Promissory Notes as Security: Use, Issuance, Transfer and Legal Remedies

Promissory notes given as security are legal documents used very often, and for various reasons, in everyday and commercial life. For this reason, it is important to know the law on such notes.

Our legislation contains no statutory provisions on promissory notes given as security. Nevertheless, there is a large body of case law concerning such notes. In this article, we will examine promissory notes given as security in the light of decisions of the Court of Cassation (Yargıtay), using a question-and-answer format.

1) What is a promissory note given as security? How does it differ from a negotiable promissory note?

A promissory note given as security (teminat senedi) is a written document in which a person undertakes that a job, an undertaking, a purchase and sale or a service will be completed as agreed and that, otherwise, the sum of money written on the note will be paid.

A promissory note given as security may be issued in any situation in which security for a payment needs to be obtained. In everyday and commercial life, it can be seen that such notes are frequently issued, in particular, between banks and their customers, between merchants in commercial sales, between employees and employers in employment relationships, between clients and the contractor/builder in contracts for work, and between owners and tenants.

A promissory note given as security differs from the promissory note (a note of debt), which is a negotiable instrument, in that it is conditional. This is because a promissory note given as security does not contain an unconditional promise to pay, which is one of the most fundamental features of negotiable instruments; on the contrary, payment is made subject to a condition. In other words, a promissory note given as security is strictly tied to the cause/underlying debt relationship that led to its issuance (a job, a promise, or goods and services); it cannot be asserted independently of that relationship. Unlike the promissory note, promissory notes given as security are not governed by the principle of abstraction (abstractness).

Since a promissory note given as security is not a negotiable instrument (bill of exchange, promissory note, check), enforcement proceedings specific to negotiable instruments cannot be brought on the basis of such a note. Instead, enforcement proceedings can be brought through the general attachment procedure (enforcement without a judgment). The practical consequence of this feature of the promissory note given as security is that, if enforcement proceedings specific to negotiable instruments are initiated on the basis of such a note, the debtor in the proceedings may, depending on the circumstances, file a complaint or raise an objection to the debt.

Finally, the promissory note, which is a negotiable instrument, must contain certain elements (formal requirements). Otherwise, the document in question will not qualify as a negotiable instrument (Turkish Commercial Code (TTK) Art. 777). For promissory notes given as security, by contrast, it is sufficient that they are drawn up in a way capable of producing legal effects. There are no mandatory elements/formal requirements for promissory notes given as security.

“Under Article 776 of Turkish Commercial Code No. 6102, the text of a promissory note must contain the word “promissory note” or “note to order” and, if the note is written in a language other than Turkish, the word used in that language as the equivalent of promissory note or note to order; an unconditional promise to pay a certain sum; the maturity date; the place of payment; the name of the person to whom or to whose order payment is to be made; the date and place of issue; and the signature of the issuer. In this context, certainty (definiteness) is one of the essential elements of negotiable instruments. Considering also its capacity to circulate, all the elements of a promissory note must be clear, precise and definite, so that they are not open to interpretation. As Öztan also states, drawing a bill of exchange or issuing a promissory note is a transaction that "does not admit conditions" ( Öztan, F.: Kıymetli Evrak Hukuku, 2nd ed., Ankara 1997, p. 451 ). Indeed, after stating that an instrument lacking the mandatory elements does not qualify as a promissory note, Article 777 of the Turkish Commercial Code also filled any gaps that might arise by introducing default rules on the maturity, the place of issue and the place of payment, and thereby supported the principle of certainty. Although it is accepted that clauses such as value, interest, waiver of protest and jurisdiction may be included, placing on a promissory note clauses that remove its abstraction from the underlying cause or its definiteness removes its character as a negotiable instrument. Even if a promissory note bears a security notation, since it is not stated what is being secured, this wording does not remove the abstract character of the promissory note.” (Assembly of Civil Chambers of the Court of Cassation (HGK), Docket No. 2017/12-333, Decision No. 2019/416, 9.4.2019)

2) In which situations are promissory notes given as security generally issued?

As stated above, promissory notes given as security may be issued as security for various legal relationships. Some of those encountered more frequently in everyday life are explained below.

Promissory Notes as Security Between Banks and Customers

In practice, notes intended as security may, though rarely, be issued between banks and their customers to secure loan relationships. However, in order to recover their receivables more easily, banks particularly prefer notes that qualify as negotiable instruments.

Under normal circumstances, certain statements that the note is a promissory note given as security must be duly written on it, or the note must be issued together with a written document (contract, protocol, etc.) explaining which relationship it secures, or else the loan agreement must provide that the note in question is given as security and must identify the note by setting out its details expressly. However, in order to benefit from the advantages that negotiable instruments enjoy in enforcement law, banks write nothing on this matter, whether on the note, in a separate protocol or in the loan agreement.

Where a note has been given as security but neither the note itself nor the legal relationship that is the actual reason for its issuance (the loan agreement) contains any statement that it was given as security, the debtor may argue that the note was given as security, that it does not qualify as a negotiable instrument because the debt stated in it is not unconditional, in other words because it secures a legal relationship, and that, consequently, enforcement proceedings specific to negotiable instruments cannot be brought on the basis of such a note. The position of the Court of Cassation in such a dispute is that the note qualifies as a negotiable instrument because the relationship it secures is not expressly written on the note or in the loan agreement. The Court of Cassation further states that, in such cases, the Enforcement Court is only authorized to carry out a formal review and therefore cannot go into the merits to examine whether the note is a promissory note given as security.

“As also adopted in the HGK’s decisions dated 14.3.2001, No. 2001/12-233, and dated 20.6.2001, No. 2001/112-496, which relationship the underlying document secures must be proved by a written document. Under Article 169/a of the Enforcement and Bankruptcy Law (İİK), the document must expressly refer to the note on which the enforcement proceedings are based, and for an express reference to be accepted, the maturity and issue dates and the amounts of the note must be stated. Although the plaintiff debtor requested the annulment of the enforcement proceedings under Article 169/a of the İİK on the ground that the note had been given as security, this claim must be proved by one of the documents falling within the same article; according to the settled case law of the Court of Cassation, where it is claimed that the note was given as security under a bank loan agreement, the loan agreement must expressly refer to the promissory note subject to the enforcement proceedings; since it is understood that the loan agreement contains no reference whatsoever to the note and that the creditor has not acknowledged that the note was given as security, the decision of the Regional Court of Appeal to stay the enforcement proceedings in respect of the plaintiff debtor was incorrect and required reversal.” (12th Civil Chamber, Docket No. 2019/808, Decision No. 2020/519, 21.1.2020)

In our opinion, however, whether the note was given as security should be determined by examining the amount of the loan agreement, the fact that the persons jointly and severally liable under the loan agreement appear on the note as avalists, the link between the date of the loan agreement and the date of issue of the note, and other related circumstances. This is because it is a known fact that, in practice, banks appear as payees on notes that are in fact issued as security. We believe that, in such a case, giving weight to the true intention of the parties would also be consistent with the true intention of the legislator (the purpose of the law).

Promissory Notes as Security in Contracts for Work

In contracts for work, clients are seen to obtain promissory notes given as security from the contractor/builder. In practice, under construction-for-flats agreements, landowners generally obtain a promissory note given as security against the possibility that the contractor fails to perform, as agreed, all of its undertakings, above all its obligation to deliver the immovable properties that are the subject of the agreement to the landowners in full.

“It is not disputed that a construction-for-flats agreement entitled “Promise-to-Sell Agreement for Real Estate and Construction-for-Flats Agreement in the Form of a Notarial Deed” was signed between the parties before the ... 1st Notary Office on September 8, 2010, under journal No. 25535. The dispute between the parties centers on whether a debt is owed under the promissory note alleged to have been given as security for the contract for work. While the plaintiff contractor claims that the promissory note in dispute was given to the defendant as security for the construction-for-flats agreement, that the agreement was performed in full and that the promissory note has become without consideration, counsel for the defendant argues that the matters asserted in the action must be proved by written evidence and that the plaintiff has failed to produce any concrete evidence on this point. ... The promissory note subject to the enforcement proceedings in the file with Docket No. 2013/9646 of the 23rd Enforcement Office is a promissory note for 200,000.00 TL issued on March 10, 2011 and maturing on April 30, 2012. The reason for issuing this promissory note is recorded as cash. Although the plaintiff claims that this promissory note was given under the construction-for-flats agreement concluded between the parties, an examination of the provisions of that agreement shows that it contains no provision that a promissory note given as security would be provided. Moreover, the note in dispute bears no wording indicating that it is a promissory note given as security. When the date of issue of the note and the dates of the agreement between the parties are also carefully assessed, it cannot be concluded that the promissory note was given as security for the agreement. While the agreement is dated September 8, 2010, the note was issued on March 10, 2011, and it is understood that the note was issued quite some time after the agreement was signed. This also leads to the conclusion that the plaintiff’s claims are unfounded…” (Court of Cassation, 15th Civil Chamber, Docket No. 2018/837, Decision No. 2019/1648, 10.4.2019)

Promissory Notes as Security in Employment Relationships

In employer-employee relationships, in practice, employers obtain from employees blank notes that bear no maturity date and are signed by the employee, to cover any damage the employee may cause to the business. If damage occurs, or sometimes without justification, the employer fills in the blank spaces on these notes and initiates enforcement proceedings specific to negotiable instruments against the employee. In such cases, the employee may file an action for a negative declaratory judgment against the employer, claiming that the note was taken as a promissory note given as security, that the employee was forced to sign it in order to get the job even though no debt was owed, and that the employee was made to sign a blank note.

“The dispute between the parties centers on whether the plaintiff owes any debt arising from the promissory note subject to the enforcement proceedings.

“It is known that, in some lines of business, employers take such notes for security purposes at the outset, when the employee starts work, in the employment relationship to which the employee and the employer are parties. In the present dispute, both parties accept that the note was taken as a promissory note given as security when the employee first started work. Although the court decided that the plaintiff was not indebted under the note, on the grounds that "...the defendant took from the plaintiff, when the plaintiff started work, a blank note bearing only the plaintiff’s signature, and this note was later filled in and enforcement proceedings were initiated; that the note, taken from the plaintiff on starting work at a time when the plaintiff did not yet owe the defendant anything, was filled in and made the subject of enforcement proceedings; that the note was blank when it was taken from the plaintiff, and that no amount or date had been written on it..", the conclusion reached is based on an incomplete examination. Even if it is established that the note was taken as a promissory note given as security when the employee first started work and was filled in later, it is wrong to accept the claim on this ground alone. It is understood from the case file that a fine was imposed on the plaintiff employee by the ... authorities and that the defendant employer paid the fine by transferring EUR 3600 on the plaintiff’s behalf. Accordingly, the reason for which the fine was imposed should be investigated and clarified, and if it is established that the fine was imposed because of the plaintiff’s faulty conduct, the claim for a declaration of non-indebtedness should be dismissed to the extent of the amount of the fine imposed.” (Court of Cassation, 9th Civil Chamber, Docket No. 2016/10252, Decision No. 2019/22236, 12.12.2019)

In addition, employees often ask their employer to return the blank notes they were made to sign on starting work, together with their claims for severance pay and wages, before those notes are made the subject of enforcement proceedings specific to negotiable instruments. In such cases, however, the courts require the employee to have evidence that a promissory note given as security was provided.

“Although, in the statement of claim, the plaintiff requested an order for the return of the promissory note given as security that the plaintiff claims to have given to the employer on starting at the workplace, the defendant did not acknowledge any such promissory note given as security, and the existence of the promissory note given as security could not be established at this stage. Accordingly, while the plaintiff’s request for the return of the promissory note given as security should have been dismissed, the failure to give any decision on this point, whether granting or rejecting it, is wrong.” (Court of Cassation, 9th Civil Chamber, Docket No. 2016/5826, Decision No. 2019/22774, 19.12.2019)

Promissory Notes as Security in Commercial Relationships

In commercial sales of goods or services, in practice, the buyer obtains a promissory note given as security against the possibility that the goods or services purchased do not conform to the agreement between the parties, or are defective or incomplete. The aim is to cover the loss by enforcing the note if the goods are not delivered as agreed.

“The action concerns a request for a declaration of non-indebtedness in respect of enforcement proceedings for the collection of a receivable arising from a promissory note that qualifies as a negotiable instrument. On the promissory note in dispute, the plaintiff is the drawer and the defendant is the payee. As the reason for issuance, the promissory note bears the entry cash. The plaintiff claims that the promissory note was given as security for goods to be purchased from the defendant under the contract dated March 1, 2014. The defendant, on the other hand, argued that the promissory note was given in return for money lent to the plaintiff. The plaintiff must prove the claim of security with statutory evidence (written evidence or oath). It was not correct for the court to accept the promissory note in dispute as a promissory note given as security on the ground that it bears the same date as the contract and that there is a commercial relationship between the parties. While the court should have asked the plaintiff for any statutory evidence that the promissory note was given as security and decided according to the outcome, it was not correct to decide as written on erroneous grounds, and the judgment had to be reversed.” (Court of Cassation, 19th Civil Chamber, Docket No. 2018/370, Decision No. 2019/5317, 27.11.2019)

“The court of first instance dismissed the action on the grounds that, according to the proceedings conducted, the evidence gathered and the expert report it adopted, there was a commercial relationship between the plaintiff and the defendant; the note given by the plaintiff to the defendant was recorded in the defendant company’s commercial books and documents; a debt of 250,000.00 TL had been deducted, on account of that note, from the defendant’s receivable from the plaintiff; although the plaintiff argued that the note was a promissory note given as security, not only did the text of the note contain no explanation of which transaction it was given to secure, but the examination of the defendant’s books also showed that the defendant had a receivable exceeding the amount of the note, and that the note, even though not yet collected, had been set off against the plaintiff’s debt and entered in the commercial books and documents accordingly; and that, consequently, not only had the plaintiff failed to prove that the note was a promissory note given as security, but it was also understood that the plaintiff owed a debt exceeding that amount; counsel for the plaintiff appealed against the judgment (...) In view of the contents of the file, the evidence on which the decision is based and the reasons requiring it, and since there is no error in the assessment of the evidence, it is decided that all the appeals on points of law by counsel for the plaintiff, which are found unjustified, be dismissed, that the judgment, found to be in accordance with procedural and substantive law, be UPHELD, and that the file be sent to the court of first instance…”(Court of Cassation, 19th Civil Chamber, Docket No. 2018/2358, Decision No. 2019/5012, 6.11.2019)

Promissory Notes as Security in Lease Relationships

Promissory notes given as security may be issued between owners of immovable property and tenants to cover the rent and/or any damage that may be caused to the leased property.

“Just as, for the plaintiff tenant to be able to request the return of the promissory note given as security, it must be proved that the electricity and water debts of the property have been cleared, that the waste collection tax and service charges payable by the tenant have been paid and that the property has been returned in the condition in which it was received, so too, for the defendant landlord to be able to claim the amount of the promissory note given as security, the landlord must specifically state which of the return conditions set out in the agreement the tenant has failed to fulfill, and the court must determine the amount for which the plaintiff tenant is liable by assessing the matters put forward by the parties. Although the defendant landlord stated that the tenant had unpaid electricity and water debts, it did not specify which months they related to or in what amounts; and although it stated that the plaintiff tenant had damaged the leased property and that evidence had been preserved on this matter, the court did not conduct an on-site inspection with court-appointed experts in the relevant field to assess whether there was any damage to the property resulting from the tenant’s misuse, and did not discuss whether the tenant had vacated and returned the leased property in accordance with the agreement. The fact that evidence of damage to the leased property has been preserved does not conclusively show that the leased property was not returned to the landlord in accordance with the agreement. Therefore, the court should have had the defendant landlord explain the amount of the unpaid electricity and water charges and submit the related documents and, after determining the amount for which the tenant was liable as at the date of vacating, asked the plaintiff tenant to submit any related payment documents; it should also have gathered the parties’ evidence on whether the leased property was returned to the landlord in accordance with the agreement, conducted an on-site inspection with court-appointed experts in the relevant field to determine whether there was any damage to the property resulting from the tenant’s misuse, and decided according to the outcome; instead, it was not correct to dismiss the action, repeating the provisions of the agreement in abstract terms, on the ground that the plaintiff had not fulfilled the conditions of the agreement.” (Court of Cassation, 6th Civil Chamber, Docket No. 2014/3772, Decision No. 2014/5978, 8.5.2014)

3) How should a promissory note given as security be drawn up?

The note should contain sufficient information clearly showing that it was given as security. For example, it should be written on the note that it was given as security, under which contract it was prepared, which relationship it secures, that it cannot be endorsed, etc.

If there is a contract in the legal relationship that gave rise to the note, the reason for giving the note and the details of the note should also be clearly stated in the text of that contract. If there is no such contract, a protocol may be drawn up stating that the note was given as security.

The words “this is a promissory note given as security” should be written in the maturity field on the front of the note. This is because, since the note serves as security, the debt will arise only when the event for which it was given occurs or fails to occur (for example, if the leased property is damaged or goods of the required quality do not arrive). For this reason, promissory notes given as security have no fixed maturity date.

The reason for giving the note should be written in the content section (the blank section) on the left side of the note. For example, “given under the contract/protocol dated _____ between the debtor and the payee” or “this is security for the rent for the month of ____” may be written.

The summary section on the far left of the front of the note appears on notes only so that the information on the front right side of the note can be found quickly (for practical convenience), and nothing needs to be written in this section. However, it may be filled in in line with the content of the note, or the blank spaces may be closed off by drawing lines through them.

On the back of the note, the details of the reason written in the content section on the front of the note should be set out. For example, “A ____ agreement concerning ____ and dated _____ has been concluded between the debtor and the payee of this note; if the ______ units of goods that are the subject of the agreement are not delivered to the payee by _____ in the quality and quantity agreed in the agreement, this note shall serve as the basis for enforcement proceedings or an action; otherwise it shall be void. This note is not endorsable.” or “The debtor is the tenant of the payee’s immovable property located at _______; if the debtor fails to pay the rent of _____ TL due for January 2021 under the lease agreement dated ____, this note shall serve as the basis for enforcement proceedings or an action; otherwise it shall be void. This note is not endorsable.” may be written.

It should be borne in mind that expressions such as “this is a promissory note given as security”, “this is security” or “held in trust” written on the front or back of the note will not, on their own, make the note a promissory note given as security, and the note will be treated as a promissory note having the character of a negotiable instrument. Debtors under such notes in particular need to pay close attention to this point.

“Not only does the promissory note dated March 24, 2008 for 150,000 YTL relied on in the enforcement proceedings contain no statement that it was given as security, but the general loan agreement dated March 24, 2008 concluded between the parties also contains no entry that the underlying note was given as security. Moreover, the enforcement court is a court of limited jurisdiction. For it to be accepted that a note was given as security, what it was given to secure must be expressly written. On this matter, the enforcement court cannot carry out an investigation by interpreting the clauses of the contract or by dwelling on the actual amount of the debt and the amount claimed in the enforcement proceedings. Enforcement courts decide on the basis of a formal review. In this situation, while the court should have dismissed the objection, it was not considered correct to accept the complaint on erroneous grounds. Insisting on the earlier decision without taking into account the statutory provisions and the explanations of the material facts set out above and the decision of the Chamber pointing to the same matters is contrary to procedure and law; the decision had to be reversed for the reasons explained.” (Assembly of Civil Chambers of the Court of Cassation, Docket No. 2012/12-768, Decision No. 2013/312, 6.3.2013)

It should also be noted that, in practice, notes are frequently issued in blank; a note issued in blank will not serve as a promissory note given as security even if it was given for security purposes, and it will have to meet the conditions required for a promissory note given as security. A note given in blank can later be filled in and used as a negotiable instrument.

“The Regional Court of Appeal, on the grounds that Article 680 of Turkish Commercial Code No. 6102, applicable by reference under Article 778, provides: "If a bill of exchange that was incomplete when issued is completed contrary to the agreements made, the non-observance of those agreements may not be asserted against the holder, unless the holder acquired the bill of exchange in bad faith or gross negligence can be imputed to the holder at the time of acquisition."; that, as also stated in the case law of the Court of Cassation, notes may be issued in blank under this provision; that the claim that the blank parts of the note were later filled in contrary to the agreement must be proved by written evidence; that the plaintiff could not submit written evidence on this matter; and that the matters stated by the court of first instance in its reasoning were not, on their own, sufficient to prove the claim that the note was a promissory note given as security, so that deciding to accept the action instead of dismissing it was contrary to procedure and law, decided to accept on the merits the defendant’s appeal against the decision of the court of first instance, to set aside the decision of the Denizli Commercial Court of First Instance dated 18/11/2016, Docket No. 2014/1319, Decision No. 2016/879, and to dismiss the action; the judgment was appealed on points of law by counsel for the plaintiff.” (Court of Cassation, 19th Civil Chamber, Docket No. 2017/3438, Decision No. 2019/5216, 20.11.2019)

4) Is the presence on the note of expressions such as “this is security”, “this is a promissory note given as security”, “non-transferable”, “not endorsable”, “this is a contract note” or “held in trust” sufficient on its own to prove that the note is a promissory note given as security?

The presence on a note (promissory note) of expressions such as “this is security”, “this is a promissory note given as security” or “held in trust” is not sufficient on its own to prove that the note is a promissory note given as security. As also adopted in the HGK decisions of March 14, 2001, No. 2001/12-233, and of June 20, 2001, No. 2001/12-496, on which the Court of Cassation relies on this point in its decisions, which relationship the underlying document secures must be clearly proved, either by writing it expressly on the note or by a separate written document.

If it cannot be clearly understood from the wording on the note which relationship the note secures, the debtor under the note can prove that the note is a promissory note given as security only with a written document (contract, protocol, etc.) that expressly refers to the note in question and explains which relationship it secures. Otherwise, the note will retain its character as a negotiable instrument.

If the note contains sufficient information clearly showing that it was given as security (that the note was given as security, that it cannot be endorsed, under which contract it was prepared, which relationship it secures, etc.), the note will then be accepted as a promissory note given as security. In this case, since the note does not contain an unconditional acknowledgment of debt, it will not have the character of a negotiable instrument, and enforcement proceedings on the basis of this note can be brought only through the general attachment procedure. If it is proved that the secured obligation has been performed, it will be possible to be released from the debt.

“The fact that "held in trust" is written on a promissory note does not show that the promissory note was given in trust or as security. In the present case, the promissory note bears only the words "held in trust", and since it is not stated for which relationship and for what reason it was given, this wording does not establish that the promissory note subject to the action and the enforcement proceedings is a promissory note given as security, or that it was given in trust to a person who is not a party to the action. Although the association’s resolution book contains an entry reading "100,000 TL each has been entrusted to the intermediary ... so that the election is not avoided", this entry was written in the resolution book before the issue date of the promissory note, and it makes no mention of a note being given. Moreover, the association’s resolution dated August 16, 2015 does not bear the defendant’s signature either. When all these matters are assessed together, the plaintiff has failed to prove the claim with written evidence; while the court should have accepted the defendant’s appeal, set aside the decision of the court of first instance and dismissed the action, it was not considered correct to decide as written by erring in the allocation of the burden of proof.” (Court of Cassation, 19th Civil Chamber, Docket No. 2017/3501, Decision No. 2019/4894, 23.10.2019)

“The mere fact that "promissory note given as security" is written on a promissory note does not prevent enforcement by attachment specific to negotiable instruments on the basis of that document. As also adopted in the HGK’s decisions dated 14.3.2001, No. 2001/12-233, and dated 20.6.2001, No. 2001/12-496, which relationship the underlying document secures must be proved by a written document. In the present case, the debtors did not submit any written document in support of their objection. Counsel for the creditor, for its part, did not accept this claim. In this situation, the debtor party has failed to prove the contrary of the claim that the promissory note was issued in return for a debt with a document that is valid for the purposes of enforcement law and of the nature provided for in Article 169/a-1 of the İ.İ.K., and the creditor has not made any statement acknowledging that the promissory note on which the enforcement proceedings are based is a promissory note given as security; it was therefore incorrect for the court to accept the objection instead of dismissing it.” (Court of Cassation, 12th Civil Chamber, Docket No. 2011/844, Decision No. 2011/16089, 20.9.2011)

5) What legal remedy is available if enforcement proceedings specific to negotiable instruments are brought on a promissory note given as security?

If, although the note contains sufficient statements that it is a promissory note given as security, the enforcement director has found the note suitable for enforcement proceedings specific to negotiable instruments, this act of the enforcement officer will be subject to complaint. In that case, the complaint must be filed with the Enforcement Court within 5 days (İİK Art. 168/para. 3, Art. 170/a). However, in the case of a note that meets all the mandatory formal requirements of a promissory note, if it cannot be fully understood from the note that it is a promissory note given as security (for example, according to the view of the Court of Cassation, the mere wording “this is a promissory note given as security” on the note does not make it a promissory note given as security. In this case, the note retains its character as a negotiable instrument.), or if the debtor under the note claims that the note is a promissory note given as security even though there is no indication on the note that it may be one (for example, if the relationship secured by the note is explained in a contract or protocol), then, in these cases, an objection to the debt, not a complaint, must be raised against the enforcement proceedings specific to negotiable instruments.

“In the present case, the back of the note subject to the enforcement proceedings bears the wording "this note has been given by us as security for half of independent unit No. 1 in the building to be constructed on block 10727, parcel 106", and since this wording removes the requirement that the note contain an unconditional acknowledgment of debt, it is understood that the note does not have the character of a negotiable instrument and is a promissory note given as security. In this situation, since the existence and amount of the receivable arising from the note, and whether it should be collected, require a trial, while the court should have decided to annul the enforcement proceedings under Article 170/a of the İİK (Complaint of the debtor under negotiable instruments law), it was incorrect to render a judgment dismissing the request on the grounds written.” (Court of Cassation, 12th Civil Chamber, Docket No. 2018/9186, Decision No. 2019/866, 23.1.2019)

It should be noted, however, that although the enforcement court is bound by the material facts put forward by the parties in their petitions, it is not bound by the legal characterization made by the applicant in this context. In other words, even if a complaint has been filed, the judge may also treat the dispute as an objection to the debt.

“In this situation, since the enforcement director, upon the request for enforcement, cannot examine under paragraph 1 of Article 168 of the İİK a matter that cannot be understood from the note, and since the debtors did not argue in their application to the enforcement court that the enforcement director had acted contrary to the rules of enforcement law, the debtors’ application to the enforcement court is not in the nature of a complaint. Although the debtors characterized their request as a complaint and requested the application of paragraph 2 of Article 170/a of the İİK, legal characterization is a matter for the judge. Since the material fact put forward by the debtors is that the note, which has the character of a negotiable instrument, was given as security for the contract dated September 21, 2012 (a separate document), the request is the subject of an objection to the debt under paragraph 5 of Article 168 and Article 169 of the İİK, and the objection must be examined at a hearing in accordance with Article 169/a of the same Law.” (Assembly of Civil Chambers of the Court of Cassation, Docket No. 2017/333, Decision No. 2019/416, 09.04.2019)

6) Can it be proved by witnesses that a note is a promissory note given as security?

Under Article 201 of the Code of Civil Procedure (HMK), our law prohibits proof by witnesses against a written instrument, except in certain exceptional cases (HMK Art. 203). In other words, where a written instrument exists, the opposing party will have to prove its claim by a written instrument. It should also be noted that, if the opposing party consents, witnesses may be heard even in cases where proof by witnesses against a written instrument is prohibited (HMK Art. 200/para. 2).

“The action concerns a request for a declaration of non-indebtedness in respect of the promissory note subject to the enforcement proceedings. The plaintiff claimed that the note subject to the enforcement proceedings and the action is a promissory note given as security, while the defendant claimed that the promissory note was given because of the plaintiff’s debt to the defendant. In this situation, the burden of proof lies with the plaintiff, who must prove by written evidence that the note in dispute is a promissory note given as security. Under Article 776 of TTK No. 6102, promissory notes contain an unconditional promise to pay a certain sum; it must be proved in writing that, to the contrary, the promissory note is a promissory note given as security. The court erred in allocating the burden of proof. Moreover, it was also contrary to procedure for the court to base its judgment on witness statements. In this action, under Articles 200 and 201 of the HMK, witnesses cannot be heard unless the defendant gives express consent.” (Court of Cassation, 19th Civil Chamber, Docket No. 2017/3501, Decision No. 2019/4894, 23.10.2019)

It should be noted, however, that where there is a requirement of proof by written instrument, witnesses may be heard if there is prima facie written evidence. As is known, prima facie written evidence is a document that, although not sufficient to fully prove the alleged legal transaction, makes that legal transaction appear likely and was issued or sent by the person against whom it is relied on, or by that person’s representative.

“The prohibition of proof against a written instrument is regulated in Article 201 of the HMK, which was in force on the date of the action. Accordingly: “Legal transactions asserted against any kind of claim based on a written instrument and capable of eliminating or reducing the effect and force of the instrument cannot be proved by witnesses, even if they concern an amount of less than two thousand five hundred Turkish liras.” However, where there is a requirement of proof by written instrument, witnesses may be heard if there is prima facie written evidence. Prima facie written evidence is a document that, although not sufficient to fully prove the alleged legal transaction, makes that legal transaction appear likely and was issued or sent by the person against whom it is relied on, or by that person’s representative. (HMK Art. 202)

For a document to be considered prima facie written evidence, three conditions must be met together. These are: 1- There must be a written document, 2- The document must have been issued by the person against whom it is relied on 3- The document must indicate the existence of the legal transaction. In the present case, the plaintiff claimed that the note issued on October 20, 2014 and payable on August 10, 2015, which the defendant made the subject of enforcement proceedings, is a promissory note given as security, and, as evidence of this, submitted the ordinary written document dated January 17, 2015 signed between the parties. It is understood that this document contains the statement “I have received the key to the shop I rented from Mr. Emrah. In return, he undertakes to pay, when it falls due, the note he gave us for the damage we have suffered and as rent”, that the defendant did not deny the signature on the document, and that, against this document, the defendant argued that there was no wording indicating that the note subject to the enforcement proceedings was a promissory note given as security. Therefore, while the court should have accepted that the document dated January 17, 2015, whose signature the defendant did not deny, constitutes prima facie written evidence, assessed the statements of the plaintiff’s witnesses as well, and decided according to the outcome, it was not considered correct to render a judgment based on an erroneous assessment and on the above reasoning, and reversal was required.” (Court of Cassation, 3rd Civil Chamber, Docket No. 2017/7104, Decision No. 2019/3450, 17.4.2019)

If a promissory note given as security clearly states that it was issued as security and identifies the commercial relationship that led to its issuance, the note will in any event be accepted as a promissory note given as security. Otherwise, since the 3 conditions that must exist for a document to be considered prima facie written evidence are not met together, the statements on the note cannot be considered prima facie written evidence. This in turn means that witnesses cannot be heard, by virtue of the prohibition of proof by witnesses against a written instrument set out in HMK Art. 201.

It should also be emphasized that, in employee-employer relationships, the Court of Cassation accepts proof by witnesses as an exception to the “prohibition of proof by witnesses”.

“It is understood from practice that, in some lines of business, employers take such notes for security purposes at the outset, when the employee starts work, in the employment relationship to which the employee and the employer are parties. Undoubtedly, if this is proved, a note taken in this way must be considered a promissory note given as security. On the other hand, employment law has separated from the field of contract law and developed by introducing different rules, taking into account, in the employee-employer relationship, the employer’s stronger social and economic position and the principles of protecting the employee and of interpretation in favor of the employee. For this reason, in employment law, witnesses are heard in favor of the employee against the documents drawn up. The employee’s debt under a note taken from the employee as security is limited to the damage the employee caused to the employer or the amount of cash in the employee’s possession. The employer must prove the damage and that it has a receivable from the plaintiff employee. Such notes taken as security must be considered invalid unless the employer proves its damage or receivable. In the present dispute, although the defendant employer claimed that the plaintiff had collected payments from customers but had not transferred them to the company account, that the company had suffered a loss, and that a note had therefore been issued to cover the loss, no evidence on this point was submitted to the file. Indeed, the plaintiff’s witnesses heard during the proceedings also stated that blank notes were taken from the plaintiff employee as promissory notes given as security on starting work and during employment, and that this was a workplace practice. Since it is understood from the defendant employer’s inability to prove that it had suffered a loss and that it had a receivable from the plaintiff, the nature of the relationship between the parties, the witness statements, the ordinary course of life and the entire content of the file that the note was taken as a promissory note given as security, it was wrong to dismiss the action instead of accepting it, and reversal was required.” (Court of Cassation, 22nd Civil Chamber, Docket No. 2016/18621, Decision No. 2019/16459)

7) Can a promissory note given as security be transferred?

Only instruments that qualify as commercial paper (kıymetli evrak) can be endorsed. Since a promissory note given as security is not commercial paper, it cannot be endorsed. However, it can be transferred under the provisions on the assignment of claims.

From this perspective, although in practice promissory notes given as security bear expressions such as “not endorsable” or “endorsement prohibited”, these expressions in fact have no legal validity. This is because a note that does not qualify as commercial paper cannot be endorsed in any event. Nevertheless, it may be said that the presence of such expressions on the note will at least prevent its endorsement for the purpose of transfer (even though such an endorsement would be invalid), and will in that respect have a deterrent effect.

According to decisions of the Court of Cassation, a right attached to a note that does not qualify as a negotiable instrument can be transferred not by endorsement but only by a duly concluded agreement for the assignment of a claim.

“The defendant ... and subsequently the defendant’s counsel, in their petitions, requested the dismissal of the action, stating that the note subject to the enforcement proceedings was a personal promissory note given as security and that its value had been paid through the accounts of a public institution, that the note did not qualify as a promissory note because it bore no issue date and could not be endorsed, and that the plaintiff holder had no capacity to bring enforcement proceedings or an action. The court dismissed the action on the grounds that, since the note in dispute bore no issue date, it did not qualify as a negotiable instrument and the right embodied in the note could not be transferred by endorsement but could be transferred by assignment of the claim; that there was no duly made assignment of the claim to the plaintiff; that the endorsement on the back of the note did not produce the effects of an assignment of a claim; and that, consequently, since no right to the receivable had arisen, the plaintiff lacked standing to sue in respect of the note in dispute; the judgment was appealed on points of law by counsel for the plaintiff. CONCLUSION: In view of the contents of the file, the evidence on which the decision is based and the reasons requiring it, and although the action should in particular have been dismissed for lack of a procedural requirement in respect of ..., against whom there were no enforcement proceedings, since the decision is correct in its result, it is decided that all the appeals on points of law by counsel for the plaintiff, which are found unjustified, be dismissed and that the judgment, found to be in accordance with procedure and law, be UPHELD” (Court of Cassation, 19th Civil Chamber, Docket No. 2018/66, Decision No. 2019/1944, 25.3.2019)

“On the other hand, a right contained in documents that do not qualify as negotiable instruments (ordinary instruments) cannot be transferred by endorsement; such a right can be transferred only by assignment of the claim. In the absence of an assignment duly made in accordance with Article 184 of the Turkish Code of Obligations No. 6098 (TBK), it must be accepted that a person who acquires by endorsement a note that does not qualify as a negotiable instrument does not have the status of legitimate holder and therefore has no right to bring enforcement proceedings either. In the present case, it is seen that the note on which the enforcement proceedings are based bears no place or date of issue. The note on which the enforcement proceedings are based, bearing no place or date of issue, does not have the character of a negotiable instrument and is in the nature of an ordinary written instrument. It is understood that the note issued by the debtor ... to the order of... was transferred to the creditor by endorsement by the said cooperative, but that, since there is no assignment duly made in accordance with Article 184 of the TBK, the right under the note did not pass to the enforcement creditor ..., and that, in this situation, the said person is not the legitimate holder and therefore has no right to bring enforcement proceedings either.” (12th Civil Chamber, Docket No. 2015/3770, Decision No. 2015/14100, 25.5.2015)

In our opinion, however, if all the endorsements on an ordinary note of debt that does not qualify as a negotiable instrument are full endorsements, the right under that note should be transferable under the provisions on the assignment of claims. This is because, under the TBK, the only requirement for an assignment of a claim to be valid is that the assignment be in writing (TBK Art. 184). Although endorsements on an ordinary note of debt are not legally considered endorsements, they satisfy the written form requirement for the assignment insofar as they clearly show from whom to whom the right was transferred.

The debtor may refuse to pay the new creditor who acquired the promissory note given as security under the provisions on the assignment of claims, on the ground that the secured performance has been rendered and that the debtor therefore owes nothing (a personal defense) (TBK Art. 188).

We believe that it is always advisable to obtain legal support from a lawyer in order to avoid any loss of rights.

This article is a general assessment prepared in accordance with the legislation in force on its date of publication; it does not constitute a legal opinion. This English text is a translation of the Turkish original; in case of any discrepancy, the Turkish version prevails.

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