New York Law Review

Tag: Commercial Reasonableness

  • B.D.G.S., Inc. v. Savings Bank of Utica, 10 N.Y.3d 108 (2008): Bank’s Duty of Care Regarding Restrictive Indorsements

    B.D.G.S., Inc. v. Savings Bank of Utica, 10 N.Y.3d 108 (2008)

    Compliance with a restrictive indorsement on a check does not automatically satisfy the requirement of reasonable commercial standards for a bank under UCC § 3-419(3); a bank’s liability for accepting improperly indorsed checks is not limited to remaining proceeds if it fails to act in a commercially reasonable manner.

    Summary

    B.D.G.S., Inc., sued Savings Bank of Utica (SBU) for accepting checks with allegedly improper restrictive indorsements. The checks, intended for B.D.G.S. as rent payments, were made out to “DBGS, Inc.” and restrictively indorsed “Pay to the order of Beechgrove Warehouse For Deposit” into Beechgrove’s account at SBU. B.D.G.S. argued that SBU failed to act in a commercially reasonable manner. The New York Court of Appeals held that compliance with the restrictive indorsements doesn’t, as a matter of law, establish that SBU acted with reasonable commercial standards under UCC § 3-419(3), and that SBU’s liability was not limited to any remaining proceeds because it failed to satisfy the statutory criteria.

    Facts

    B.D.G.S. owned a warehouse managed by Balio and Duniec, who formed Beechgrove Warehouse Corporation. Rite-Aid, a tenant of B.D.G.S., made rent payments via checks payable to “DBGS, Inc.” (a typo). Balio and Duniec indorsed sixteen of these checks, along with a large refund check from Niagara Mohawk, “Pay to the order of Beechgrove Warehouse For Deposit” and deposited them into Beechgrove’s SBU account. B.D.G.S. discovered the misdirection of funds and sued SBU, alleging the bank improperly accepted the checks.

    Procedural History

    B.D.G.S. moved for partial summary judgment on liability, which was denied. SBU’s cross-motion for summary judgment was also denied. A jury found that SBU did not act in accordance with reasonable commercial standards. The trial court denied SBU’s post-trial motions and entered judgment for B.D.G.S. The Appellate Division affirmed. The New York Court of Appeals granted SBU leave to appeal and affirmed the Appellate Division’s decision.

    Issue(s)

    1. Whether compliance with a restrictive indorsement constitutes acting in accordance with reasonable commercial standards as a matter of law under UCC § 3-419(3)?

    2. Whether SBU’s liability under UCC § 3-419(3) is limited to the amount of proceeds remaining in its possession?

    Holding

    1. No, because there are situations where following the indorsements would not be reasonable; for example, if the bank had good cause to know the indorsements were forged.

    2. No, because SBU did not act in conformity with reasonable commercial standards, the defense under UCC § 3-419(3) is unavailable, and the bank’s liability is not limited to the amount of the proceeds remaining in its possession.

    Court’s Reasoning

    The Court reasoned that UCC § 3-419(3) limits a depositary bank’s liability in an action for money had and received only when the bank complies with restrictive indorsements, acts in good faith, and acts in accordance with reasonable commercial standards. The Court distinguished Spielman v. Manufacturers Hanover Trust Co., noting that Spielman involved a suit by the drawer of a check against the depositary bank, whereas this case involves a suit by the payee. The Court stated that compliance with restrictive indorsements is not necessarily commercially reasonable as a matter of law under all circumstances. The Court relied on expert testimony indicating aspects of the transactions should have raised red flags for SBU, and testimony that SBU did not comply with its own procedures. Because SBU failed to act in accordance with reasonable commercial standards, the protection of limited liability under UCC § 3-419(3) did not apply. The Court stated that when a bank fails to meet the requirements of 3-419(3), the bank’s liability is determined by the common-law action for money had and received as it existed prior to the enactment of the UCC. Quoting Henderson v. Lincoln Rochester Trust Co., the Court stated that a collecting bank has “an obligation to pay the proceeds collected to the true payee owner in the absence of a valid indorsement.”

  • Shimamoto v. S&F Warehouses, Inc., 99 N.Y.2d 165 (2002): Commercial Reasonableness in Warehouse Lien Sales

    99 N.Y.2d 165 (2002)

    When enforcing a warehouseman’s lien under UCC 7-210, a failure to comply with the statute’s requirements gives rise to a cause of action for damages, and while a “willful violation” results in conversion damages, a non-willful violation requires a determination of whether the sale was commercially reasonable.

    Summary

    Plaintiff, an administrator of an estate, sued a warehouse, trucking company, law firm, and auctioneer for conversion and other claims related to the sale of stored fabric to satisfy a warehouse lien. The New York Court of Appeals held that while the defendants’ actions did not amount to a willful violation justifying conversion damages under UCC 7-210(9), a question remained regarding the commercial reasonableness of the sale. The court emphasized that a failure to demand return of the goods is not a prerequisite to a claim under UCC 7-210(9) when a conversion claim is not viable. The case was remitted for a new trial on the commercial reasonableness of the sale and entitlement to damages.

    Facts

    Bart Schwartz, a textile importer, stored fabric at S&F Warehouses. A dispute arose, and Schwartz fell behind on storage payments. The warehouse retained a law firm to collect the debt, who then hired an auctioneer. A “Notice of Sale on Lien” was sent to Schwartz, stating the lien amount and a planned auction. The notice lacked a statement of Schwartz’s right to challenge the lien under UCC 7-211. The auction occurred, with S&F Warehouses bidding on and acquiring the fabric for $25,000. Schwartz later inquired about his goods and was informed of the sale. He did not attempt to settle the account or recover the goods.

    Procedural History

    Plaintiff sued, alleging conversion, due process violations, and negligence. The Supreme Court directed a verdict against the warehouse defendants. The Appellate Division reversed, finding no willful violation and remanding for trial on commercial reasonableness. On remand, the Supreme Court dismissed the remaining claim due to plaintiff’s failure to demand return of the goods, which the Appellate Division affirmed. The Court of Appeals granted leave to appeal.

    Issue(s)

    1. Whether the defendants committed a “willful violation” of UCC 7-210(9) by failing to include notice of UCC 7-211 rights in the Notice of Sale on Lien, thus entitling plaintiff to conversion damages.

    2. Whether a demand for return of goods is a condition precedent to commencing an action for damages under UCC 7-210(9) based on a non-commercially reasonable sale.

    3. Whether the plaintiff demonstrated entitlement to damages as a result of a commercially unreasonable sale.

    Holding

    1. No, because the evidence did not demonstrate a reckless disregard for legal obligations amounting to a willful violation of UCC 7-210(9).

    2. No, because a demand for return of goods is not required in a statutory cause of action based on failure to comply with the foreclosure process under UCC 7-210 when a conversion claim is not viable.

    3. Undetermined; the case was remitted to determine whether the sale was commercially unreasonable and, if so, the resulting damages.

    Court’s Reasoning

    The court clarified that UCC 7-210(9) defines the circumstances under which different types of damages are awarded, based on the degree of culpability. It adopted the Appellate Division’s definition of “willful violation” as a “grossly reckless disregard for legal obligations.” The court agreed that the defendants’ actions did not rise to that level, even with the attorney’s failure to review the notice of sale. It emphasized that the plaintiff’s remedy was limited to a statutory cause of action challenging the sale under UCC 7-210(9), and that the statute does not require a demand for return of goods as a prerequisite. The court distinguished I.C.C. Metals v. Municipal Warehouse Co., as that case involved common-law negligence and conversion claims, not a warehouse lien foreclosure. While acknowledging the failure to include notice of section 7-211 rights was a violation, the plaintiff failed to demonstrate how that specific omission caused damages, as the validity of the lien was conceded. The court remanded the case for a determination of whether the sale was commercially reasonable, and if so, the actual damages caused. The plaintiff would need to demonstrate how aspects of the sale fell short of what a diligent warehouse lienholder would do, resulting in lower proceeds. Quoting UCC 7-210(1), the court noted: “the fact that a better price could have been obtained by a sale at a different time or in a different method from that selected by the warehouseman is not of itself sufficient to establish that the sale was not made in a commercially reasonable manner.”

  • Marine Midland Bank v. Russo Produce Co., 50 N.Y.2d 31 (1980): Commercial Reasonableness of Collateral Sale

    Marine Midland Bank v. Russo Produce Co., 50 N.Y.2d 31 (1980)

    When a secured party sells collateral after default, the sale’s commercial reasonableness, including the price obtained, is a question of fact for the jury, and an appellate court cannot substitute its factual findings for a jury verdict supported by sufficient evidence.

    Summary

    Marine Midland Bank sold stock held as collateral after Russo Produce Co. defaulted, and Russo claimed the sale was improper because the price was too low. Russo presented evidence at trial suggesting the corporation’s primary asset, an oil tanker, was worth significantly more than the sale price. The jury found in favor of Russo, but the trial court set aside the verdict as against the weight of the evidence and ordered a new trial. The Appellate Division went further, entering judgment for the bank. The Court of Appeals reversed, holding that because there was sufficient evidence to support the jury’s verdict, the Appellate Division erred in substituting its own factual findings and entering judgment for the bank; its power was limited to ordering a new trial.

    Facts

    Russo Produce Co. defaulted on a loan from Marine Midland Bank, for which it had pledged stock as collateral.

    The bank subsequently sold the stock in a private sale.

    Russo challenged the sale, arguing that the sale price was unreasonably low, violating section 9-504 of the Uniform Commercial Code.

    At trial, Russo presented evidence suggesting the corporation’s sole asset, an oil tanker, was worth at least $1,650,000 at the time of the sale, significantly more than the price obtained by the bank.

    Procedural History

    The trial court initially entered a verdict for Russo.

    The trial court then set aside the jury verdict as against the weight of the evidence and ordered a new trial.

    The Appellate Division reversed the trial court’s order for a new trial and entered judgment for Marine Midland Bank, dismissing Russo’s complaint.

    Russo appealed to the New York Court of Appeals.

    Issue(s)

    Whether the Appellate Division erred in entering judgment for the defendant (Marine Midland Bank) after the trial court ordered a new trial, when there was sufficient evidence presented at trial to support the jury’s verdict.

    Holding

    Yes, because the Appellate Division improperly substituted its factual findings for those of the jury when sufficient evidence supported the jury’s verdict; the Appellate Division’s authority was limited to ordering a new trial in such circumstances.

    Court’s Reasoning

    The Court of Appeals emphasized the role of the jury as the fact-finder. The court noted that the Appellate Division exceeded its authority by making new factual findings and substituting them for the jury’s verdict. The court cited Cohen v. Hallmark Cards, 45 NY2d 493, 498, stating that the Appellate Division only had the power to order a new trial “unless there was insufficient evidence to support the verdict.” Because Russo presented sufficient evidence regarding the oil tanker’s value from which the jury could have inferred that the sale price was unreasonably low, the Appellate Division’s entry of judgment for the bank was deemed erroneous. The court implicitly reinforced the importance of UCC 9-504 regarding commercially reasonable sales of collateral, stating the core question was one of fact for the jury to decide. The decision underscores that the determination of commercial reasonableness is intensely fact-dependent, and appellate courts should defer to jury findings when supported by evidence, even if the appellate court might have reached a different conclusion on the same facts.