DZ Bank Deutche Zentral-Genossenschaftsbank v. Michael McCranie

Court of Appeals for the Eleventh Circuit
879 F.3d 1076 (2018)

ELI5:

Sections

Rule of Law:

Under the Uniform Commercial Code (UCC), a promissory note is not a negotiable instrument if it references a separate writing for "additional terms," as this renders the promise to pay conditional or requires consultation of another document to determine rights and duties. Additionally, the defenses of commercial frustration and impossibility are unavailable to a debtor when the risk causing the frustration (such as a counterparty's insolvency) was foreseeable at the time of contracting.

Facts:

McCranie, an experienced insurance agent, purchased an insurance agency franchise from Brooke Corporation and financed the purchase through a separate entity, Brooke Credit Corporation.
McCranie signed a promissory note and an 'Agreement for Advancement of Loan' (Advancement Agreement) with Brooke Credit; the Advancement Agreement gave the lender extensive protections but offered McCranie no reciprocal protections against the franchisor's failure.
In 2002, McCranie refinanced his debt by executing a new Note which contained a text box stating 'ADDITIONAL TERMS: See Agreement for Advancement of Loan dated October 30, 2000.'
Brooke Credit sold and transferred various loans, including McCranie's Note, to Brooke Funding, which subsequently pledged the Note as collateral to DZ Bank.
Brooke Corporation (the franchisor) eventually failed financially and stopped paying commissions to McCranie, leading McCranie to terminate the franchise agreement.
Due to the loss of commissions and the collapse of the franchise relationship, McCranie stopped making payments on the Note.
DZ Bank, having taken possession of the collateral after Brooke Funding defaulted, demanded payment from McCranie.

Procedural Posture:

DZ Bank sued McCranie in the U.S. District Court for the Middle District of Florida for breach of contract.
The District Court granted summary judgment in favor of DZ Bank.
McCranie appealed to the Eleventh Circuit Court of Appeals.
The Eleventh Circuit reversed the summary judgment and remanded the case for trial due to questions regarding the chain of title.
On remand, the District Court conducted a bench trial.
The District Court entered judgment in favor of DZ Bank, ruling the Note was a negotiable instrument and rejecting McCranie's defenses.
McCranie appealed the District Court's post-trial judgment to the Eleventh Circuit Court of Appeals.

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Issue:

Is a promissory note considered a negotiable instrument under the UCC when it explicitly directs the reader to a separate agreement for "additional terms," and is a borrower's obligation to repay a franchise loan excused by the financial failure of the franchisor?

Opinions:

Majority - Judge Melloy

No, the Note is not a negotiable instrument because it refers to an outside document for undefined terms, but yes, McCranie is still liable because the contract is valid and his defenses fail. The court determined that for a note to be a negotiable instrument under the UCC, it must be a self-contained unconditional promise to pay. The Note's inclusion of the phrase 'ADDITIONAL TERMS: See Agreement...' destroyed negotiability because it required a holder to consult a separate writing to determine the full scope of rights and duties, and it did not specify that those terms were limited to permissible subjects like security or prepayment. However, the court found DZ Bank had standing to enforce the Note as a standard contract through valid assignment. Regarding McCranie's defenses, the court rejected the claim that the franchisor's failure excused the debt (frustration of purpose). The court reasoned that McCranie was a sophisticated party represented by counsel; the risk of the franchisor failing was foreseeable, yet McCranie failed to negotiate a contract clause protecting himself against that specific risk.

Analysis:

This decision provides a strict textualist interpretation of UCC Article 3 regarding negotiability. It clarifies that a note cannot simply reference another document for general 'additional terms' without losing its status as a negotiable instrument, distinguishing this from permissible references regarding collateral or prepayment. Practical significance lies in the burden it places on lenders to draft self-contained notes if they wish to enjoy 'Holder in Due Course' status. Furthermore, the decision reinforces the high bar for asserting commercial frustration or impossibility defenses in franchise litigation. It serves as a warning to franchisees that loan obligations to third-party lenders are generally independent of the success of the underlying franchise unless explicitly tied together in the contract.

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