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.