[t]he paper in question, stating: “Pay to the order of ______” is not a bearer instrument…..
Let’s get an understanding of the basics before we move on the details. If an instrument states “Pay to the Order of” it is “order paper” or an “order instrument”, as where if an instrument states “Pay to Bearer” or “Pay to the order or Bearer” it is “bearer paper” or a “bearer instrument.
An order instrument must have a specifically named “payee” identified on the payee line, as where a bearer instrument is payable to whom ever has possession of the instrument. A good examples of an order instruments would be a check because on its face the check states “Pay to the order of” and then who ever draws the check would write in the name of the person or entity entitled to receive payment by the presentment of this instrument.
A good example of a bearer instrument is a 10 dollar bill, because it is a negotiable instrument, but who ever has the 10 dollar bill in his possession can present the instrument for payment.
Now for the details, in Hoss v.Fabacher 578 S.W.2d 454 (1979) Tex 1st D Ct App (hereafter Hoss) the vital differences were defined in very fine detail.
Note: The Texas Business and Commerce Code (BCC) reflects the Federal Uniform Commercial Code very closely. For example here the fed section will be 3-203, the Texas statutory equivalent will be section 3.203.
In Hoss it states, “Under the Texas Business and Commerce Code, ‘instrument’ means a negotiable instrument.” § 3.102(a)(5) (1967).
To be a negotiable instrument, the writing must
(1) be signed by the maker or drawer,
(2) contain an unconditional promise or order to pay a sum certain in money and no other promise, order, obligation or power given by the maker or drawer except as authorized by the Code,
(3) be payable on demand or at a definite time, and
(4) be payable to order or to bearer. § 3.104(a) (1967).
An instrument is payable to bearer when by its terms it is payable to
(1) bearer or to the order of bearer; or
(2) a specified person or bearer; or
(3) “cash” or the order of “cash”, or any other indication which does not purport to designate a specific payee. § 3.111 (1967)
The official comment to this section clearly states 2. Paragraph (c) is reworded to remove any possible implication that “Pay to the order of ______” makes the instrument payable to bearer. It is an incomplete order instrument and falls under Section 3-115.
Hoss goes further to state, “Section 3.115(a) of the Code, titled “Incomplete Instruments,” provides that when a paper whose contents at the time of signing show that it is intended to become an instrument is signed while incomplete in any necessary respect, it is unenforceable until completed. Comment 2 following that section defines “necessary” as “necessary to complete instrument. It will always include the promise or order, the designation of the payee, and the amount payable.” In our case the paper in question, stating: “Pay to the order of ______” is not a bearer instrument”
There have been many attorneys that argue that an “incomplete order instrument” is a negotiable instrument that is, “indorsed in blank” and is therefore a “bearer instrument”. Under Hoss, this argument falls on its face. Hoss outlines that an “incomplete order instrument” is in fact NOT a bearer instrument and that the attorney is trying to pull the preverbal wool over the eyes of the court. Counsel’s statement may not reach fraud upon the court but it is certainly not a winning argument in light of Hoss.
One such recent case from the Maryland Court of Appeals has ruled in Deutsche Bank v. Brock, 63 A.3d 40, 430 Md. 714 (2013) that a servicer possessing an original promissory note endorsed in blank, the most common type of endorsement for thousands of notes owned by mortgaged-backed security trusts, can initiate foreclosure simply as the holder.
The appellate court erred in its ruling I believe because it was not argued correctly. Just because millions of negotiable instruments have been rendered of no force or effect does not change the meaning of an “incomplete order instrument” and in no way changes the intent of congress when the UCC was originally promulgated. It is my opinion, for what it’s worth, that the Deutsche v Brock ruling should be taken to the US Supreme Court for an order of reversal on those grounds. I suppose time will tell.