Lines of Credit Are Not Negotiable Instruments. The Colorado Court of Appeals in a unanimous opinion held that a line of credit is not a negotiable instrument and therefore that UCC Article 3 does not apply to agreements for a line of credit. CadleRock Joint Venture LP v. Esperanza Architecture & Consulting, Inc., 2021 WL 3921503, 20CA0919 (Colo. App. Sept. 2, 2021), https://www.courts.state.co.us/Courts/Court_of_Appeals/Opinion/2021/20ca0919-PD.pdf.
The facts of the case were straightforward. A borrower took out a $500,000 revolving line of credit with a bank. The borrower and the bank then modified the line of credit to increase it to $750,000. The borrowers defaulted on the line of credit in 2012. The plaintiff in the case asserted that it was the successor to the line of credit through endorsements and allonges, but the original line of credit agreement was lost. The plaintiff sued under theories of debt due and breach of contract, among others. The district court dismissed all of the claims on summary judgment except the one for breach of contract based on the borrower’s argument that the line of credit was not enforceable under the UCC.
The Court of Appeals overturned the district court’s summary judgment ruling. The Court of Appeals ruled that the line of credit was not a negotiable instrument under C.R.S. § 4-3-104(a), which requires that the instrument be for an unconditional promise or order “to pay a fixed amount of money.” The Court of Appeals followed several decisions from other jurisdictions that have concluded that a line of credit does not meet the “fixed amount of money” requirement to be a negotiable instrument. The Court of Appeals explained that “the amount the borrowers promised to pay could fluctuate significantly over the course of the loan,” precluding the line of credit from being for a “fixed amount.”
The implication behind the decision is that the defenses to enforcement of negotiable instruments available in the UCC do not apply to lines of credit.