has so much potential significance for drafting and litigation.  Those of you reading this will have a weapon you might call upon someday.

The cases I reviewed which were interesting involved cases where a letterhead or other symbol was considered binding since there was a ‘present intent’ to authenticate the writing via the symbol or letterhead.  Other cases considered technicalities under former Article 9 provisions requiring signatures on financing statements.  Several quoted the requirement of ‘present intent to authenticate’ but did not go outside the facts of their case.

One of things that make great professional strides a realistic possibility is the ability to create new ideas and new ways to approach old problems.  I would classify this as one of those ideas. Several others have been presented in earlier posts.  The essence of the process is being able to see the meaning of the statute through a diverse set of eyes.  Not just one way to read it, but several.  Further, never giving into the notion that just because someone hasn’t said it is so, doesn’t mean it isn’t.  For decades I clamored that punitive damages should lie for an egregious breach of the duty of good faith.  Finally, thanks to this blog, I was forced to grind through the cases and was able to find case law which not only agreed, but made it easier to get punitive damages.

The point is, just because there is nothing specific out there, doesn’t mean the argument doesn’t have merit and of equal significance, does not mean it can’t have an enormous impact on how the case plays out.  For example, let’s assume that John Lender agrees to loan Fred Borrower $500,000.00. Fred agrees, and it is his understanding that John will help Fred promote his business via John’s advertising agency.  Fred signs the note.  John does nothing to promote Fred’s business which goes into default on the note.  John sues Fred on the note.

Defense:  Fred had no ‘present intent’ to authenticate the note.  Fred signed his name under the assumption that John would promote his business.  Moreover, Fred distinctly remembers John saying he would.  John doesn’t want anything to do with this. John wants the motion for summary judgment granted.  Fred has conceded that the manual signature was his, but denied any present intent to authenticate.

From an analytical standpoint, that may look like a long shot.  So did punitive damages under a letter of credit.  In analyzing this type of strategy, you must think of it in stages.  There are many ‘victories’ and losses in law suits.  If for example, you are able to get the court to entertain this argument past the motion stage, you have dramatically altered the playing field.  Now, a full blown trial must take place requiring dramatically increased costs and perhaps putting information in public that the other side doesn’t want in front of the public.  You may not have won the case at this point, but you dramatically changed the dynamics and the likelihood of a favorable resolution. 

Also note Section 3-308(a) which states in part:

(a)  In an action with respect to an instrument, the authenticity of, and authority to make, each signature on the instrument is admitted unless specifically denied in the pleadings. If the validity of a signature is denied in the pleadings, the burden of establishing validity is on the person claiming validity, . . .

If I were drafting an instrument on behalf of a lender, I would place a term in the instrument which acknowledges the borrower’s present intent to authenticate the writing.  Further, I would place in that instrument that there are no conditions precedent required by the lender to establish a ‘present intent’ to authenticate the writing. Finally, I would have this provision initialed by the borrower.  While this certainly isn’t binding on the court, it would go a long way toward a favorable result for the lender.

As for the argument itself, the same basic analysis discussed in several other posts would apply.  The facts of the case are processed through the policies upon which the UCC is drafted as stated in Section 1-103:

 The Uniform Commercial Code must be liberally construed and applied to promote its underlying purposes and policies, which are: (1) to simplify, clarify, and modernize the law governing commercial transactions; (2) to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and (3) to make uniform the law among the various jurisdictions.

In the hypothetical noted above, one might argue that Fred’s argument should be given full weight as it ‘permits the continued expansion of commercial practices through…agreement of the parties.’  This could be strengthened by the general UCC policy of freedom of contract as stated in Section 1-302, and as seen throughout the Uniform Commercial Code.  Further, these arguments are bolstered by the mandate of the Court to ‘liberally construe and apply the Code’ to promote the policy stated.

Negotiable Instruments: Liability of Parties

Part 4 of Article 3 deals with liability of parties.  The basic rule is contained in Section 3-401:

(a)  A person is not liable on an instrument unless (i) the person signed the instrument, or (ii) the person is represented by an agent or representative who signed the instrument and the signature is binding on the represented person under Section 3-402.

Therefore, if a person has not ‘signed’ an instrument, the person is not liable on the instrument. That is not to say that he or she may not be liable on an underlying transaction for which the instrument has been issued; it is however, a statement that the person will not be liable on the instrument.  As noted in Section 3-401(a) however, in  a principal agent scenario, the principal can be bound on an instrument signed by an appropriately designated agent under Section 3-402.

To understand what Section 3-401(a) means, and the ‘person’ to be liable, we must again first apply the broad definition of ‘person’ under Section 1-201(b)(27):

"Person" means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision, agency, or instrumentality, public corporation, or any other legal or commercial entity.

Once we know who the ‘person’ is, we must go on to examine all of the elements contained in Section 3-104 to determine if the writing is negotiable.  One of those elements is that the writing be ‘signed’ by the maker or drawer of the instrument.  We will discuss the liability of these parties under the UCC shortly, but for now, in order to establish that a writing is in fact an instrument, we must determine whether, as a matter of law, it has been signed. 

That term is defined under Section 1-201(b)(37).

"Signed" includes using any symbol executed or adopted with present intention to adopt or accept a writing. [Emphasis added]

Once again, the language is unmistakably clear—there must be a ‘present intention’ to authenticate the writing.  The potential impact on the enforcement of a negotiable instrument is immediately seen.  Did the person whose signature appears on the writing have a present intention to authenticate the writing?  Or, was their some condition precedent that the lender or some other party was supposed to take before the signature became ‘active’? 

            The question of when something becomes ‘signed’ will be discussed in the next post.  For now, I simply wanted to bring this up since it is rarely discussed, and equally because the potential impact on the ‘present intent’ requirement on enforcing an obligation on an instrument is enormous.  That discussion will wait until we have laid out the basic liabilities of parties on an instrument.

            The liability of an issuer of a note is contained in Section 3-412.  Before addressing that section, it is necessary to reexamine ‘issue’ so that we can determine who the issuer is, and hence, who is liable and for what. ‘Issue’ is defined under Section 3-105(a) as:

[T]he first delivery of an instrument by the maker or drawer, whether to a holder or nonholder, for the purpose of giving rights on the instrument to any person.

The liability for the issuer [maker] of a note is ‘to pay the instrument (i) according to its terms as the time it was issued….’  Section 3-412. Leaving aside any special rules, this is the basic rule—whatever amount the note was originally made out for is the amount owed by the maker. Section 3-412 goes on to state: ‘The obligation is owed to a person entitled to enforce the instrument or to an indorser who paid the instrument under Section 3-415’.

"Person entitled to enforce" an instrument means (i) the holder of the instrument, (ii) a nonholder in possession of the instrument who has the rights of a holder, or (iii) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to Section 3-309 or 3-418(d)…. Section 3-301

Therefore, if Maker signs a note for $5,000.00 payable to the order of Payee, who in turn negotiates the note to Third Party, the latter becomes the holder of the instrument and hence the ‘person entitled to enforce’ the instrument.  Until the negotiation, Maker would be the holder, and hence the ‘person entitled to enforce’.

            Whereas the obligation of the maker vests upon the issue of the note, the liability of the drawer of a draft does not kick in until the instrument is dishonored:

(a)  If an unaccepted draft is dishonored, the drawer is obliged to pay the draft (i) according to its terms at the time it was issued or, if not issued, at the time it first came into possession of a holder….The obligation is owed to a person entitled to enforce the draft or to an indorser who paid the draft under Section 3-415.                       Section 3-414(b)

Unlike a note in which the maker promises to make payment, the drawer of a draft is ordering payment by a third party.[Section 3-103(e)].  If the draft is drawn on a bank and payable on demand, it is a check per Section 3-104(f), the third party of course, is the bank upon which the check was drawn. If the bank refuses payment, the check would be dishonored under Section 3-502 and the liability of the drawer would activate under Section 3-414(b).

            It is interesting to note that the issuing of a check does not, in and of itself, create a liability by the bank on the instrument:

A check or other draft does not of itself operate as an assignment of funds in the hands of the drawee available for its payment, and the drawee is not liable on the instrument until the drawee accepts it.  Section 3-408

Therefore, at the time the check is issued, no one is immediately liable. The drawer is not liable until the check is dishonored, and the bank is not liable until it accepts.

"Acceptance" means the drawee's signed agreement to pay a draft as presented. It must be written on the draft and may consist of the drawee's signature alone. Acceptance may be made at any time and becomes effective when notification pursuant to instructions is given or the accepted draft is delivered for the purpose of giving rights on the acceptance to any person.  Section 3-409(a)

The final liability to be discussed at this time is that of the indorser. Indorsement is defined under Section 3-204(a):

(a)  "Indorsement" means a signature, other than that of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is made on an instrument for the purpose of (i) negotiating the instrument, (ii) restricting payment of the instrument, or (iii) incurring indorser's liability on the instrument….

(b) "Indorser" means a person who makes an indorsement.

The indorser’s liabililty is similar to that of the drawer insofar as it does not kick in until the instrument has been dishonored:

(a)  Subject to subsections (b), (c), and (d) and to Section 3-419(d), if an instrument is dishonored, an indorser is obliged to pay the amount due on the instrument (i) according to the terms of the instrument at the time it was indorsed… The obligation of the indorser is owed to a person entitled to enforce the instrument or to a subsequent indorser who paid the instrument under this section.

From the foregoing it is seen that the basic rule regarding the liability of the parties is to pay the instrument according to its terms at the time it was signed.  These basic rules are subject to some important exceptions including, among others, instruments signed when the instrument is incomplete or when there is negligence involved in the preparation or issuing of an instrument.  These exceptions will be discussed in future posts.  The groundwork for these discussion is in place with an understanding of the basic liabilities discussed in this post.

The next post will discuss the meaning of ‘signed’ in detail.  The importance of this definition on the enforceability and drafting of negotiable instruments will become quickly apparent.