## Facts

- Woodworth invested in The Richmond Indiana Venture, a limited partnership.
- On December 18, 1987, Woodworth executed a promissory note promising to pay “to the order of The Richmond Indiana Venture, A Limited Partnership or holder” $655,625 as part of the deferred portion of his partnership investment.
- The note provided that if payments were not timely made, the partnership could, at its option, terminate (forfeit) Woodworth’s partnership interest.
- The promissory note was later assigned or negotiated to Signet Bank/Maryland (Signet).
- Woodworth failed to make installment payments due on July 1, 1989, and July 1, 1990.
- Woodworth filed suit on November 2, 1989.
- Woodworth moved for partial summary judgment seeking a ruling that Signet was not a holder in due course; Signet moved for summary judgment asserting it was a holder in due course and that Woodworth’s defenses were therefore limited.

## Issues

1. Whether a promissory note that allows the payee partnership, upon the maker’s default, to terminate the maker’s partnership interest is a negotiable instrument under U.C.C. § 3-104.
2. If the note is not negotiable, whether the assignee bank can qualify as a holder in due course.

## Decision

- The court granted Woodworth’s motion for partial summary judgment on the holder-in-due-course issue.
- The court held the note was nonnegotiable because the forfeiture provision was an additional promise or undertaking beyond the promise to pay money, and it was not one of the additional terms permitted for negotiable instruments.
- Because the note was nonnegotiable, the court held Signet could not be a holder in due course of that instrument.
- The court denied Signet’s motion for summary judgment to the extent it depended on holder-in-due-course protection.

## Legal Principles

- Under U.C.C. § 3-104, a negotiable instrument must contain an unconditional promise or order to pay a sum certain in money and must not include additional promises or undertakings except those allowed by Article 3.
- A clause that permits forfeiture of the maker’s ownership interest in a partnership upon default is more than a simple reference to another agreement or a statement of collateral; it is an extra undertaking that defeats negotiability.
- U.C.C. § 3-112 allows only limited ancillary terms; a default-based termination of a partnership interest is not among them.
- Official Comment 5 to U.C.C. § 3-104 indicates that when negotiability is doubtful because of additional terms, the result should be nonnegotiability.
- Holder-in-due-course status under Article 3 requires a negotiable instrument; a transferee of nonnegotiable paper takes without holder-in-due-course protections and remains subject to defenses available on the underlying obligation.

## Conclusion

The court ruled that the note’s default-triggered partnership-interest termination clause added an unpermitted undertaking, making the note nonnegotiable; as a result, Signet Bank, as assignee, could not be a holder in due course and could not rely on Article 3’s holder-in-due-course protections to restrict Woodworth’s defenses.


Woodworth v. Richmond Indiana Venture, 13 U.C.C. Rep. Serv. 2d 1149 (1990)