Hydrocarbon Processing Corp. v. Chemical Bank New York Trust Co., 16 N.Y.2d 147 (1965)
A collecting bank owes its principal ordinary care in discharging its duty, but is not necessarily precluded from collecting its own debt by lawful means, so long as it acts in good faith and with due diligence.
Summary
Hydrocarbon Processing Corp. sued Chemical Bank for failing to remit funds from a draft collection in Cuba. Chemical Bank offset funds it held for a Cuban bank (Banco) against a debt owed to it by a nationalized Cuban entity (Electric). The court held that Chemical Bank was not liable to Hydrocarbon because it acted with ordinary care and in good faith. The bank’s actions regarding unrelated funds did not constitute a breach of duty to Hydrocarbon, and the plaintiff could not selectively benefit from the Cuban nationalization while preventing the bank from doing the same.
Facts
Hydrocarbon, a creditor-vendor, deposited a sight draft with Chemical Bank for collection from its debtor-vendee in Cuba. Funds reached Banco, a Cuban bank, but were not transmitted due to lack of an export permit and subsequent nationalization of Banco. Banco’s assets and liabilities were merged into Nacional by the Cuban government. Electric, also nationalized, owed Chemical Bank $750,000. Chemical Bank received instructions from Whitney National Bank to credit Banco’s account in London. Chemical Bank then charged Banco’s London account, credited Nacional, and offset the amount against Electric’s debt.
Procedural History
Hydrocarbon sued Chemical Bank, arguing the bank improperly offset the funds. The Appellate Division agreed with Hydrocarbon. Chemical Bank appealed to the New York Court of Appeals.
Issue(s)
Whether Chemical Bank, as a collecting bank, breached a duty to Hydrocarbon by offsetting funds held for a Cuban bank against a debt owed to it by a related, nationalized Cuban entity, when the funds collected on Hydrocarbon’s draft were blocked due to Cuban regulations.
Holding
No, because Chemical Bank acted with ordinary care and in good faith, and its actions regarding the unrelated funds did not constitute a breach of duty owed to Hydrocarbon as a collecting agent.
Court’s Reasoning
The court emphasized that the Cuban nationalization’s effect and the propriety of the bank’s offset were not the central issues. The key question was whether Chemical Bank, as a collecting agent, breached a duty to Hydrocarbon. The court cited Uniform Commercial Code § 4-202, stating a collecting bank owes its principal “ordinary care.” The bank fulfilled its duties under this section. The court reasoned that holding the bank liable would effectively make it a guarantor of the draft, which is not the intent of the law. Citing Thack v. First Nat. Bank & Trust Co., the court noted that a collecting bank is not precluded from collecting its own debt by lawful means, so long as it acts in good faith. The court found no evidence of collusion or bad faith. The fund in dispute came into the bank’s possession in good faith through an unrelated transaction. The court reasoned, “If, then, the defendant could properly apply the money to its own debt, at least as opposed to the plaintiff, there would be no purpose in requiring the bank to notify the plaintiff of the fund’s existence, and no liability would flow from the failure to do so.” The court rejected the argument that the bank was obligated to notify Hydrocarbon of the existence of the Banco credit. The court reversed the Appellate Division’s order and entered judgment for Chemical Bank.