Gillman v. Chase Manhattan Bank, N.A., 73 N.Y.2d 1 (1988)

A security agreement granting a bank a security interest in a customer’s deposit accounts, allowing the bank to segregate funds without notice if it deems itself insecure, is enforceable absent procedural and substantive unconscionability and does not constitute a preferential transfer under Debtor and Creditor Law § 15 (6-a) when the segregation is involuntary.

Summary

Gillman, the assignee for the benefit of creditors of Jamaica Tobacco, sued Chase Manhattan Bank, arguing that Chase illegally segregated Jamaica Tobacco’s bank deposit. Chase had issued a letter of credit to Jamaica Tobacco and claimed a security interest in its deposits based on an agreement. Chase segregated $372,920.57 from Jamaica Tobacco’s checking account due to the company’s financial difficulties. The New York Court of Appeals held that the security agreement was not unconscionable and that Chase’s actions were permissible under the agreement. The court found no bad faith on Chase’s part and determined that the segregation of funds did not constitute a preferential transfer.

Facts

Jamaica Tobacco obtained a $400,000 letter of credit from Chase to secure a surety bond required for purchasing cigarette stamps on credit. The application included a security agreement granting Chase a lien on all Jamaica Tobacco’s deposit accounts. The agreement allowed Chase to deem itself insecure and apply the deposits to Jamaica Tobacco’s obligations without notice. After the letter of credit was renewed, Chase learned Jamaica Tobacco had violated loan restrictions and subordination agreements. Deeming itself insecure, Chase transferred funds from Jamaica Tobacco’s checking account to another account inaccessible to Jamaica Tobacco, leading to dishonored checks. Aetna eventually drew on the letter of credit.

Procedural History

The Supreme Court found the security agreement unconscionable and awarded damages to the assignee. The Appellate Division reversed, finding the agreement conscionable, no bad faith by Chase, and no preferential transfer. The Court of Appeals granted leave to appeal.

Issue(s)

1. Whether the security agreement granting Chase a lien on Jamaica Tobacco’s deposit accounts was unconscionable and therefore unenforceable.

2. Whether Chase acted in bad faith by segregating Jamaica Tobacco’s checking account without notice and dishonoring checks drawn thereon.

3. Whether Chase’s segregation of the checking account constituted a preferential transfer in violation of Debtor and Creditor Law § 15 (6-a).

Holding

1. No, because the agreement was not procedurally or substantively unconscionable.

2. No, because Chase acted within the terms of the security agreement and had a valid security interest in the account.

3. No, because the transfer was not voluntary, as required by Debtor and Creditor Law § 15 (6-a).

Court’s Reasoning

The court found no procedural unconscionability, noting that Frohlich signed the application with a bold-faced legend referencing the security agreement. The court stated that under general contract law, Jamaica Tobacco was bound by the agreement regardless of Frohlich’s claim that he didn’t read it. The court reasoned that the terms were not substantively unconscionable given Chase’s obligations under the letter of credit and the typical practice of requiring security interests in bank deposits. The court emphasized the importance of allowing the bank to act without notice to protect its security interest. The court stated, “The aim of the Uniform Commercial Code unconscionability provision (UCC 2-302), it has been said, is to prevent oppression and unfair surprise, not to readjust the agreed allocation of the risks in the light of some perceived imbalance in the parties’ bargaining power.” The court found that paragraph 7 of the security agreement granted chase a security interest in the checking account. The court rejected the claim of commercial bad faith, because there was no commercial bad faith in Chase’s actions in segregating the account. The court held that Debtor and Creditor Law § 15 (6-a) applied only to voluntary transfers. The court reasoned that because the segregation was done without knowledge or consent of Jamaica Tobacco, it was not a voluntary transfer.