An in-depth analysis is required of the case from the point of view of three aspects of transactions involving promissory notes issued by the retirees. These aspects are:
- The legality of promissory notes,
- Endorsement of promissory notes in favor of Ralph, and
- Status of Ralph as a ‘holder in due course’.
Legality of Promissory Notes
Negotiable Instruments in U.S.are governed mainly by State Statutory Law. Every state has adopted Article 3 of the Uniform Commercial Code (UCC), with some modifications, as the law governing negotiable instruments. A promissory note is one of the negotiable instruments. ‘Promissory Note is a written promise made by one person to another to pay a certain amount of money on demand or at a specified time in the future. It can also give other details like interest amount, installment payments, penalties for late payments, provision for a legal fee if legal action involved1.’ To be a legal document, a promissory note must a) be in writing, b) signed by the maker, c) contain an undertaking to pay, d) be a promise to pay unconditionally on-demand or at a fixed or determinable future time, e) contains a promise to pay money and money only, and f) be certain about the payee, maker, and sum of money payable.
In the matter under consideration, Fred is Payee, retirees are makers, and the selling price of property lots is the amount of money payable under the promissory notes. Retirees paid the consideration of lots with promissory notes. That means promissory notes were written documents, signed by retirees (makers), and certainly contained promises by the retirees to pay the money unconditionally on-demand or at a fixed or determinable time, or as per the order of Fred. Accordingly, the promissory notes issued by retirees complied with all legal requirements and thus were legal documents.
Endorsement of promissory notes in favor of Ralph
The matter contains a statement that ‘The holder of these promissory notes is Fred’s brother, Ralph’. About how Ralph became a holder of promissory notes, the matter states that, ‘ Ralph got him to transfer all of the promissory notes to Ralph in consideration for the work Ralph had done to develop the property.’ This indicates that Fred had endorsed all the promissory notes in favor of Ralph.
Endorsement of any negotiable instrument can be a blank endorsement, a special endorsement, or a qualified endorsement. Blank endorsement consists of the signature of payee. By the mere signature of the payee, blank endorsement converts an order promissory note into a bearer promissory note. Special endorsement indicates the party to whom the note is being made payable. With the special endorsement, a promissory note remains an order paper but becomes payable to the order of the endorsee. When a promissory note is endorsed with special endorsement, it becomes an order note. Qualified endorsement contains words of qualifications such as ‘Without Recourse’. It does not restrict further negotiations but the endorser makes no promise or guarantee of payment if the instrument is dishonored.
Nothing is in mentioned in the matter about the type of endorsement executed by Fred while transferring the notes to Ralph. There are very less chances of a blank endorsement as the matter states that ‘Ralph got him to transfer all of the promissory notes to Ralph in consideration for the work….’. There might be a special endorsement indicating the name of Ralph as nothing else is reflected in the matter about any qualification of the endorsements. When special endorsement were executed by Fred promissory notes were converted into order notes and retirees were compulsorily and legally required to honor the notes even if the developments were not completed by Fred, as a promissory note is an unconditional promise to pay on demand or at fixed or determinable future time.
Was Ralph a ‘holder in due course’?
When a holder obtains the special status of ‘Holder in Due Course’ (HDC), the instrument (promissory note) under that situation is subject neither to superior claims nor to most of defenses. A party takes a negotiable instrument as a holder in due course if it is a) taken for value,
- in good faith, and
- without notice of defects in the instruments.
Facts of the case from the point of view above conditions for holder becoming a holder in due course are as under:
- Over a million dollars were due to Ralph from Fred for work Ralph did to prepare the lots, including initial paving of some of the access roads. Accordingly, Ralph obtained the promissory notes for value.
- Ralph did not take the notes in good faith. Ralph was fully aware that Fred told retirees that they would be able to have water on their property. He was going to put in the water lines but he knew that there was no way to get water for the project. Ralph has this factual knowledge of the fraud conducted by Red, who left for Mexico after transferring promissory notes to him. Ralph’s intent was malafide and he just wanted to exploit the promises of retirees.
- The problem does not mention any defect in promissory notes. Those are legal and appear to be endorsed properly as stated earlier in this study.
Therefore, Ralph was not a ‘holder in due course’ because he did not took promissory notes in good faith, though notes were transferred for value and there was no mention of any defect in the instruments. Only because Ralph was not a holder in due course the retirees were right not to owner the promissory notes, The defenses of retirees are real as Ralph acquired the notes through a mala fied intentions and therefore retirees will win the suit against Ralph.
Claims of Beneficiaries
The trust under consideration is a private trust. There appears to be no express trust agreement defining the specific duties of trustee and care needed to perform those duties. In absence of express terms, the trustees are expected to perform duties as a prudent person. From the time of creation of trust until final distribution of assets, a trustee has the power to perform every act that a prudent man would perform for the purposes of trust.
Mary is supposed to perform her duties as a fiduciary person. ‘The significant duties of a fiduciary are to :
- Take possession and maintain control of fiduciary assets;
- Keep fiduciary assets separate and distinct from all other assets of institution;
- Maintain clear and accurate accounts and records;
- Provide information to beneficiaries in a timely manner;
- Exercise the same care and skill in administering the trust, as a person of ordinary prudence would exercise in dealing with his or her own property. This is generally referred to as the ‘prudent man’ or ‘prudent investor’ rule; and
- Administer the trust solely in the interest of beneficiary, which is referred as duty of loyalty. This duty prevents the fiduciary from putting itself in a position where its corporate interests conflict with those of the trust it is representing.’1
Mary had control of assets under trust. She certainly kept her assets separate and distinct from the assets of trust. This is clear when she sold her car to the trust. The car is worth $10000, but she sold the car a price of $ 5000 to the trust. This is an act of prudence. Every purchaser would try to purchase the car at lowest of prices. This exactly was the act of Mary. This also reflects that Mary was using utmost skill in administering the affairs of the trust.
The problem arose when the investment of $50000 made in penny stocks was lost. She took the advise of her stock broker to invest funds of trust in stocks that have a high rate of failure and folding. While performing trust duties, a fiduciary runs certain risks like ‘Financial Risks’, that are inherent in the fiduciary activities of the investment.
As a normal prudent person, Mary consulted her stockbroker; and believing in the expertise and acumen of the stockbroker she invested in the penny stocks. It was inherent risk of the transaction that resulted into losses. It could go otherwise as stockbroker was considering the transaction as a ‘sure deal’.
Though trustee is accountable to a beneficiary for profits made by administering the trust assets; but ‘the trustee is not liable to the beneficiary for a loss or depreciation in value of the trust property or for failure to make profit that does not result from a failure to perform duties set forth in this subtitle or from any other breach of trust.’2
The law stated here makes absolutely clear that trustee is not responsible for losses not resulting from a failure to perform duties or any breach of trust on part of trustee. Mary was performing duties in normal course. There is no sign of any breach of trust. Rather she gave a positive sign of her loyalty towards trust when she sold her own car at a loss to the trust. She, in fact, believed in the assessment of the stockbroker as any other prudent person would have done. This is altogether a different matter that stock she was trying to deal in had a high rate of failure or folding. She invested relying on the ability of stockbroker who assessed this as a ‘sure deal’.
Mary did not commit any act against her fiduciary responsibilities. Losses could have occurred to any prudent person in such a deal. Under such circumstances, no claim is available to beneficiaries (Mary’s two brothers) as Mary was within performing her duties as a fiduciary.
References
Promissory Note, Legal- Explanations. Com, Web.
Fiduciary Duties Risks and Liabilities, 2001, OTS Trust and Assets Management Handbook, Web.
Section 114.001(b) of Property Code, Subchapter A: Liabilities of Trustee, Web.