On October 14, 1980, United American Bank of Knoxville made a $1,700,000 loan to Frederic B. Ingram. William F. Earthman, the president of the bank and a beneficiary of the loan, had arranged for the loan and prepared the loan documents. Mr. Ingram and Mr. Earthman were old friends, and Mr. Ingram had loaned Mr. Earthman money in the past. Mr. Ingram was in jail at the time of this loan and was unable to complete the documents for the loan. Mr. Earthman says that Mr. Ingram authorized him to do the loan so long as it did not cost him anything to do it.
Also on October 14, 1980, Mr. Earthman prepared and executed a personal $1,700,000 note to Mr. Ingram, using a standard Commerce Union Bank note form. Mr. Earthman wrote “Frederic B. Ingram” in the space for identifying the lending bank and also filled in another blank stating that the note would be due “Eighteen Months after Date.” With regard to the interest, Mr. Earthman checked a box signifying that the interest would be “At the Bank’s ‘Prime Rate’ plus % per year.”
Mr. Earthman then sold both of the notes, which ended up in the hands of third parties (holders in due course) who demanded payment. Mr. Ingram raised the defense that he had not authorized Mr. Earthman to handle the transactions. The third parties said the notes were negotiable instruments and they were entitled to payment without listening to Mr. Ingram’s defenses. Mr. Earthman said his note to Mr. Ingram as well as the bank note from Mr. Ingram were not negotiable and that they could both raise defenses to the third parties seeking payment.
Who is correct? What do you think of Mr. Earthman’s banking processes and procedures? What ethical issues do you see in these loan transactions? [Ingram v Earthman, 993 SW2d 611 (Tenn)]