Israel Discount Bank Ltd. v. Rosen, 59 N.Y.2d 428 (1983)
A bank cannot claim holder in due course status on promissory notes if it had knowledge that the underlying agreement for which the notes were issued was rescindable at will, rendering the notes voidable.
Summary
Israel Discount Bank sought summary judgment against diamond merchants Rosen and Consolidated Jewelry Co. to enforce promissory notes. These notes were initially made out to a diamond seller, Siegman, who then endorsed them to the bank as collateral. The defendants argued failure of consideration because the underlying diamond transactions allowed for rescission without liability, a fact allegedly known to the bank. The New York Court of Appeals reversed the lower courts’ decisions, holding that the defendants presented sufficient evidence to raise triable issues of fact regarding the bank’s knowledge of the voidability of the notes, precluding summary judgment for the bank as a holder in due course.
Facts
Rappaport and Fishman, operating as Consolidated Jewelry Co., and Rosen, regularly purchased diamonds from Siegman, issuing promissory notes in his favor as payment. Siegman then endorsed these notes to Israel Discount Bank to secure loans and collateralize existing debt. The bank later presented the notes for payment, but they were dishonored by Rosen and Consolidated. The bank sued, seeking to enforce the notes as a holder in due course.
Procedural History
The Supreme Court initially denied the bank’s motion for summary judgment in the Rosen case, finding factual issues regarding the bank’s knowledge of the transactions. However, the Supreme Court granted the motion in the Consolidated case. The Appellate Division reversed in Rosen and affirmed in Consolidated, relying on a prior decision, but the Court of Appeals reversed both appellate decisions.
Issue(s)
- Whether the promissory notes issued to Siegman were predicated on agreements rescindable at will, thereby rendering the notes voidable obligations.
- Whether Israel Discount Bank had knowledge of the alleged voidability of the notes at the time it accepted them.
Holding
- Yes, because the defendants presented evidence suggesting that the underlying diamond transactions allowed any party to rescind the agreement without liability, effectively making the agreements and related notes nullities.
- Yes, because the bank’s own invoices and conduct indicated its awareness of the customers’ right to return or refuse diamonds, which would make the bank aware that the obligations were voidable.
Court’s Reasoning
The court reasoned that to claim holder in due course status, the bank must have taken the notes for value, in good faith, and without notice of claims or defenses against them. If the bank knew the underlying agreements were voidable, it could not be a holder in due course. The court found that the defendants submitted sufficient evidence to raise triable issues of fact on this point. Affidavits from all parties stated the agreements were rescindable at will, which meant the notes could be considered voidable obligations. The bank’s own invoices contained a return/refusal clause, providing further evidence the bank was aware of the non-binding nature of the transactions. The Court distinguished this case from First Int. Bank of Israel v Blankstein & Son, where the evidence was insufficient to demonstrate the bank’s knowledge. The Court quoted U.C.C. § 3-304(4)(b) stating that knowledge that the instrument was issued in return for a binding executory promise does not of itself give the purchaser notice of a defense or claim because the code does not require the holder to presume that a party will breach his promise and thereby give rise to a defense to performance.