Statutes of limitation control the time in which a person or entity may bring certain causes of action against another. Kentucky law proscribes that an action on a written obligation entered into before July 1, 2014 must be brought within 15 years, and any obligation entered into after July 1, 2014, must be brought within 10 years.1 While this seems pretty straightforward, UCC Article 3 offers a wrinkle when it comes to "negotiable instruments."
It is no secret that the case law from the last couple of years has drastically altered what creditors knew (or thought they knew) about statutes of limitation. For example, not long ago it was routinely accepted that, but for a choice of law provision, the limitations period of the forum state controlled. However, recent applications of borrowing statutes have brought to bear new factors that must be considered when determining which jurisdiction's limitations period should be applied.2 In recent cases, courts from multiple jurisdictions have held that the statute of limitations of the state where payments were made determines whether the collection action was timely filed.3
This brings us to the often-overlooked implications of UCC Article 3 on the limitations analysis for an action on a written obligation that also qualifies as a negotiable instrument. First, it is necessary to understand and define what a negotiable instrument is under to UCC.4
The UCC, as adopted by Kentucky, defines a negotiable instrument as, in pertinent part:
"[A]n unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it:
(a) Is payable to bearer or to order at the time it is issued or first comes into possession of a holder;
(b) Is payable on demand or at a definite time; and
(c) Does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain:
1. An undertaking or power to give, maintain, or protect collateral to secure payment;
2. An authorization or power to the holder to confess judgment or realize on or dispose of collateral; or
3. A waiver of the benefit of any law intended for the advantage or protection of an obligor."5
The Kentucky Supreme Court outlined the hallmarks of a negotiable instrument:
"A negotiable instrument is an unconditional order or promise to pay a sum certain in money. KRS 355.3-104. If the instrument is 'subject to or governed by another agreement,' its negotiability is destroyed, and the determination of whether an instrument is unconditional must be made from the content of the instrument itself. KRS 355.3-105(2)(a). Upon execution of a negotiable instrument, the maker engages that he will 'pay the instrument according to its tenor.' KRS 355.3-413. 'Thus, the maker's (contractual) liability is unconditional and absolute; . . .' J. White and R. Summers, Uniform Commercial Code, (2d ed. 1980) pp. 498-499."6
UCC Official Comments offer additional clarification. A negotiable instrument is a "promise or order" signed by the person making the promise or giving the instruction to pay and must (1) be unconditional; (2) for a fixed amount, with or without interest or other charges as set forth in the promise or order; (3) be "payable to bearer or to order;" (4) be payable "on demand or at a definite time;" and (5) cannot state "any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money" with the three stated exceptions of KRS § 355.3-104(1)(c).7 Further, where none of the provisions of KRS § 355.3-104(1)(c) apply, "any promise or order that is not payable to bearer or to order" is excluded from purview Article 3.8
Simply put, a negotiable instrument is a written, unconditional promise made by one person (the maker) to pay a fixed sum of money to another person (the payee) on demand or at a specified future time. Moreover, a negotiable instrument is something that must be transferrable from one holder in due course to another. However, just because an instrument is transferrable does not make it a negotiable instrument. There is an essential difference between a negotiable instrument and an otherwise assigned or transferred interest. When an instrument is negotiated and delivered to the holder, the holder acquires all the rights of a holder in due course including equitable rights, but an assignee acquires only the right, title and interest of his assignor, which is generally the right to receive and collect payments due on the instrument.9
Thus, one must be careful not to equate the transfer by negotiability to transfer by general assignment. The Court of Appeals for the D.C. Circuit found that despite the fact that federal student loan agreements were readily assignable, such transferability did not necessarily make them negotiable instruments under UCC Article 3.10
Why is this important? Under Article 3, the time to bring an action on a negotiable instrument may be less than the limitations period for a written obligation. For example, in Kentucky, the time to bring an action on a negotiable instrument is not 10 years (or 15 if signed prior to July 1, 2014) as specified under the general limitations statutes, but rather only 6 years after maturity, or if the due date is accelerated due to default, 6 years after the accelerated due date.11 Thus, when reviewing legal options to enforce an obligation, it is critical for a creditor and counsel to determine whether or not the instrument giving rise to the cause of action is a negotiable instrument in order to ensure compliance with the reduced limitations period.
In some jurisdictions, this analysis may not have any real practical effect. For example, in Indiana law, where the law provides for a 6-year limitation for "promissory notes, bills of exchange, or other written contracts for the payment of money,"12 the negotiable instrument analysis is unnecessary for limitations purposes because the 6-years limit will apply. However, in Kentucky Article 3 creates a potential trap for creditors and their counsel.
Accordingly, from a practitioner's standpoint, a creditor and its counsel must always review any instrument between the parties to see if it falls within the definition of a negotiable instrument. It is imperative to determine whether and how Article 3 may impact the time the creditor has to enforce obligations that bear the hallmarks of a negotiable instrument. Moreover, when drafting a note or similar instrument, counsel should be careful to properly distinguish the instrument from an Article 3 negotiable instrument to avoid the reduced limitations period if a true negotiable instrument is not intended.
For more information on this topic, please contact James T. Hart, Esq. Mr. Hart is an attorney based in the Cincinnati office of Weltman, Weinberg & Reis Co., LPA. He practices in Consumer and Commercial Collections, with a focus on legal action recovery, healthcare collections, student loan recovery, subrogation, and complex commercial collections.
1 KRS § 413.090(2).
2 KRS § 413.320.
3 Conway v. Portfolio Recovery Assocs., LLC, 13 F. Supp. 3d 711 (E.D. Ky. 2014), rev’d on other grounds; Taylor v. First Resolution Inv. Corp., 148 Ohio St.3d 627, 2016-Ohio-3444 (Ohio June 16, 2016); Portfolio Recovery Assocs., LLC v. King, 14 N.Y.3d 410, 927 N.E.2d 1059, 1061, 901 N.Y.S.2d 575 (N.Y. 2010); Hamid v Stock & Grimes, LLP, 2011 U.S. Dist. LEXIS 96245, 2011 WL 3803792 (E.D. Pa. Aug. 26, 2011).
4 While checks and certificates of deposit are also defined as negotiable instruments under KRS 355.3-104(6) – (10), the focus of this article is on notes and other such written instruments that may be construed as “negotiable instruments” under Article 3 of the UCC.
5 KRS § 355.3-104.
6 Schmuckie v. Alvey, 758 S.W.2d 31, 33 (Ky. 1988).
7 KRS § 355.3-104, Official Comment 1.
8 KRS § 355.3-104, Official Comment 2.
9 Railroad Co. v. National Bank, 102 U.S. 14, 23-24 (1880) (holding “the holder who takes the transferred paper, before its maturity, and without notice, actual or otherwise, of any defence thereto, is held to have received it in due course of business, and, in the sense of the commercial law, becomes a holder for value, entitled to enforce payment, without regard to any equity or defence which exists between prior parties to such paper.”).
10 Armstrong v. Accrediting Council for Continuing Education and Training, Inc., 168 F.3d 1362 (D.C. Cir. 1999) (holding “Although guaranteed student loans often change hands many times, they are not considered negotiable instruments; neither repurchasers nor assignees become ‘holders in due course.’”)referencing Jackson v. Culinary School of Washington, 788 F. Supp. 1233, 1248 n.9 (D.D.C. 1992), rev'd on other grounds, 27 F.2d 573 (D.C. Cir. 1994), vacated, 515 U.S. 1139, on reconsideration, 59 F.3d 354 (D.C. Cir. 1995).
11 KRS § 355.3-118.
12 Ind. Code § 34-11-2-9.