Subject to applicable law regarding exclusion of proof of contemporaneous or previous agreements, the obligation of a party to an instrument to pay the instrument may be modified, supplemented, or nullified by a separate agreement of the obligor and a person entitled to enforce the instrument, if the instrument is issued or the obligation is incurred in reliance on the agreement or as part of the same transaction giving rise to the agreement. To the extent an obligation is modified, supplemented, or nullified by an agreement under this section, the agreement is a defense to the obligation.

OFFICIAL COMMENTS

1. UCC Official Comments © by ALI & the NCCUSL. Reproduced with permission of the PEB for the UCC. All rights reserved.
2. 1. The separate agreement might be a security agreement or mortgage or it might be an agreement that contradicts the terms of the instrument. For example, a person may be induced to sign an instrument under an agreement that the signer will not be liable on the instrument unless certain conditions are met. Suppose X requested credit from Creditor who is willing to give the credit only if an acceptable accommodation party will sign the note of X as co-maker. Y agrees to sign as co-maker on the condition that the Creditor also obtain the signature of Z as co-maker. Creditor agrees and Y signs as co-maker with X. Creditor fails to obtain the signature of Z on the note. Under Section 3-412 and 3-419(b) [55-3-412 and 55-3-419 NMSA 1978, respectively], Y is obliged to pay the note, but Section 3-117 [55-3-117 NMSA 1978] applies. In this case, the agreement modifies the terms of the note by stating a condition to the obligation of Y to pay the note. This case is essentially similar to a case in which the maker of a note is induced to sign the note by fraud of the holder. Although the agreement that Y not be liable on the note unless Z also signs may not have been fraudulently made, a subsequent attempt by Creditor to require Y to pay the note in violation of the agreement is a bad faith act. Section 3-117, [55-3-117 NMSA 1978] in treating the agreement as a defense, allows Y to assert the agreement against the Creditor, but the defense would not be good against a subsequent holder in due course of the note that took it without notice of the agreement. If there cannot be a holder in due course because of Section 3-106(d) [55-3-106 NMSA 1978], a subsequent holder that took the note in good faith, for value and without knowledge of the agreement would not be able to enforce the liability of Y. This result is consistent with the risk that a holder not in due course takes with respect to fraud in inducing issuance of an instrument.
3. 2. The effect of merger of integration clauses to the effect that a writing is intended to be the complete and exclusive statement of the terms of the agreement or that the agreement is not subject to conditions is left to the supplementary law of the jurisdiction pursuant to Section 1-103 [55-3-103 NMSA 1978]. Thus, in the case discussed in Comment 1, whether Y is permitted to prove the condition to Y's obligation to pay the note is determined by that law. Moreover, nothing in this section is intended to validate an agreement which is fraudulent or void as against public policy, as in the case of a note given to deceive a bank examiner.

History: 1978 Comp., § 55-3-117, enacted by Laws 1992, ch. 114, § 104.

ANNOTATIONS

Repeals. — Laws 1992, ch. 114, § 237 repealed former 55-3-117 NMSA 1978, as enacted by Laws 1961, ch. 96, § 3-117, relating to instruments payable with words of description, effective July 1, 1992. Laws 1992, ch. 114, § 104, enacted a new section, effective July 1, 1992. For provisions of former section, see the 1991 NMSA 1978 on NMOneSource.com.

No cure available to make defective note negotiable under Code. — An instrument which in and of itself did not meet the requirements of former 50A-3-104, 1953 Comp. could not be made negotiable for Article 3 purposes by reference to another document which purported to cure the defects in the note's negotiability. First State Bank v. Clark, 1977-NMSC-088, 91 N.M. 117, 570 P.2d 1144.

Note may be negotiable under ordinary contract law. — Even though a note or instrument is not a "negotiable instrument" for Article 3 purposes, it may nevertheless be negotiable between the parties involved under ordinary contract law. First State Bank v. Clark, 1977-NMSC-088, 91 N.M. 117, 570 P.2d 1144.

Extension note generally not novation. — An extension note extending only the due date does not constitute a novation unless a contrary intention is shown. Where the original note contains a provision allowing reasonable attorney's fees for collection, this provision is not altered by the extension note. First Nat'l Bank v. Niccum (In re Permian Anchor Servs.), 649 F.2d 763 (10th Cir. 1981).

Stock transfer agreement. — All documents executed as part of a stock transfer agreement are to be considered together and the terms of all such documents are binding upon even a holder in due course with notice of them. Color World TV Rental, Inc. v. White (In re Flowers), 25 B.R. 652 (Bankr. D.N.M. 1982).

Am. Jur. 2d, A.L.R. and C.J.S. references. — 11 Am. Jur. 2d Bills and Notes §§ 54, 62, 70 to 72, 147, 460; 12 Am. Jur. 2d Bills and Notes § 1241.

Reference to extrinsic agreement as affecting negotiability of bill, note or trade acceptance, 104 A.L.R. 1378.

10 C.J.S. Bills and Notes § 103 et seq.