UCC TOOLKIT: PROMISSORY NOTES First Run … 3 - 7/2461552.3 may not be the same as common law...

UCC TOOLKIT: PROMISSORY NOTES First Run Broadcast: September 9, 2014 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 essential tools of transactional practice. They are used extensively in business, real estate and commercial transactions. They are also frequently and mistakenly thought of as “boilerplate” – right up to the point when a party needs to collect a note but realizes it is not enforceable. Governed by UCC Article 5/Negotiable Instruments, promissory notes are also commonly bought and sold, and pledged as collateral in transactions among owners of closely held companies. When their complexity is overlooked, their enforceability is easily jeopardized. This program will provide you with a practical guide to drafting and reviewing promissory notes, the rights and duties of parties to notes, significant enforceability issues, and the rights of buyers in due course.

• Drafting and reviewing essential provisions of promissory notes in business and real estate transactions

• Ensuring compliance and enforceability under UCC Article 5 • Rights and duties of parties to a note – makers, holders, transferees • Receiving, selling, buying and pledging promissory notes • Implied warranties when transferring a promissory note • Collection issues, including statutes of limitation • Holders in due course – eligibility for the status and rights attaching to it

Speaker: John Murdock is a partner in the Nashville office of Bradley Arant Boult Cummings, LLP, where his practice includes business acquisitions and dispositions, commercial lending, and commercial law generally. He is a member of the Commercial Financial Services Committee of the ABA Business Law Section and formerly served as chair of its Lender Liability Subcommittee. He is also a Fellow of the American College of Commercial Finance Lawyers. Mr. Murdock received his B.S., magna cum laude, from Vanderbilt University and his J.D. from Vanderbilt University Law School.

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UCC Toolkit: Promissory Notes Teleseminar

September 9, 2014 1:00PM – 2:00PM

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Date: September 9, 2014

Seminar Title: UCC Toolkit: Promissory Notes

Location: Teleseminar - LIVE

Credits: 1.0 MCLE General Credit (Program totals 60 minutes)

Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

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Promissory Notes

John E. Murdock IIIBradley Arant Boult Cummings LLP – Nashville, Tennessee

(o) (615) [email protected]://www.babc.com

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

A. The two main consequences of Article 3 relate to the transfer ofpromissory 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 noteitself as an obligation of the maker, whether or not the note is transferred by the initialholder.

II. About Article 3

A. Article 3 was amended broadly in 1990. The 1990 version is what ismeant by most present references to "Article 3." Citations in this summary are to the1990 version of Article 3 unless otherwise specified.

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

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

B. Additional official amendments were issued in 2002. The 2002amendments have been adopted thus far in ten states. These amendments make morecheck collection changes and make some changes of importance to ordinary promissorynotes. 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 obligationssurrounding the issuance and transfer of negotiable instruments. It does not apply toinstruments that are not negotiable instruments. A given promissory note thus either

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invokes Article 3 because it is negotiable, or Article 3 is irrelevant to it because the noteis not negotiable. These differences are the main subject of this summary.

III. Basic concepts of Article 3

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

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

1. Delivery alone conveys whatever rights the transferor had in thenote and gives rise to implied warranties of transfer (title, authority, no unauthorizedalterations, 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, 3-203.

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

b. If the holder qualifies, the holder may also be a holder indue course ("HDC") and have greater rights to collect from the maker than the transferorhad. Sections 3-302, 3-305. For this reason, a maker would always prefer that apromissory note is not negotiable, and a payee or subsequent owner would always preferthat 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 basedupon whether or not it is a negotiable instrument. Article 3 contains its own statute oflimitations. Section 3-118. For a note payable at a definite time, an action must becommenced within six years after the due dates stated in the note, unless the maturity isaccelerated. In that case, it must be commenced within six years after the accelerated duedate. Section 3-118(a). For a demand note, an action must be commenced within sixyears after the demand, but if no demand is made, an action is barred if no payments ofinterest or principal are made for ten years. Section 3-118(b).

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

C. A co-maker has a statutory surety status as an "accommodation party" tothe extent the co-maker signs a negotiable promissory note but did not receive theproceeds of the note. The terms and conditions of this status as provided by Article 3

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may not be the same as common law requirements applicable to other obligations ofsuretyship. Sections 3-419, 3-605.

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

V. Practice Issues - Transfer by Negotiation

A. An "allonge" is a writing separate from a negotiable instrument on whichan 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 asthe pledge of a promissory note to a lender) and for outright purchases. Some technicalrequirements still exist regarding transfer of promissory notes using an indorsementprovided 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 andthis can be a trap for the unwary.

1. Example: Southwestern Resolution Corp. v. Watson, 964 S.W.2d262, 33 UCC Rep. Serv. 2d 1144 (Tex. 1997). An allonge was stapled and taped to anote. There was evidence that the allonge had been removed five or six times forphotocopying and re-attached each time. The court held that the indorsements on theallonge were valid. The court said that stapling is the modern method of "affixing" onepaper to another and that the 1990 revision’s deletion of the former requirement that anallonge be "so firmly affixed to the instrument as to become a part thereof" removed anydoubt whether stapling was sufficient.

2. Example: Estrada v. River Oaks Bank & Trust Co., 550 S.W.2d719, 22 UCC Rep. Serv. 719 (Tex. Civ. App. 1977, n.r.e.). Estrada executed four notesto Lewis. Lewis pledged the notes to the bank. He did not indorse them, but executed asingle collateral assignment of the four notes. The bank stapled the assignment to thenotes. The court held that even if the assignment qualified as an allonge (which itprobably didn’t under pre-revision Article 3), a single signature was not sufficient toindorse four notes. The court noted that "indorsement by allonge has never beenconsidered as prudent or desirable as an indorsement on the instrument itself." 550S.W.2d at 728. In reversing a summary judgment for the bank, the court noted that as atransferee of the notes, the bank can still recover against Lewis. The lack of a propernegotiation only precludes it from being an HDC.

B. Additional explanatory words added to indorsements generally do notimpair their effect. For example, some borrowers who pledge promissory notes wish toinclude the words "for collateral security only" or similar phrases. The expandedlanguage of the indorsement does not impair the ability of the pledgee lender or any

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subsequent person to become a holder or enforce the instrument. See Section 3-206(b),(d),(e).

C. It must always be remembered that transfer warranties arise by statute if anegotiable promissory note is transferred and that indorser liability arises upon anindorsement. Sections 3-203(a), 3-416, 3-204, 3-415. It is equally important toremember 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 bycontract 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 ofmost claims to the instrument and free of most defenses otherwise available to the maker.

a. Fraud. With limited exception, a person obligated on anegotiable instrument cannot assert against an HDC fraud that occurred in the underlyingtransaction. Section 3-305(b). The only fraud that can be asserted is "fraud that inducedthe obligor to sign the instrument with neither knowledge nor reasonable opportunity tolearn of its character or its essential terms." Section 3-305(a)(iii). This is sometimesreferred to as "real fraud," to distinguish it from "personal fraud," which is the ordinarytype of fraud and cannot be asserted against an HDC. "Real" fraud may be found onlywhen the maker has signed a document without a reasonable opportunity to understandits meaning, such as when a signature page is switched from another document to anegotiable 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 UCCRep. Serv. 2d 450 (Mass. App. Ct. 1994), an investor with an MBA from Harvard signeda promissory note without reading it when a business associate told him he was signing aloan application for another deal. Because he had an opportunity to read the note, hecould not assert the fraud against a thrift with the rights of an HDC.

b. Payment not known to the holder. The basic principle ofnegotiable instruments is that an HDC is entitled to rely on the instrument and is notbound by anything extrinsic to it. If the maker or another person obligated on theinstrument makes a payment, he needs to have the payment noted on the instrument sothat anyone who later takes the note is aware of the payment. With respect to paymentsmade to a person who has already transferred the note to a new holder, the rule hasalways been (and still is in most jurisdictions) that the payment does not discharge thedebt. For protection, the maker has to require the person being paid to produce the note(and to record the payment on the note if the note is not finally paid and will be returnedto the holder). This rule is changed by the 2002 amendments to Article 3 (adopted inonly a few jurisdictions). New Section 3-602(b) provides that a payment to a personformerly entitled to enforce the note is effective against a later transferee unless themaker has received notice of the transfer and an address at which payments are to bemade. The Official Comment notes that this change makes the rule consistent with UCC

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Section 9-406(a), Restatement of Mortgages Section 5.5 and Restatement of ContractsSection 338(1). For example, in Bank of Miami v. Florida City Express, Inc., 367 So.2d683, 25 UCC Rep. Serv. 1102 (Fla. Dist. Ct. App. 1979), Florida City Express executedtwo promissory notes in favor of a supplier. The supplier discounted the notes to thebank, but Florida City Express paid the supplier the full amount owed, some of thepayments being made before the transfer to the bank and some after. The bank did notgive to Florida City Express that the bank had acquired the notes until it attempted tomake collection. The court held that because the bank was an HDC, it was entitled torecover the full amount of the notes from Florida City Express. Under the 2002amendments, the liability of Florida City Express would be reduced by the amount of anypayments made after the bank came into possession of the notes.

c. Security interests and ownership claims. If a party wishesto have an indefeasible claim to a negotiable promissory note, whether as a lien securityinterest or as an owner, it should take possession of the original instrument in order tomake it impossible for another HDC to exist. Thus, for example, while Revised Article 9allows for the perfection of security interests in "instruments" (which for the purpose ofRevised Article 9 include, but are not limited to, negotiable promissory notes) by filing afinancing 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 limitednumber of defenses: infancy, duress, lack of capacity, illegality that nullifies theobligation, "real" fraud (where maker lacked intent to sign an instrument), discharge byinsolvency 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, abinding promise (including a binding commitment to extend credit) constitutes "value,"but under the Article 3 definition, value is not given until the promise is actuallyperformed and then only to the extent that it has been performed.

(i) Hypothetical: Borrower pledges a note to Bank assecurity for a line of credit. Bank has given "value" under Article 1, so its securityinterest can attach. Bank does not give "value" under Article 3 until Borrower draws onthe line of credit. If, before Borrower draws on the line of credit, Bank learns that themaker alleges that the note was issued to Borrower in payment for defective goods, Bankcannot be a holder in due course of the note.

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(ii) Hypothetical: Developer gives Builder a note in theprincipal amount of $100,000 in payment for a job. Builder sells the note to Investor toraise ready cash. Because Developer’s credit is shaky, Investor pays only $80,000 for thenote. 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 precedinghypothetical except Investor does not pay Builder the full $80,000, he pays $40,000 andpromises to pay the remaining $40,000 at a later date. Because Investor has paid onlyhalf of the amount he promised, he is entitled to HDC status only to the extent of half theamount 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 defensesthat Developer may have arising out of the same transaction as the note. See Section 3-302(d).

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

c. The holder must take the instrument in good faith. Section3-302(2)(ii).

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

(i) It is overdue or has been dishonored. Unless thematurity of the note has been accelerated, a default in the payment of interest alone doesnot make the note overdue. If any part of the principal is in default, however, the note isoverdue until the default is cured. Section 3-302(a)(2)(ii); see Section 3-304.

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

(iii) There are any claims or defenses to the instrument.Section 3-302(2)(a)(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 thetransferor to enforce the instrument, including rights of a holder in due course.

(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’sindorsement on the note and so cannot be an HDC in its own right. It still acquiresBorrower’s right to enforce the note as an HDC.

(ii) Hypothetical: Debtor grants Finance Company asecurity interest in a portfolio of notes of which Debtor is an HDC. Finance Company

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perfects its security interest by filing and does not take possession of the notes. FinanceCompany 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 aworkout agreement) takes possession of the notes, it then succeeds to Debtor’s status asan 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 Gildroywere 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 allowedWelch to procure Gildroy’s signatures on the loan documents. Gildroy, apparentlythinking he was signing documentation for a loan application for the hotel in which hadan interest, signed the note without reading it. (The opinion is not clear as to exactlywhat he thought he was signing.) TSB was acquired by New Bedford Institution forSavings ("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 shelterprinciple, 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 bea holder in due course. (Comment 2 to Section 3-305 confirms this.) Gildroy assertedfurther that TSB was not a holder in due course because it had not taken the note in goodfaith as required by the predecessor of Section 3-302(a)(2). The court indicated thatTSB’s failure to follow good banking practices by accepting without question a note notsigned 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 acknowledgedthat the result might have been different under the 1990 revisions which added arequirement of "the observance of reasonable commercial standards of fair dealing." SeeSection 3-302(b)(1) or, in jurisdictions that have adopted Revised Article 1, Section 1-201(19).

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

A. The instrument must be a signed writing. There is no equivalent ofelectronic chattel paper or electronic letters of credit. See Sections 3-103(a)(6), 3-103(a)(9).

B. The instrument must contain an unconditional promise or order to paymoney. Section 3-104(a). A note is unconditional unless (i) it states an express conditionto payment, (ii) it states that it is subject to or governed by another writing, or (iii) itstates 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 withthat certain Credit and Security Agreement dated March 15, 2006 by and between EnronCorporation and Continental Illinois National Bank." The note may be negotiable.

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2. Example: A note states: "This note is executed in connection withand is governed by that certain Credit and Security Agreement dated March 15, 2006 byand between Enron Corporation and Continental Illinois National Bank." The note is notnegotiable.

3. The instrument cannot contain any other undertakings orinstructions by the maker beyond the obligation to pay money, except for a fewcustomary ancillary promises permitted by Section 3-104(a)(3) ((i) an undertaking orpower to give, maintain or protect collateral, (ii) an authorization to confess judgment orto realize on or dispose of collateral, and (iii) a waiver of any of the obligor’s legalrights). For this reason, the typical lease or installment sale contract cannot be anegotiable instrument (although a separate note given in connection with such atransaction 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 anundertaking 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 itcould not be a negotiable instrument. It could be assigned but could not be negotiated.

c. Undertakings by a person other than the maker do notdefeat 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 "PromissoryNote" in which the attorney promised to perform legal services and the client promised topay the attorney $8,500. The court held that the promises by the attorney did not makethe note non-negotiable. (It was, however, held to be non-negotiable because it waspayable 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 toextrinsic sources (such as a bank's index rate). This was a change made by the 1990amendments. The traditional rule was that the amount of interest must be calculable fromthe information on the note itself. Section 3-112.

2. Principal must be fixed, however. For example, in RTC v. OaksApartments Joint Venture, 966 F.2d 995, 18 UCC Rep. Serv. 2d 492 (5th Cir. 1992), apartnership and five partners signed a promissory note promising to pay "the sum ofTWO MILLION AND NO/100 DOLLARS ($2,000,000) or so much thereof as may beadvanced in accordance with the terms of a certain Loan Agreement executed on evendate herewith, with interest thereon at the rate provided below." The partners claimedthat a separate agreement limited each partner’s individual liability to 20% of theoutstanding debt. The RTC argued that it was a holder in due course of the note and thatD’Oench, Duhme (under which the RTC may have rights similar to those of a holder in

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due course) precluded the use of the side agreement. The court held that the uncertaintywith respect to the principal amount of the note precluded the note from being anegotiable instrument. It remanded the case for determination whether D’Oench, Duhmeapplied.

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 ondemand. Section 3-108(a).

2. A note is payable at a definite time even though it provides forprepayment, acceleration, extension at the option of the holder, or extension to a furtherdefinite time at the option of the maker or upon a specified event. Section 3-108(c). Forexample, in DH Cattle Holdings Co. v. Smith, 607 N.Y.S.2d 227, 22 UCC Rep. Serv. 2d799 (App. Div. 1994), after a college football player was drafted in the first round, hisbusiness advisors got him into a number of tax shelters. He executed a note in theamount of $490,500 payable to a cattle breeding partnership. The note stated certaindates 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 aresold but in no event later than December 31, 1989." The player stopped makingpayments when he suspected the deal was fraudulent. Later, the note was pledged toRabobank in connection with a loan to an affiliate of the partnership. The court held thatthe fact there was a final date by which all of the principal and interest had to be paidmade 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 tobearer, it is not a negotiable instrument. It can say "pay to the order of First NationalBank," or it can say "pay to First National Bank or order," but if it just says "pay to FirstNational Bank," it is not negotiable. Section 3-104(c) makes an exception for checks, butthere is no comparable exception for notes.

1. The original text of Article 3 contained a provision that a writingotherwise 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 duecourse of such an instrument. The 1990 and 2002 versions contain no comparableprovision. 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. Spidellor Lennette M. Spidel of Route 5, Box 5324, Nampa, Idaho 83651, the sum of EIGHTTHOUSAND FIVE HUNDRED DOLLARS ($8,500) . . . ." was held to be non-negotiable because it did not contain the word "order."

VIII. Other characterization issues.

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A. Even if a promissory note meets the requirements to be a negotiableinstrument 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).

B. Characterization under Article 9-102 definitions:

"Instrument" means a negotiable instrument or any other writing that evidences aright to the payment of a monetary obligation, is not itself a security agreement orlease, and is of a type that in ordinary course of business is transferred by deliverywith any necessary indorsement or assignment. The term does not include (i)investment property, (ii) letters of credit, or (iii) writings that evidence a right topayment arising out of the use of a credit or charge card or information containedon or for use with the card.

"Investment property" means a security, whether certificated or uncertificated,security entitlement, securities account, commodity contract, or commodityaccount.

"Chattel paper" means a record or records that evidence both a monetaryobligation and a security interest in specific goods, a security interest in specificgoods and software used in the goods, or a lease of specific goods. The term doesnot include charters or other contracts involving the use or hire of a vessel. If atransaction is evidenced both by a security agreement or lease and by aninstrument or series of instruments, the group of records taken together constituteschattel paper.

C. Section 9-403 allows an obligor under a non-negotiable promissory note towaive defenses against assignees in the same manner that the obligor would be bound ifthe instrument were negotiable and in the hands of a holder in due course.

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Promissory Notes

John E. Murdock IIIBradley Arant Boult Cummings LLP

Nashville, [email protected]://www.babc.com

Issue Article 3 Instrument Article 8 Security Common Law Obligation

Form Strict rules of negotiability: (i) written promiseto pay, (ii) a fixed amount of money, (iii) toorder or bearer, (iv) on demand or at a definitetime, (v) and (almost) no other promise, and(vi) which is not an Article 8 security. 3-104(a)

(i) an obligation, (ii) evidencedby a certificate in bearer orregistered form or uncertificatedand transferable on officialrecords, (iii) one of a class orseries or divisible into a class orseries, and (iv) of a type tradedon a securities exchange orexpressly opted in. 8-102(15).

Anything that is not an Article3 negotiable instrument or anArticle 8 security

Article 3 may be applied byanalogy. See comment to 3-104

Obligation

Statute of limitations 6 years / 10 years. 3-118 Varies (not addressed) Varies

Statute of frauds Varies (not addressed); likely applies Does not apply. 8-113 Varies; likely applies

Obligation of Joint and several. 3-116 Varies (not addressed) Varies

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multiple makers

Obligation ofcomakers acting assureties

Accommodation party with statutory suretyshipprovisions. 3-419, 3-605

Varies (not addressed) Varies

Procedure forpayment

Required procedures (presentment 3-501, noticeof dishonor 3-503, protest 3-505)

Anticipates presentment 8-207,no details, no concepts ofdishonor

Varies

Credit for payments Only if made to actual holder under 1990version; if made to last known holder under2002 amendments. 3-602

Only if made to registeredowner or bearer. 8-207

Likely last known owner ofthe obligation

Transfer

Method By delivery (plus indorsement). 3-201, 203 By delivery (plus indorsement).8-301, 303, 106

By assignment

Warranties Implied. 3-416

The transferor is the person entitled to enforcethe instrument

All signatures are authentic and authorized

Instrument has not been altered

Instrument is not subject to a defense or claimin recoupment

Transferor has no knowledge of an insolvencyproceeding against maker

Implied. 8-108

Certificate is genuine and hasnot been altered

Transferor knows of no fact thatmight impair the validity of thesecurity

Absence of any adverse claim

Any indorsement authorized

Transfer otherwise effective

Varies; matter of evidence

37/2461554.2

Credit recourseagainst indorser

Full unless disclaimed. 3-415 None unless expresslyundertaken. 8-304

Varies; matter of evidence

Rights of transferee Possible holder in due course, taking free ofclaims and most defenses. 3-305

Possible protected purchaser 8-303 taking free of claims andpossible purchaser for value,taking free of most defenses 8-202

Usually no greater than rightsof transferor. But see EnronCorp. v. Springfield Assocs.,L.L.C. (In re Enron Corp.),2007 WL 2446498 (S.D.N.Y.8/27/07); see Restatement(Second) of Contracts 15 STNT (1981)

Page 1 of 27/1817896.1

PROMISSORY NOTE 1

$100.00 Nashville, Tennessee DATE

FOR VALUE RECEIVED, John E. Murdock III ("Maker") promises to pay to the orderof Matthew W. Kavanaugh ("Payee") the sum of One Hundred and No/100 Dollars ($100.00),together with interest thereon at the fixed rate of ten percent (10%) per annum (based upon a360-day year and actual days elapsed). Interest in arrears shall become due on the first day ofeach month commencing February 1, 2012. All remaining principal, interest, and expensesoutstanding hereunder shall become due on January 27, 2013.

All amounts due under this Promissory Note are payable at par in lawful money of theUnited States of America, at the principal place of business of Payee in Los Angeles, California,or at such other address as the Payee or other holder hereof (herein "Holder") may direct.

If any payment of interest is not made within fifteen (15) days of its due date, a latecharge equal to five percent (5%) of such payment shall become due. Holder's right to impose alate charge does not evidence a grace period for the making of payments hereunder.

The occurrence of any of the following shall constitute an event of default under thisPromissory Note: (a) the failure of Maker to make any payment when due under this or any otherobligation to Holder (time is of the essence of this Promissory Note); (b) the institution ofproceedings by Maker under any state insolvency law or under any federal bankruptcy law; (c)the institution of proceedings against Maker under any state insolvency law or under any federalbankruptcy law, if such proceedings are not dismissed within thirty (30) days; (d) Maker'sbecoming insolvent or generally failing to pay his debts as they become due; or (e) theoccurrence of any event or presence of any condition that causes Holder in good faith to feelinsecure regarding the likelihood of its receiving orderly and complete payment according to theterms of this Promissory Note without proceeding against any collateral or seeking paymentfrom any surety or guarantor.

Upon the occurrence of an event of default, as defined above, Holder may, at its optionand without notice, declare all principal and interest provided for under this Promissory Note,and any other obligations of Maker to Holder, to be presently due and payable, and Holder mayenforce any remedies available to Holder under any documents securing or evidencingobligations of Maker to Holder. Holder may waive any default before or after it occurs and mayrestore this Promissory Note in full effect without impairing the right to declare it due for asubsequent default, this right being a continuing one. Upon default, the remaining unpaidprincipal balance of the indebtedness evidenced hereby and all expenses due Holder shall bearinterest at the highest rate permissible under applicable law.

Prepayment of principal or accrued interest may be made, in whole or in part, at any timewithout penalty. Any prepayment(s) shall reduce the final payment(s) and shall not reduce ordefer installments next due.

Page 2 of 27/1817896.1

Maker and all sureties, guarantors, endorsers and other parties to this instrument herebyconsent to any and all renewals, waivers, modifications, or extensions of time (of any duration)that may be granted by Holder with respect to this Promissory Note and severally waive demand,presentment, protest, notice of dishonor, and all other actions and notices that might otherwise berequired by law. All parties hereto waive the defense of impairment of collateral and all otherdefenses of suretyship.

Maker and all sureties, guarantors, endorsers and other parties hereto agree to payreasonable attorneys' fees and all court and other costs that Holder may incur in the course ofefforts to collect the debt evidenced hereby or to protect Holder's interest in any collateralsecuring the same.

The validity and construction of this Promissory Note shall be determined according tothe laws of Tennessee applicable to contracts executed and performed within that state.

The provisions of this Promissory Note may be amended or waived only by instrument inwriting signed by the Holder and Maker.

This Promissory Note has been issued on the date stated above.

______________________________________John E. Murdock III

PAY TO THE ORDER OF WILLIAM L. NORTON

___________________________________________Matthew W. Kavanaugh

Page 1 of 27/1818570.1

PROMISSORY NOTE 2


FOR VALUE RECEIVED, John E. Murdock, Inc. ("Maker"), a Tennessee corporation,promises to pay to the order of Matthew W. Kavanaugh ("Payee") the sum of One Hundred andNo/100 Dollars ($100.00), together with interest thereon at the fixed rate of ten percent (10%)per annum (based upon a 360-day year and actual days elapsed). Interest in arrears shall becomedue on the first day of each month commencing February 1, 2012. All remaining principal,interest, and expenses outstanding hereunder shall become due on January 27, 2013.



The transfer of this Promissory Note and participation therein shall be registered uponbooks maintained by Maker for this purpose.

This Promissory Note may be divided into a series of participation interests.


Upon the occurrence of an event of default, as defined above, Holder may, at its optionand without notice, declare all principal and interest provided for under this Promissory Note,and any other obligations of Maker to Holder, to be presently due and payable, and Holder mayenforce any remedies available to Holder under any documents securing or evidencingobligations of Maker to Holder. Holder may waive any default before or after it occurs and mayrestore this Promissory Note in full effect without impairing the right to declare it due for asubsequent default, this right being a continuing one. Upon default, the remaining unpaid

Page 2 of 27/1818570.1

principal balance of the indebtedness evidenced hereby and all expenses due Holder shall bearinterest at the highest rate permissible under applicable law.







JOHN E. MURDOCK, INC.

By:_________________________Title: President


__________________________________________Matthew W. Kavanaugh

Page 1 of 27/1818575.1

PROMISSORY NOTE 3


FOR VALUE RECEIVED, John E. Murdock, Inc. ("Maker"), a Tennessee corporation,promises to pay to Matthew W. Kavanaugh ("Payee") the sum of One Hundred and No/100Dollars ($100.00), together with interest thereon at the fixed rate of ten percent (10%) per annum(based upon a 360-day year and actual days elapsed). Interest in arrears shall become due on thefirst day of each month commencing February 1, 2012. All remaining principal, interest, andexpenses outstanding hereunder shall become due on January 27, 2013.




Upon the occurrence of an event of default, as defined above, Holder may, at its optionand without notice, declare all principal and interest provided for under this Promissory Note,and any other obligations of Maker to Holder, to be presently due and payable, and Holder mayenforce any remedies available to Holder under any documents securing or evidencingobligations of Maker to Holder. Holder may waive any default before or after it occurs and mayrestore this Promissory Note in full effect without impairing the right to declare it due for asubsequent default, this right being a continuing one. Upon default, the remaining unpaidprincipal balance of the indebtedness evidenced hereby and all expenses due Holder shall bearinterest at the highest rate permissible under applicable law.


Page 2 of 27/1818575.1






JOHN E. MURDOCK, INC.

By:_________________________Title: President


___________________________________________Matthew W. Kavanaugh

Date post:	26-Jun-2018
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