Amberboy v. Societe de Banque Privee

• Decision Date: 15 April 1992
• Docket Number: No. D-0986,D-0986
• Citation: 831 S.W.2d 793
• Parties: , 17 UCC Rep.Serv.2d 145 Emil J. AMBERBOY, et al., Appellants, v. SOCIETE de BANQUE PRIVEE, et al., Appellees.
• Court: Texas Supreme Court

Page 793

831 S.W.2d 793

60 USLW 2715, 17 UCC Rep.Serv.2d 145

Emil J. AMBERBOY, et al., Appellants, v. SOCIETE de BANQUE PRIVEE, et al., Appellees.

No. D-0986.

Supreme Court of Texas.

April 15, 1992.

Edward K. White, III, J. Leon Lebowitz, The Woodlands, E. John Gorman, Houston, for appellants.

J. Eugene Clements, Stephen B. Schulte, Jerry L. Mitchell, Jr., Houston, for appellees.

OPINION

CORNYN, Justice.

This case comes to us on a certified question from the United States Court of Appeals for the Fifth Circuit. The question is whether a promissory note requiring interest to be charged at a rate that can be determined only by reference to a bank's published prime rate is a negotiable instrument as defined by the Texas Uniform Commercial Code. Ackerman v. Federal Deposit Ins. Corp., 930 F.2d 3, 4 (5th Cir.1991), certified question accepted sub nom., Amberboy v. Societe de Banque Privee, 34 Tex.Sup.Ct.J. 690 (June 22, 1991). For the reasons set forth below, we answer the question in the affirmative.

In Texas, negotiable instruments are governed by the Uniform Commercial Code ("U.C.C.") as adopted by the Texas Legislature and codified in the Texas Business and Commerce Code. ¹ Specifically, section 3.104 contains the requirements of a negotiable instrument. That section provides:

(a) Any writing to be a negotiable instrument within this chapter must

(1) be signed by the maker or drawer; and

(2) contain an unconditional promise or order to pay a sum certain in money and no other promise, order, obligation or power given by the maker or drawer except as authorized by this chapter; and

(3) be payable on demand or at a definite time; and

(4) be payable to order or to bearer.

TEX.BUS. & COM.CODE § 3.104. The Code does not define the term "sum certain." However, section 3.106 lists several instances when the sum certain requirement is not defeated even though the amount payable is not explicitly stated on the instrument. ² This is not just an ordinary case of statutory construction. Our construction of the provisions of the U.C.C. is grounded in the Code's fundamental purpose, which is to "simplify, clarify and modernize the law governing commercial transactions...." TEX.BUS. & COM.CODE § 1.102(b)(1). Further, the drafters of the U.C.C. expressly contemplated that the courts would advance the basic purpose of the Code by construing the U.C.C.'s provisions "in the light of unforeseen and new circumstances and practices." TEX.BUS. & COM.CODE ANN. § 1.102, comment 1 (Vernon 1968); see also Gary B. Tillman, Variable Interest Rates, Negotiability, and the Sum Certain Requirement, 22 U.C.C. L.J. 36, 60 (1989). This "permit[s] the continued expansion of commercial practices through custom, usage and agreement of the parties...." TEX.BUS. & COM.CODE § 1.102(b)(2).

It is our task to construe the U.C.C.'s "four corners" rule for determining whether the sum certain requirement is met. For an instrument to be negotiable under that rule, the sum certain to be paid must be capable of computation "from the instrument itself without reference to any outside source...." TEX.BUS. & COM.CODE ANN. § 3.106, comment 1 (Vernon 1968). However, the Code itself evidences that this is not intended to be a rigid, absolute rule. Section 3.106 lists several instances in which reference to sources outside the instrument are necessary to determine the sum payable under the instrument. See, e.g., § 3.106(a)(4) (payment in exchange at current rate).

Section 3.106 does not explicitly mention variable rate notes ("VRNs") because when the U.C.C. was developed in the 1950s and adopted in the 1960s, VRNs were virtually unknown. Fred H. Miller, 1990 Articles 3 and 4: Looking to the Twenty-First Century, UCC BULL., June 1991, at 1; Tillman, 22 U.C.C. L.J. at 61-62; see also Janine S. Hiller, Negotiability and Variable Interest Rates, 90 COM.L.J. 277, 277-78 (1985). The necessity for VRNs came about as a result of the volatile financial markets of the late 1970s. By the mid-1980s, VRNs accounted for 60% of the total loans made in this country. Hiller, 90 COM.L.J. at 277. That dominance in the financial markets has continued into the 90s. Federal Reserve, Statistical Release, Survey of Terms of Bank Lending Made During November 5-9, 1990 (Dec. 14, 1990).

The majority of courts which have addressed the issue before us have declined to hold that notes which contain variable interest rates are negotiable instruments. Chemical Bank v. D3J Assocs. Ltd. Partnership, 14 U.C.C.Rep.Serv.2d (Callaghan) 790, 794, 1991 WL 58049 (D.Md.1991) (rate stated as 1% above floating prime or its equivalent charged by specified bank); In re Gas Reclamation, Inc. Securities Litigation, 741 F.Supp. 1094, 1102-03 (S.D.N.Y.1990) (rate stated as lesser of a fixed rate over the prime rate charged by a specified bank or the maximum lawful allowed), appeal dism'd sub nom. Abish v. Northwestern Nat'l Ins. Co., 924 F.2d 448 (2d Cir.1991); National Union Fire Ins. Co. v. Alexander, 728 F.Supp. 192, 199-200 (S.D.N.Y.1989) (rate stated as 2% above prime rate charged by Cullen Frost Bank, adjusted daily); Northern Trust Co. v. E.T. Clancy Export Corp., 612 F.Supp. 712, 715 (N.D.Ill.1985) (rate stated as 1/2% above the bank's floating prime rate); Centerre Bank v. Campbell, 744 S.W.2d 490, 498 (Mo.App.1988) (interest may vary with bank rates charged to the lender); Taylor v. Roeder, 234 Va. 99, 360 S.E.2d 191, 195 (1987) (rate stated as 3% over Chase Manhattan prime adjusted monthly); Farmers Prod. Credit Ass'n v. Arena, 145 Vt. 20, 481 A.2d 1064, 1065 (1984) (provided for a variable rate of interest); A. Alport & Son Inc. v. Hotel Evans, Inc., 65 Misc.2d 374, 317 N.Y.S.2d 937, 939-40 (1970) (provided for interest at bank rates). A number of states, either in response to court decisions which reject VRNs as negotiable instruments or for reasons that are not readily apparent, have amended section 3.106 to provide that the sum certain requirement is not defeated because the rate of interest to be charged is tied to and varies with certain enumerated types of published rates. ³ A similar amendment to the Texas Uniform Commercial Code was contained in House Bill 2497, which passed the House but was not voted upon in the Senate. ⁴

We believe the better reasoned view is reflected in the opinions of those courts which have held that VRNs do meet the sum certain requirement and thus are negotiable instruments subject to the terms of article 3 of the U.C.C. Goss v. Trinity Sav. & Loan Ass'n, 813 P.2d 492, 499 (Okla.1991) (interest rate tied to T-bill index); Tanenbaum v. Agri-Capital, Inc., 885 F.2d 464, 468-69 (8th Cir.1989) (applying the Texas Uniform Commercial Code); First City Fed. Sav. Bank v. Bhogaonker, 715 F.Supp. 1216, 1219-20 (S.D.N.Y.1989); Klehm v. Grecian Chalet, Ltd., 164 Ill.App.3d 610, 115 Ill.Dec. 662, 667, 518 N.E.2d 187, 192 (1987). Notably, four of the six states whose courts have held VRNs to be non-negotiable under versions of the U.C.C. similar to ours, all but Illinois ⁵ and Vermont, have amended their versions of the U.C.C. to render VRNs negotiable. ⁶ Paradoxically, the concurrent enactment of statutory amendments designed to "clarify existing law" and conflicting court decisions expounding on "existing law" prompted the National Conference of Commissioners on Uniform State Law to propose, in the interest of uniformity, its own amendments to article 3 of the Uniform Commercial Code to specifically provide that VRNs are negotiable instruments. ⁷

A VRN which contains provision for interest to be paid at a variable rate that is readily ascertainable by reference to a bank's published prime rate is compatible with the Code's objective of commercial certainty. The Code does not require "mathematical certainty" but only "commercial certainty." Tanenbaum, 885 F.2d at 468 (applying TEX.BUS. & COM.CODE § 3.104 and citing Cudahy Packing Co. v. State Nat'l Bank, 134 F. 538, 542 (8th Cir.1904)). Commercial certainty serves the purpose of the law of negotiable instruments, which is to make the instrument the functional equivalent of money. Hiller, 90 COM.L.J. at 279; see also Cobb Bank & Trust Co. v. American Mfg. Mut. Ins. Co., 459 F.Supp. 328, 333 (N.D.Ga.1978). If the rate of interest to be paid under the instrument is readily ascertainable by reference to a bank's published prime rate, this purpose is achieved.

We believe that the construction more consistent with the stated purpose of the U.C.C. and modern commercial practices obliges us to answer the Fifth Circuit's certified question affirmatively. Widespread use and acceptance of VRNs in the 1980s is precisely the type of new circumstance contemplated by the drafters of section 1.102, comment 1.

Appellants' reliance on our decision in Brazos River Authority v. Carr is misplaced. 405 S.W.2d 689 (Tex.1966). Although the bonds in Brazos River contained a variable rate, we held they were not negotiable because they did not contain an unconditional promise to pay; payment was required only if funds were available in a specified account at the time payment was due. Id. at 696. For this reason, Brazos River Authority does not control this case.

In support for the conclusion that "[u]se of an interest rate that cannot be calculated from information on the face of the note has consistently been held to violate the Texas statute's 'sum certain' requirement," at 801, the concurring and dissenting justices cite four cases. Two were decided by federal district courts citing no Texas state court authority. ⁸ To the extent that federal courts have ventured an "Erie-guess" as to the applicable Texas law, and guessed differently from our answer to the present certified question, see American Waste & Pollution Control Co. v. Browning-Ferris, Inc., 949 F.2d 1384, 1386 (5th Cir.1991) (cases cited), we do not feel constrained to address those opinions except to respectfully say that we have decided this issue of unsettled Texas law...