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First Run Broadcast: March 14, 2006
1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes)

Promissory notes are the most ubiquitous commercial documents. Often short and simple in form, their legal
foundation can be complex, because many promissory notes are negotiable instruments within the scope of
Article 3 of the UCC. As such, the method of their transfer and the rights and duties of interested parties are
governed by an intricate set of rules that are easily forgotten (until they matter). In this program, led by national
experts on commercial law, you will be guided through the aspects of Article 3 that most commonly affect
commercial transactions.

In this program, you will learn about:

   •   How the three core concepts of Article 3 – negotiable instrument, negotiation, and holder in due course
       – relate to promissory notes
   •   Why even a negotiable promissory note might not be governed by Article 3
   •   What those "boilerplate" waivers in promissory notes really do
   •   The proper mechanics for the sale or purchase of a promissory note
   •   The rights of lenders who take pledges of promissory notes
   •   When a maker will not receive credit for payments made on its promissory note
   •   Defeating the alleged holder in due course

John Murdock is a member in the Nashville office of Boult, Cummings, Conners & Berry, PLC, where his
practice includes business acquisitions and dispositions, commercial lending, and creditor's rights and
commercial law generally. He is active in commercial law-related committees of the American Bar
Association, including the Commercial Financial Services Committee of the ABA Business Section, formerly
serving as Chair of its Lender Liability Subcommittee. Mr. Murdock is listed in The Best Lawyers in America®
2006 for his banking law practice and is a Fellow of the American College of Commercial Finance Lawyers.
He has lectured extensively on subjects including commercial lending, creditor remedies, the purchase and sale
of distressed businesses, the Uniform Commercial Code and the use of information technology in the practice of
law. Mr. Murdock received his B.S., magna cum laude, from Vanderbilt University and his J.D. from
Vanderbilt University School of Law.

Robert M. Lloyd is the Lindsay Young Distinguished Professor of Law at the University of Tennessee College
of Law, where he teaches commercial law and debtor-creditor law. Before joining the College of Law, he had a
successful career in commercial law with the Los Angeles firm of Sheppard, Mullin, Richter & Hampton.
Professor Lloyd has helped develop the College of Law’s new concentration in business transactions and served
as the first director of the college’s Center for Entrepreneurial Law. He is the author of the textbook “Secured
Transactions,” published by Matthew Bender, and many other book chapters and articles for professional and
academic publications. Professor Lloyd is a Fellow of the American College of Commercial Finance Lawyers.
He received his B.S.E. from Princeton and his J.D. from the University of Michigan Law School.
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             UCC Article 3: Promissory Notes as Commercial Papaer,Teleseminar
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        UCC Article 3 and Promissory Notes

                  March 14, 2006

                  Robert M. Lloyd
       University of Tennessee College of Law
                Knoxville, Tennessee

                John E. Murdock III
       Boult, Cummings, Conners & Berry PLC
                Nashville, Tennessee
                            Article 3 and Promissory Notes
                                Teleseminar March 14, 2006

                                       Robert M. Lloyd
                           University of Tennessee College of Law
                                    Knoxville, Tennessee

                                     John E. Murdock III
                           Boult, Cummings, Conners & Berry PLC
                                    Nashville, Tennessee

I.      Article 3 is not just about checks and bank drafts. Article 3 affects rights and
duties in issuing, receiving, selling, buying, pledging, or receiving a pledge of, ordinary
promissory notes that qualify as "negotiable instruments." This presentation addresses
the application of Article 3 to promissory notes issued in commercial transactions.

       A.     The two main consequences of Article 3 relate to the transfer of
promissory notes.

                1.     Mechanics and effect of transfer between transferor and transferee.

               2.      Effect of transfer as to rights between maker and transferee
(through the potential status of the transferee as a holder in due course, or "HDC").

         B.     Article 3 also controls the interpretation and effect of the promissory note
itself as an obligation of the maker, whether or not the note is transferred by the initial

II.      About Article 3

       A.      Article 3 was amended broadly in 1990. The 1990 version is what is
meant by most present references to "Article 3." Citations in this outline are to the 1990
version of Article 3 unless otherwise specified.

                 1.      Changed title from Commercial Paper to Negotiable Instruments
to better reflect scope.

               2.      Made many substantive changes, most of which were more
relevant to check collections than to promissory note practice.

     B.     Additional official amendments were issued in 2002.            The 2002
amendments have been adopted thus far in four states and are pending for consideration

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in 2006 in three more states. These amendments make more check collection changes
and make some changes of importance to ordinary promissory notes. A present reference
to "Revised Article 3" would usually mean the 2002 version. Many citations to the 1990
version are also accurate citations to the 2002 version.

        C.     Article 3 applies an extensive body of law to define the obligations
surrounding the issuance and transfer of negotiable instruments. It does not apply to
instruments that are not negotiable instruments. A given promissory note thus either
invokes Article 3 because it is negotiable, or Article 3 is irrelevant to it because the note
is not negotiable. These differences are the main subject of this presentation.

III.     Basic concepts of Article 3

       A.     A promissory note is only a negotiable instrument if it meets specific
requirements as to what it says. Section 3-104.

       B.     A negotiable instrument may be transferred by delivery alone or by
negotiation. Sections 3-201, 3-203.

                1.     Delivery alone conveys whatever rights the transferor had in the
note and gives rise to implied warranties of transfer (title, authority, no unauthorized
alterations, no defenses to payment, no knowledge of bankruptcy of maker). Sections 3-
203(a), 3-416.

             2.      Negotiation is delivery plus any necessary indorsement, creating a
"holder" (one in possession of an instrument that runs to him or her). Sections 3-201, 3-

                       a.     Negotiation conveys rights of transferor and usually adds
an indorser with statutory recourse obligations making the indorser liable for the credit
of the maker. Sections 3-204, 3-415.

                      b.      If the holder qualifies, the holder may also be a holder in
due course ("HDC") and have greater rights to collect from the maker than the transferor
had. Sections 3-302, 3-305. For this reason, a maker would always prefer that a
promissory note is not negotiable, and a payee or subsequent owner would always prefer
that a promissory note is negotiable.

IV.      Practice Issues - Terms and Conditions of Issuance

        A.     The statute of limitations applicable to a promissory note may vary based
upon whether or not it is a negotiable instrument. Article 3 contains its own statute of
limitations. Section 3-118. For a note payable at a definite time, an action must be
commenced within six years after the due dates stated in the note, unless the maturity is
accelerated. In that case, it must be commenced within six years after the accelerated due
date. Section 3 118(a). For a demand note, an action must be commenced within six

1239646 v3                                      -2-
years after the demand, but if no demand is made, an action is barred if no payments of
interest or principal are made for ten years. Section 3-118(b).

        B.      The obligations of multiple makers who sign a negotiable promissory note
are joint and several unless the note requires otherwise. Section 3-116.

       C.       A co-maker has a statutory surety status as an "accommodation party" to
the extent it signs a negotiable promissory note but did not receive the proceeds of the
note. The terms and conditions of this status as provided by Article 3 may not be the
same as common law requirements applicable to other obligations of suretyship.
Sections 3-419, 3-605.

        D.     Negotiable promissory notes are subject to procedural requirements in
their enforcement that do not apply to non-negotiable notes, such as the obligation to
physically present the instrument and demand payment or to give indorsers notice of the
dishonor by the maker (such as by obtaining a "protest," a formal certification of
dishonor required mostly in international transactions). Sections 3-501, 3-502, 3-503, 3-
505. Many of these requirements are customarily waived in the "boilerplate" of
promissory notes.

V.       Practice Issues - Transfer by Negotiation

        A.      An "allonge" is a writing separate from a negotiable instrument on which
an indorsement is provided incidental to the transfer of the instrument. Section 3-204(a).
Allonges are commonly used as matters of convenience for temporary transfers (such as
the pledge of a promissory note to a lender) and for some outright purchases. Some
technical requirements still exist regarding transfer of promissory notes using an
indorsement provided by an allonge. For example, to be an effective indorsement, an
allonge must be "affixed" to the instrument. The precise degree of affixation that suffices
is not clear and this can be a trap for the unwary.

               1.     Example: Southwestern Resolution Corp. v. Watson, 964 S.W.2d
262, 33 UCC Rep. Serv. 2d 1144 (Tex. 1997). An allonge was stapled and taped to a
note. There was evidence that the allonge had been removed five or six times for
photocopying and re-attached each time. The court held that the indorsements on the
allonge were valid. The court said that stapling is the modern method of "affixing" one
paper to another and that the 1990 revision’s deletion of the former requirement that an
allonge be "so firmly affixed to the instrument as to become a part thereof" removed any
doubt whether stapling was sufficient.

                2.     Example: Estrada v. River Oaks Bank & Trust Co., 550 S.W.2d
719, 22 UCC Rep. Serv. 719 (Tex. Civ. App. 1977, n.r.e.). Estrada executed four notes
to Lewis. Lewis pledged the notes to the bank. He did not indorse them, but executed a
single collateral assignment of the four notes. The bank stapled the assignment to the
notes. The court held that even if the assignment qualified as an allonge (which it
probably didn’t under pre-revision Article 3), a single signature was not sufficient to
indorse four notes. The court noted that "indorsement by allonge has never been

1239646 v3                                      -3-
considered as prudent or desirable as an indorsement on the instrument itself." 550
S.W.2d at 728. In reversing a summary judgment for the bank, the court noted that as a
transferee of the notes, the bank can still recover against Lewis. The lack of a proper
negotiation only precludes it from being an HDC.

         B.    Additional explanatory words added to indorsements generally do not
impair their effect. For example, some borrowers who pledge promissory notes wish to
include the words "for collateral security only" or similar phrases. The expanded
language of the indorsement does not impair the ability of the pledgee lender or any
subsequent person to become a holder or enforce the instrument. See Section 3-206(b),

       C.       It must always be remembered that transfer warranties arise by statute if a
negotiable promissory note is transferred and that indorser liability arises upon an
indorsement. Sections 3-203(a), 3-416, 3-204, 3-415. It is equally important to
remember that these same undertakings may not be implied by common law if a non-
negotiable promissory note is transferred, so they should be provided or disclaimed by
contract to reflect clearly the intention of the parties.

VI.      Rights of a Holder in Due Course

         A.     Effect

               1.      A holder in due course takes a negotiable promissory note free of
most claims to the instrument and free of most defenses otherwise available to the maker.

                        a.     Fraud. With limited exception, a person obligated on a
negotiable instrument cannot assert against an HDC fraud that occurred in the underlying
transaction. Section 3-305(b). The only fraud that can be asserted is "fraud that induced
the obligor to sign the instrument with neither knowledge nor reasonable opportunity to
learn of its character or its essential terms." Section 3-305(a)(iii). This is sometimes
referred to as "real fraud," to distinguish it from "personal fraud," which is the ordinary
type of fraud and cannot be asserted against an HDC. "Real" fraud may be found only
when the maker has signed a document without a reasonable opportunity to understand
its meaning, such as when a signature page is switched from another document to a
negotiable instrument. Mere ignorance or lack of diligence in signing is not "real" fraud.
For example, in New Bedford Institution for Savings v. Gildroy, 634 N.E.2d 920, 25 UCC
Rep. Serv. 2d 450 (Mass. App. Ct. 1994), an investor with an MBA from Harvard signed
a promissory note without reading it when a business associate told him he was signing a
loan application for another deal. Because he had an opportunity to read the note, he
could not assert the fraud against a thrift with the rights of an HDC.

                      b.      Payment not known to the holder. The basic principle of
negotiable instruments is that an HDC is entitled to rely on the instrument and is not
bound by anything extrinsic to it. If the maker or another person obligated on the
instrument makes a payment, he needs to have the payment noted on the instrument so
that anyone who later takes the note is aware of the payment. With respect to payments

1239646 v3                                     -4-
made to a person who has already transferred the note to a new holder, the rule has
always been (and still is in most jurisdictions) that the payment does not discharge the
debt. The payor has to protect himself by requiring the person being paid to produce the
note (and of course to record the payment on the note). This rule is changed by the 2002
amendments to Article 3 (adopted in only a few jurisdictions). New Section 3-602(b)
provides that a payment to a person formerly entitled to enforce the note is effective
against a later transferee unless the maker has received notice of the transfer and an
address at which payments are to be made. The Official Comment notes that this change
makes the rule consistent with UCC Section 9-406(a), Restatement of Mortgages Section
5.5 and Restatement of Contracts Section 338(1). For example, in Bank of Miami v.
Florida City Express, Inc., 367 So.2d 683, 25 UCC Rep. Serv. 1102 (Fla. Dist. Ct. App.
1979), Florida City Express executed two promissory notes in favor of a supplier. The
supplier discounted the notes to the bank, but Florida City Express paid the supplier the
full amount owed, some of the payments being made before the transfer to the bank and
some after. The bank never gave Florida City Express notice that it had acquired the
notes until it attempted to make collection. The court held that because the bank was an
HDC, it was entitled to recover the full amount of the notes from Florida City Express.
Under the 2002 amendments, the liability of Florida City Express would be reduced by
the amount of any payments made after the bank came into possession of the notes.

                       c.     Security interests and ownership claims. If a party wishes
to have an indefeasible claim to a negotiable promissory note, whether as a lien security
interest or as an owner, it should take possession of the original instrument in order to
make it impossible for another HDC to exist. Thus, for example, while Revised Article 9
allows for the perfection of security interests in "instruments" (which for the purpose of
Revised Article 9 include, but are not limited to, negotiable promissory notes) by filing a
financing statement, a holder in due course of the instrument will still have priority.
Sections 9-312(a), 9-330(d), 9-331(a).

                       d.     A holder in due course does not take free of a limited
number of defenses: infancy, duress, lack of capacity, illegality that nullifies the
obligation, "real" fraud (where maker lacked intent to sign an instrument), discharge by
insolvency proceeding, and the statute of limitations.

         B.    How HDC status is obtained.

               1.     Becoming HDC in one's own right (i.e., other than by "shelter").

                      a.      The HDC must be a "holder" (defined above).

                      b.     The holder must give "value." Note that the definition of
"value" in Article 3 (Section 3-303) is different from the Article 1 definition of value
(Section 1-204, which applies in most other articles. Under the Article 1 definition, a
binding promise (including a binding commitment to extend credit) constitutes "value,"
but under the Article 3 definition, value is not given until the promise is actually
performed and then only to the extent that it has been performed.

1239646 v3                                     -5-
                               (i)    Hypothetical: Borrower pledges a note to Bank as
security for a line of credit. Bank has given "value" under Article 1, so its security
interest can attach. Bank does not give "value" under Article 3 until Borrower draws on
the line of credit. If, before Borrower draws on the line of credit, Bank learns that the
maker alleges that the note was issued to Borrower in payment for defective goods, Bank
cannot be a holder in due course of the note.

                             (ii)    Hypothetical: Developer gives Builder a note in the
principal amount of $100,000 in payment for a job. Builder sells the note to Investor to
raise ready cash. Because Developer’s credit is shaky, Investor pays only $80,000 for the
note. Investor can be an HDC of the note and can enforce it as an HDC for the full
$100,000 plus any applicable interest.

                             (iii) Hypothetical:       Same facts as the preceding
hypothetical except Investor does not pay Builder the full $80,000, he pays $40,000 and
promises to pay the remaining $40,000 at a later date. Because Investor has paid only
half of the amount he promised, he is entitled to HDC status only to the extent of half the
amount owing on the instrument ($50,000). Investor may be able to collect the full
$100,000 from Developer, but the second $50,000 is subject to any claims or defenses
that Developer may have arising out of the same transaction as the note. See Section 3-

                             (iv)    Hypothetical: Instead of selling the note, Builder
borrows $70,000 from Bank and pledges the note as collateral. Bank is an HDC only to
the extent of the amount owing on the secured debt.

                        c.     The holder must take the instrument in good faith. Section

                        d.     The holder must take the instrument without notice that:

                               (i)    It is overdue or has been dishonored. Unless the
maturity of the note has been accelerated, a default in the payment of interest alone does
not make the note overdue. If any part of the principal is in default, however, the note is
overdue until the default is cured. Section 3-302(2)(ii); see Section 3-304.

                               (ii)    There is any unauthorized signature or alteration.
Section 3-302(2)(iv).

                               (iii)   There are any claims or defenses to the instrument.
Section 3-302(2)(v,vi).

                2.      Acquiring HDC status through the "shelter" principle.

                        a.      Section 3-203(b) provides that a transfer of the instrument,
whether or not the transfer is a negotiation, gives the transferee all of the rights of the
transferor to enforce the instrument, including rights of a holder in due course.

1239646 v3                                     -6-
                              (i)     Hypothetical: Borrower, who is an HDC of a note,
pledges the note to Bank as security for a loan. Bank fails to obtain Borrower’s
indorsement on the note and so cannot be an HDC in its own right. It still acquires
Borrower’s right to enforce the note as an HDC.

                                (ii)    Hypothetical: Debtor grants Finance Company a
security interest in a portfolio of notes of which Debtor is an HDC. Finance Company
perfects its security interest by filing and does not take possession of the notes. Finance
Company does not succeed to Debtor’s position as an HDC because it is not a
"transferee" under Section 3-203(a). If Finance Company later (perhaps through a
workout agreement) takes possession of the notes, it then succeeds to Debtor’s status as
an HDC.

                       b.     Example: New Bedford Institution for Savings v. Gildroy,
634 N.E.2d 920, 25 UCC Rep. Serv. 2d 450 (Mass. App. Ct. 1994). Welch and Gildroy
were co-owners of a hotel. In order to get financing for the completion of another hotel,
in which Gildroy was not a co-owner, Welch approached Taunton State Bank ("TSB")
and falsely told them Gildroy was a co-owner. TSB approved the loan and allowed
Welch to procure Gildroy’s signatures on the loan documents. Gildroy, apparently
thinking he was signing documentation for a loan application for the hotel in which had
an interest, signed the note without reading it. (The opinion is not clear as to exactly
what he thought he was signing.) TSB was acquired by New Bedford Institution for
Savings ("New Bedford"). The note was never indorsed to New Bedford. Therefore,
New Bedford could not be a holder in due course in its own right. Under the shelter
principle, however, New Bedford did succeed to TSB’s rights as a holder in due course.
The court noted that, contrary to the common misunderstanding, a payee of a note can be
a holder in due course. (Comment 2 to Section 3-305 confirms this.) Gildroy asserted
further that TSB was not a holder in due course because it had not taken the note in good
faith as required by the predecessor of Section 3-302(a)(2). The court indicated that
TSB’s failure to follow good banking practices by accepting without question a note not
signed in the presence of a bank officer complied with the then-existing definition of
"good faith," which required only "honesty in fact." The court implicitly acknowledged
that the result might have been different under the 1990 revisions which added a
requirement of "the observance of reasonable commercial standards of fair dealing." See
Section 3-302(b)(1) or, in jurisdictions that have adopted Revised Article 1, Section 1-

VII. When is a promissory note a negotiable instrument? It must be a specific promise
to pay and little else (i.e., a "traveler without baggage").

        A.     The instrument must be a signed writing. There is no equivalent of
electronic chattel paper or electronic letters of credit. See Sections 3-103(a)(6), 3-

      B.     The instrument must contain an unconditional promise or order to pay
money. Section 3-104(a). A note is unconditional unless (i) it states an express condition

1239646 v3                                     -7-
to payment, (ii) it states that it is subject to or governed by another writing, or (iii) it
states that the rights or obligations with respect to the note are stated in another writing.
A mere reference to another document, however, does not make the note conditional.
Section 3-106.

              1.     Example: A note states: "This note is executed in connection with
that certain Revolving Credit and Security Agreement dated March 15, 2006 by and
between Enron Corporation and Continental Illinois National Bank." The note may be

             2.      Example: A note states: "This note is executed in connection with
and is governed by that certain Revolving Credit and Security Agreement dated
March 15, 2006 by and between Enron Corporation and Continental Illinois National
Bank." The note is not negotiable.

               3.     The instrument cannot contain any other undertakings or
instructions by the maker beyond the obligation to pay money, except for a few
customary ancillary promises permitted by Section 3-104(a)(3) ((i) an undertaking or
power to give, maintain or protect collateral, (ii) an authorization to confess judgment or
to realize on or dispose of collateral, and (iii) a waiver of any of the obligor’s legal
rights). For this reason, the typical lease or installment sale contract cannot be a
negotiable instrument (although a separate note given in connection with such a
transaction may be negotiable).

                       a.     Example: Ford v. Darwin, 767 S.W.2d 851 10 U.C.C. Rep.
Serv. 2d 426 (Tex. Ct. App. 1989). A "Promissory Note Agreement" that contained an
undertaking to sell stock was not a negotiable instrument.

                      b.       Example: Walter Implement, Inc. v. Focht, 709 P.2d 1215,
42 UCC Rep. Serv. 356 (Wash. Ct. App. 1985). An equipment lease did not contain the
"order" or "bearer" language and contained additional promises and undertakings, so it
could not be a negotiable instrument. It could be assigned but could not be negotiated.

                       c.      Undertakings by a person other than the maker do not
defeat negotiability. In Spidell v. Jenkins, 727 P.2d 1285, 3 UCC Rep. Serv. 2d 161
(Idaho Ct. App. 1986) an attorney and his client executed a document titled "Promissory
Note" in which the attorney promised to perform legal services and the client promised to
pay the attorney $8,500. The court held that the promises by the attorney did not make
the note non-negotiable. (It was, however, held to be non-negotiable because it was
payable to the attorney rather than to his order.)

         C.    The promise must be to pay a "fixed" amount of money. Section 3-104(a).

               1.     Interest may be variable and may be based upon references to
extrinsic sources (such as a bank's index rate). This was a change made by the 1990
amendments. The traditional rule was that the amount of interest must be calculable from
the information on the note itself. Section 3-112.

1239646 v3                                      -8-
               2.     Principal must be fixed, however. For example, in RTC v. Oaks
Apartments Joint Venture, 966 F.2d 995, 18 UCC Rep. Serv. 2d 492 (5th Cir. 1992), a
partnership and five partners signed a promissory note promising to pay "the sum of
TWO MILLION AND NO/100 DOLLARS ($2,000,000) or so much thereof as may be
advanced in accordance with the terms of a certain Loan Agreement executed on even
date herewith, with interest thereon at the rate provided below." The partners claimed
that a separate agreement limited each partner’s individual liability to 20% of the
outstanding debt. The RTC argued that it was a holder in due course of the note and that
D’Oench, Duhme (under which the RTC may have rights similar to those of a holder in
due course) precluded the use of the side agreement. The court held that the uncertainty
with respect to the principal amount of the note precluded the note from being a
negotiable instrument. It remanded the case for determination whether D’Oench, Duhme

       D.      The promise must be payable on demand or at a definite time. Sections 3-
104(a)(2), 3-108.

             1.     A note that does not state a time for payment is payable on
demand. Section 3-108(a).

                2.     A note is payable at a definite time even though it provides for
prepayment, acceleration, extension at the option of the holder, or extension to a further
definite time at the option of the maker or upon a specified event. Section 3-108(c). For
example, in DH Cattle Holdings Co. v. Smith, 607 N.Y.S.2d 227, 22 UCC Rep. Serv. 2d
799 (App. Div. 1994), after a college football player was drafted in the first round, his
business advisors got him into a number of tax shelters. He executed a note in the
amount of $490,500 payable to a cattle breeding partnership. The note stated certain
dates on which payments of principal and interest were payable. It further provided
"subsequent payments of principal and interest shall be made as animals or semen are
sold but in no event later than December 31, 1989." The player stopped making
payments when he suspected the deal was fraudulent. Later, the note was pledged to
Rabobank in connection with a loan to an affiliate of the partnership. The court held that
the fact there was a final date by which all of the principal and interest had to be paid
made the note payable at a definite time. Thus, Rabobank could be an HDC.

        E.      The promise must be payable to order to bearer. Sections 3-104(a)(1), 3-
109. These are "magic words" under Article 3. If the note is not payable to order or to
bearer, it is not a negotiable instrument. It can say "pay to the order of First National
Bank," or it can say "pay to First National Bank or order," but if it just says "pay to First
National Bank," it is not negotiable. Section 3-104(c) makes an exception for checks, but
there is no comparable exception for notes.

              1.      The original text of Article 3 contained a provision that a writing
otherwise qualifying as a negotiable instrument but missing the magic words "order" or
"bearer" would be governed by Article 3, except that there could be no holder in due

1239646 v3                                      -9-
course of such an instrument. The later versions contain no comparable provision. See
Official Comment 2 to Section 3-104.

              2.       In Spidell v. Jenkins, 727 P.2d 1285, 3 UCC Rep. Serv. 2d 161
(Idaho Ct. App. 1986), a note reading in part: "I . . . promise to pay to Norman E. Spidell
or Lennette M. Spidel of Route 5, Box 5324, Nampa, Idaho 83651, the sum of EIGHT
THOUSAND FIVE HUNDRED DOLLARS ($8,500) . . . ." was held to be non-
negotiable because it did not contain the word "order."

        F.     Even if a promissory note meets the requirements to be a negotiable
instrument under Article 3, if it also meets the definition of a "security" under Article 8,
Article 8 preempts Article 3 entirely. Section 3-102(a).

1239646 v3                                     - 10 -
                            Article 3 and Promissory Notes
                              Teleseminar Hypothetical

                                         Scene 1
        Two Makers sign each of two promissory notes payable to Payee in exchange for
the purchase of property from Payee. Note 1 is a negotiable instrument under Article 3,
and Note 2 is not. The application of Article 3 may affect the obligations of Makers
arising under the two respective Notes upon their initial issuance.

               Are there any "magic words" that must be included in the Notes?

                      Note 1:________________________________________

                      Note 2:________________________________________

               Are there any particular waivers that should be included in the Notes?

                      Note 1:________________________________________

                      Note 2:________________________________________

                Are the obligations of Makers joint and several if the Notes do not

                      Note 1:________________________________________

                      Note 2:________________________________________

               Might a co-maker have any suretyship defenses, and if so, what are they?

                      Note 1:________________________________________

                      Note 2:________________________________________

               Might the Notes be signed in duplicate originals?

                      Note 1:________________________________________

                      Note 2:________________________________________

               What is the statute of limitations on the Notes?

                      Note 1:________________________________________

                      Note 2:________________________________________

1239646 v3                                    - 11 -
                 Scene 2: Payee pledges the Notes to Bank to secure a line of credit. The
         application of Article 3 may affect the documentation of the pledge of the two
         respective Notes (assume Bank wants to obtain the best possible rights, not just a
         perfected security interest).

                       Note 1:

                       Best transfer is by _________________, which has two elements,
                       ________________________ and _________________________.

                       ________________________ of the pledged note should be
                       ___________ recourse.

                       An allonge must be ______________________ to be an effective

                       Note 2:

                       Best transfer is by ________________.

                       _____________ is not required and of no particular effect (but
         customary, and protects the lender against ___________________).

                       ________________ is not required and of no particular effect (but
                       often customary).

         Scene 3: One of the following three options occurs next:

                Option 1: Makers prepay to Payee the full balance of the Notes.

                Note 1 – Payment is only effective to discharge Makers from Note 1 if
                ________________________________________________________ and

                Note 2 – Payment is only effective to discharge Makers from Note 2 if

                 Option 2: Payee was dishonest with Makers and title to goods "sold" to
         Makers fails completely. Payee also was dishonest with Bank and defaults on
         obligations to Bank. Bank exercises remedies under its pledge of the Notes by
         demanding payment from Makers at maturity of the Notes.

               Note 1 – Bank can recover from innocent Makers to the extent of
______________________ as of the time Bank received notice of the defense, because
Bank is a holder in due course to that extent.

                Note 2 – Bank cannot recover Note 2 from Makers at all.

1239646 v3                                     - 12 -
                Option 3: Payee was dishonest and title to goods "sold" to Makers fails
         completely. Payee also was dishonest with Bank and defaults on obligations to
         Bank. Bank exercises remedies under its pledge of the Notes by selling the Notes
         to Note Purchaser at a 50% discount. Note Purchaser qualifies as a holder in due
         course under Article 3.

                Note 1 – Note Purchaser can recover _________________ of Note 1 from

                Note 2 – Note Purchaser cannot recover Note 2 from Makers at all.

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