Marine Midland Bank-New York v. Graybar Electric Co., 41 N.Y.2d 703 (1977)

A bank does not become a holder in due course of a check merely by giving a provisional credit for the check and then unilaterally applying that credit to a debt owed to the bank when the credit is later reversed due to a stop payment order.

Summary

Marine Midland Bank sought to recover from Graybar Electric on a check Graybar had issued to Dynamics Corp. The bank had provisionally credited Dynamics’ account for the check and then set off the balance against Dynamics’ debt to the bank. Graybar stopped payment on the check. The court held that the bank was not a holder in due course because it had only given provisional credit, and therefore could not recover from Graybar. The court emphasized that a bank’s unilateral application of provisional credit does not constitute giving value under the UCC, especially when the credit is later reversed.

Facts

Dynamics Corp. had loans from Marine Midland Bank. In July 1972, Dynamics requested an extension on a $4,420,000 note, which the bank refused. The bank informed Dynamics it would set off balances in Dynamics’ accounts against the debt. Among the items deposited in Dynamics’ account on July 28, 1972, was a check from Graybar Electric for $137,989.47 payable to Dynamics’ Waring Products Division. The bank forwarded the check for payment, but Graybar had issued a stop payment order on July 31, 1972. Graybar subsequently issued a replacement check for a lesser amount. The bank then sued Graybar to collect on the original check, asserting holder in due course status.

Procedural History

The bank sued Graybar in Special Term, seeking payment on the check as a holder in due course. Graybar interpleaded Dynamics. Special Term denied the bank’s motion for summary judgment, dismissed its complaint, denied Graybar’s request for discharge, and denied Dynamics’ cross-motion. The Appellate Division affirmed. The Court of Appeals affirmed, but on different grounds than the lower courts.

Issue(s)

1. Whether a bank is entitled to set off a check payable to its customer, deposited in an account with the bank, against that customer’s indebtedness to the bank when a stop payment order is placed on the check?

2. Whether a bank that provisionally credits a customer’s account for a check and then sets off the balance against the customer’s debt becomes a holder in due course, thus precluding a stop payment order?

Holding

1. No, because under the circumstances, the bank did not become a holder in due course.

2. No, because the provisional credit given by the bank did not constitute “value” under the Uniform Commercial Code, and the bank’s unilateral action did not elevate the transaction to the level of those instances where value is considered to be given.

Court’s Reasoning

The court reasoned that while a bank generally has the right to set off a borrower’s accounts against matured indebtedness, setting off on the day the loan is due is premature. However, the crucial point was whether the bank gave value for the check. The bank argued it gave value by acquiring a security interest in the check when it applied the credit to Dynamics’ debt. The court disagreed, finding the credit was provisional and reversed upon notice of the stop payment order. The court distinguished this situation from cases where the bank actually extinguishes the debt. “To say that the bank was doing something of advantage to Dynamics by applying the credit to that depositor’s indebtedness is to ignore what actually occurred. The bank was merely seeking to protect itself and not giving value, in any traditional sense, or under the Uniform Commercial Code.” Since the bank did not give value, it could not be a holder in due course and therefore could not recover on the check. The court emphasized that its determination was based on the conclusion that what the bank did was merely give a provisional credit for the Graybar check. “That the bank unilaterally agreed to apply this provisional credit to Dynamics’ indebtedness should not elevate the transaction to the level of those instances where value is considered to be given under the Uniform Commercial Code.” Therefore, since the bank did not give value, it is not a holder in due course and cannot recover on the check.