In an unpublished opinion, the Michigan Court of Appeals held that a promissory note for $400,000 that had been transferred to Plaintiffs was not enforceable because the transfer had been of a photocopy of the promissory note, and not the original note.
In Shaya v. Karam, Mitchell Karam owed the Plaintiffs money for an investment Plaintiffs had made in Mitchell’s development of a motel. As payment for the money owed, Mitchell attempted to transfer a promissory note from Defendants for $400,000. In an attempt to transfer his interest in the promissory note to Plaintiffs, Mitchell signed a slip of paper referencing the $400,000 promissory note. In addition, he specified the parties to the promissory note, the date the promissory note was entered into, and stated that the promissory note should be paid to Plaintiffs. Plaintiffs then retained a photocopy of the promissory note and put the two documents in an envelope together.
After this attempted transfer took place, another assignment of the same promissory note was made to another party. When Plaintiffs then tried to enforce their assignment of the note by presenting the photocopy and endorsement, the Defendants refused to pay. The Plaintiffs then brought a claim for the $400,000.
Because the promissory note was made payable to Mitchell, transfer (or negotiation) of the promissory note to Plaintiffs required 1) transfer of possession of the promissory note and 2) endorsement. MCL 440.3201.
The Court found that the attempted transfer of the promissory note failed both of these steps:
No Transfer of Possession
In order to transfer possession of the promissory note, the original note had to have been transferred. Here, the Plaintiffs only had a copy of the original promissory note. Because the Plaintiffs did not have possession of the original note, no transfer of possession could have occurred.
No Valid Endorsement
In order to be valid, an endorsement must be made on the instrument. MCL 440.3204(1). In addition, the statute provides that an endorsement may be made on a paper that is “affixed” to the instrument. In this case, the Plaintiffs had included an endorsement on a piece of paper with the photocopy of the instrument. This failed to satisfy the need for an endorsement in two ways. First, the endorsement had to be made on, or attached to, the original promissory note, a copy would not do. Second, even if the original was included in the envelope, Plaintiffs failed to “affix” the endorsement to the promissory note because they were loosely inserted into the envelope together, instead of being “fasten[ed], join[ed], or attach[ed].”
If you have any additional questions regarding the making, transferring or enforcing of a promissory note, or any other questions, please contact the attorneys at Demorest Law Firm.
