APPEAL FROM THE SUPERIOR COURT, DISTRICT OF COLUMBIA, HENRY H. KENNEDY, JR., J. [709 A2d Page 75]
Before Terry, Schwelb, and Farrell, Associate Judges.
The opinion of the court was delivered by: Farrell, Associate Judge:
Plaintiffs-appellees Gary and Joel Israel sued defendant-appellant Big Builders, Inc. for the principal and interest due on a promissory note which Big Builders had issued to Gary Israel, and Gary in turn had assigned to his brother, Joel Israel. Big Builders answered in part by asserting fraud or misrepresentation in the transaction that gave rise to the promissory note. The trial court granted summary judgment in favor of the plaintiffs on the ground that Joel Israel was a holder in due course of the promissory note. We reverse, because there are disputed issues of material fact requiring resolution by a trial.
Gary Israel served as a real estate broker in connection with the purchase of certain real estate by Big Builders. As part of his commission, Gary received a promissory note in the amount of $23,752. The unpaid balance plus interest was due on September 18, 1991. On February 8, 1990, Gary executed a separate assignment of the promissory note to his brother Joel. The note itself was not endorsed to Joel, nor was the assignment attached to the note. The assignment stated that Joel had paid Gary $15,000 and other "good and valuable considerations" for the note. The only evidence in the record of this payment, however, is a photocopy of what appears to be a carbon copy duplicate check or deposit slip reflecting payment of $15,000 from Joel to Gary as a "Loan for Note." The plaintiffs explained their failure to produce the original cancelled check at trial by stating that there was a "delay in obtaining [it] and there is a substantial expense for having the bank produce it."
When the promissory note came due, Big Builders failed to make payment. The Israel brothers sued, and Big Builders defended partly by asserting that Gary Israel had misrepresented the quality of the underlying real estate investment. As pointed out, the [709 A2d Page 76]
trial court rejected this defense as a matter of law after concluding that Joel Israel was a holder in due course of the promissory note.
Big Builders contends that summary judgment was improper because there are disputed issues of material fact relating to whether Joel Israel was a holder in due course. We agree. *fn1
To attain the status of holder in due course of a negotiable instrument, one must take possession of the instrument for value, in good faith, and without notice, inter alia, that any party has a defense or claim in recoupment. D.C.Code § 28:3-302(a)(2) (1996). *fn2 Further, to become a "holder" (and hence a holder in due course) a transferee must take the instrument by a "negotiation," id. § 28:3-201(a), which, if the instrument is payable to an identified person, "requires transfer of possession of the instrument and its indorsement by the holder." Id. § 28:3-201(b) (emphasis added). "Indorsement" in turn means "a signature . . . that alone or accompanied by other words is made on an instrument for the purpose of . . . negotiating the instrument. . . . For the purpose of determining whether a signature is made on an instrument, a paper affixed to the instrument is a part of the instrument." Id. § 28:3-204(a).
"[T]he physical 'holder' of an unendorsed note drawn to order is not a 'holder in due course.' " Bonuso v. Shroyer Loan & Fin. Co., 37 A.2d 760, 761 (D.C. 1944). Big Builders asserts that, at a minimum, there is a genuine factual dispute whether Gary Israel indorsed the promissory note. Indeed, as Big Builders points out, the Israels do not even assert that there was an indorsement by signature on the note itself. They rely instead upon the written assignment, which refers to the note and contains Gary Israel's signature, and which they accordingly assert is the legal equivalent of "a paper affixed to the instrument" and "part of the instrument."
The primary obstacle to this contention is that, as the Israels concede, the assignment was never physically affixed to the note. "Affix" in its literal meaning is "to attach physically." WEBSTER'S THIRD NEW INTERNATIONAL DICTIONARY 36 (1971). The predecessor to current § 28:3-204(a) stated that an indorsement must be written "on the instrument or on a paper so firmly affixed thereto as to become a part thereof." D.C.Code § 28:3-202(2) (1994) (emphasis added). See Manzon v. Greenwald, 145 A.2d 575, 576 (D.C. 1958) ("The law requires that indorsements be written on the instrument itself or upon a paper attached thereto."). The Israels do not contend that the present version represents a weakening of that requirement. *fn3 "A signature on a separate unattached paper is not an indorsement of the commercial paper. . . ." 5A ANDERSON, UNIFORM COMMERCIAL CODE § 3-202:48, at 498 (3d ed. 1994). See also 4 W. HAWKLAND & L. LAWRENCE, UNIFORM COMMERCIAL CODE SERIES § 3-202:05 (1984); Adams v. Madison Realty & Dev., 853 F.2d 163, 166 (3d Cir. 1988); Tallahassee Bank & Trust Co. v. Raines, 125 Ga. App. 263, 187 S.E.2d 320, 321 (1972). The Israels invoke what amounts to a notion of "incorporation by reference" that has no support in either the language of Title 28 or the relevant case law. [709 A2d Page 77]
Furthermore, an indorsement on a separate paper, called an allonge, may be used only when there is no room for the indorsement on the instrument itself. "When there is space on the commercial paper for an indorsement, an allonge cannot be used and an indorsement on an unnecessary allonge has no effect as an indorsement. . . ." 5A ANDERSON § 3-202:49, at 498-9. See also Crossland Sav. Bank FSB v. Constant, 737 S.W.2d 19, 21 (Tex. Ct. App. 1987); Pribus v. Bush, 118 Cal.App.3d 1003, 1007, 173 Cal.Rptr. 747, 749 (4th Dist. 1981); Tallahassee Bank & Trust Co., 187 S.E.2d at 321. The Israels have never contended that the promissory note lacked sufficient room for an indorsement.
At the very least, therefore, there are genuine issues of material fact as to whether the promissory note was ...