Mecham v. United Bank of Ariz.

Decision Date27 September 1971
Docket NumberNo. 10335,10335
Citation107 Ariz. 437,489 P.2d 247
Parties, 9 UCC Rep.Serv. 1070 Evan MECHAM et al., Appellants, v. UNITED BANK OF ARIZONA, an Arizona state bank, a corporation, et al., Appellees.
CourtArizona Supreme Court
Rawlins, Ellis, Burrus & Kiewit by Chester J. Peterson, Phoenix, for appellants

Carson, Messinger, Elliott, Laughlin & Ragan by Robert W. Holland, Phoenix, for appellee United Bank of Ariz.

Stephen W. Connors, Phoenix, for appellees Munson.

CAMERON, Justice.

This is an appeal by the maker of a promissory note from a judgment in favor of the payee, Max E. Munson, and the United Bank of Arizona claiming to be a holder in due course.

On appeal we are called upon to answer the following questions:

1. Was the bank a holder in due course?

2. Was there consideration for the note?

The facts necessary to decide this appeal are as follows. In late 1966, Mecham Investment Company (Mecham Investment) began planning construction of a shopping center in Flagstaff, Arizona. Pursuant to that plan, Mr. Evan Mecham, president of the corporation, orally contracted with Munson Mortgage and Investment Company (Munson Mortgage) to secure a permanent first mortgage loan commitment in the amount of $675,000 at 7% Interest per annum.

On or about 3 February 1967, Munson Mortgage received from Security Mutual Life Insurance Company of New York (Security) a document entitled 'Permanent First Mortgage Loan Commitment--Mecham Investment Company.' This letter, however, provided for a 7 1/2% Per annum interest rate. It also called for acceptance prior to 13 February 1967. Munson Mortgage wrote a letter to Mecham Investment on the 14th day of February concerning certain amendments to the Security letter of 3 February. One of the terms was a promised

modification of the interest rate from 7 1/2% To 7%. The letter also contained the following breakdown of the sums due to Munson and Security by Mecham as follows:

                "Summary of remittance to
                  be accompanied by your
                  acceptance of this
                  commitment is as follows
                    Security Mutual Life
                      Commitment Fee                                                 $13,500.00
                  *Security Mutual Life
                    Good Faith Deposit                                                 6,750.00
                   Munson Mortgage
                    Earned Fee                                                        10,125.00
                                   Total                                             $30,375.00
                * To be refunded in full upon purchase of loan by Security Mutual Life
                Insurance Co."

This letter was 'approved and accepted' by Mecham Investment on the 20th day of February. At that time, Mecham delivered to Munson two notes. The first of these, for $20,250, due 24 February 1967 and payable to Security, represented the commitment fee and good faith deposit ($13,500 and $6,750) due Security pursuant to the 3 February offer. The second, for $10,125 by Evan and Francis Mecham and Mecham Pontiac Corporation, due in 15 days, represented the fee of Munson Mortgage.

On 6 March 1967, Munson endorsed his acceptance and approval. This endorsement apparently followed renewed oral confirmation by Security of earlier promised modifications. At that time the $20,250 note was returned to Mecham Investment, and a note for $6,750 by Evan Mecham in favor of Security, together with a check in the amount of $13,500 by Mecham Investment in favor of Security, was given to Munson. The back of the check contained the following:

'Acceptance of this check constitutes commitment for a loan of $675,000.00 on a 15 year level amortization plan at seven percent interest for 'Merchandise Fair' Shopping Center at Cedar Ave. & Isabel St. in Flagstaff, Arizona.'

That check was specially endorsed by Security.

On 14 March, Munson Mortgage received ostensible written confirmation of approval of Security's finance committee of the 7% Rate and basic approval on the remaining modifications. This letter was signed by James K. Johnson of Security's Investment Department.

Because of an unrelated past due and owing debt, Munson offered the 20 February note in the amount of $10,125 to the United Bank as security and in exchange for an agreement for forbearance with collateral. The note was past due, however, and the bank refused to accept it. Thereupon, Munson drew a new 90 day note, dated 1 December 1967, and took it to Mecham for signature. Munson and Mecham agreed that a 120 day note was preferable. Written modification of the note's term and due date were initialed by the two parties. This note provided for payment to Max Munson rather than Munson Mortgage, and was made by Mecham Pontiac Corporation by Evan Mecham, President, and Mr. and Mrs. Mecham individually, the shareholders of Mecham Investment. The original note was made payable to Munson Mortgage and made solely by Mecham Pontiac Corporation. The bank similarly refused to accept this note--apparently due to the alterations on its face.

As a result, the bank drew a new note having the same due date, payee and makers as the second note. The principal amount was changed to reflect the intervening accrued interest. They requested in addition to the signatures on this note, dated 19 January 1968, that they have evidence of a resolution of the board of Mecham Pontiac Corporation authorizing Evan Mecham to execute the new note. Such a resolution was passed prior to the signing of the note, i.e. 18 January 1968, and authorized Mecham to execute the note to Munson 'covering the amount due for a permanent commitment from Security Mutual.' The 19 January note, as accepted by United Bank, is the subject of this suit. Mecham counterclaimed

against Munson for $13,500 as well as any amounts found due to United Bank on its complaint. From a judgment in favor of both United Bank, as plaintiff, and Max Munson, cross-defendant, defendant Mecham appeals.


Arizona adopted the Uniform Commercial Code (UCC). A.R.S. § 44--2201, et seq., effective 31 December 1967. Since this note was dated 19 January 1968, it will be interpreted in light of the Uniform Commercial Code.

According to § 44--2504 A.R.S., in order to be a negotiable instrument, a writing must be (1) signed by the maker, (2) contain an unconditional promise or order to pay a sum certain in money, (3) be payable at a definite time, and (4) be payable to order or to bearer. The fact that the note in question provides for an amount plus 6% Interest to be paid when due does not preclude its being a sum certain. § 44--2506, subsec. A, par. 1 A.R.S. Neither does its covenant to pay costs of collection and attorney's fees upon default. § 44--2506, subsec. A, par. 5 A.R.S. When a note, such as this one, provides for payment on or before a stated date it is payable at a definite time. § 44--2509, subsec. A, par. 1 A.R.S. And, finally, an instrument is payable to order when it is payable to the order of a person who is not the maker, drawer, or drawee. § 44--2510, subsec. A, par. 3 A.R.S.

Thus, the note before the court is a negotiable instrument. As such it is the proverbial traveler without baggage. It is free to circulate in the stream of commerce free of defects not apparent on its face. As § 44--2202, subsec. B, par. 2 A.R.S. acknowledges, this unimpaired circulation is designed to permit facilitation of commercial practices. It is for that reason, among others, that Mr. Mecham's allegation of conditional delivery is not permitted to change his legally unconditional promise to pay to a conditional promise--thereby destroying its negotiability. See § 44--2505 subsec. A, par. 1 A.R.S. The comments to predecessor provision UCC 3--105(1)(A) clearly indicate that the section was 'intended to make it clear that, so far as negotiability is affected, the * * * character of the promise or order is to be determined by what is expressed in the instrument itself.'

Thus, we turn to the possessory nature of the bank. § 44--2208, subsec. 20 A.R.S. defines a holder as a 'person who is in possession of a document of title or an instrument or an investment security drawn, issued or indorsed to him or to his order or to bearer or in blank.' To become a holder of an order instrument there must be delivery with any necessary endorsement. § 44--2524, subsec. A, A.R.S. Munson delivered this note to the bank after endorsing in blank as provided in § 44--2526, subsec. B A.R.S. The bank was a holder.

Now, we seek to determine whether the bank is a holder in due course. According to § 44--2532, subsec. A A.R.S., a holder in due course is a holder who takes the instrument (1) for value, (2) in good faith, (3) without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person. In this case the bank took the note as security for an antecedent debt and in exchange for an agreement for forbearance with collateral. § 44--2533, subsec. 2 A.R.S. acknowledges this to be 'taking for value.' Additionally, § 44--2545 A.R.S. provides that no consideration is necessary for an instrument given as security for an antecedent obligation of any kind. As to 'good faith', defined as honesty in fact in the conduct or transaction concerned (§ 44--2208, subsec. 19 A.R.S.), we have no doubt that the mere preparation for signature, of a new note with the same makers, payee, due date, interest rate, etc. as the one before them (and rejected for alterations apparent on its face, see § 44--2534, subsec. A, par. 1) meets the standard.

As to notice of a defense or claim, it means, minimally, that from all the facts and circumstances known to Having established its status as a holder in due course, the bank achieves preferred status. To the extent that the bank is a holder in due course it takes the instrument free from all defenses of any party to the instrument with whom it has not dealt. § 44--2535, subsec. ...

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