SOS Oil Corp. v. Norstar Bank of Long Island, 76 N.Y.2d 561 (1990)

A payor bank is strictly accountable under UCC 4-302 for the face amount of a check if it fails to pay, return, or send notice of dishonor before the midnight deadline, regardless of whether it also functions as the depositary bank, unless a valid defense applies.

Summary

Norstar Bank, acting as both payor and depositary bank, mistakenly encoded a $255,000 check from Conlo to SOS Oil for $25,000, crediting SOS with the lesser amount. SOS discovered the error over a year later, after Conlo closed its account and ceased operations. SOS sued Norstar under UCC 4-302. The court held Norstar liable for the $230,000 discrepancy. The Court of Appeals affirmed, holding that Norstar’s defenses (based on a corporate resolution requiring prompt notice of errors and common-law principles) were insufficient to overcome its strict liability under UCC 4-302 for missing the midnight deadline. This case highlights the importance of the midnight deadline rule in ensuring the integrity of commercial paper transactions.

Facts

1. SOS Oil sold petroleum products to Conlo Services, maintaining a “running account.”
2. SOS opened a checking account at Norstar Bank; Conlo also had an account there.
3. Conlo deposited checks directly into SOS’s Norstar account.
4. On July 9, 1984, Conlo deposited a $255,000 check, payable to SOS, into SOS’s account at Norstar. The check and deposit slip correctly stated the amount.
5. Norstar mistakenly encoded the check as $25,000, crediting SOS with that amount and debiting Conlo accordingly.
6. The $25,000 deposit appeared on SOS’s July 31, 1984 statement.
7. SOS discovered the error months later during a dispute with Conlo.
8. SOS notified Norstar on October 31, 1985, demanding the $230,000 difference.
9. By then, Conlo’s account at Norstar was closed, and Conlo was out of business.

Procedural History

1. SOS sued Norstar, alleging UCC 4-302 liability, breach of contract, and negligence.
2. Norstar denied liability, asserting the notification requirements of a “Corporate Resolution” and defenses of estoppel, account stated, contributory negligence, and illegality.
3. The trial court granted summary judgment to SOS on the UCC 4-302 claim.
4. The Appellate Division affirmed.
5. The New York Court of Appeals affirmed.

Issue(s)

1. Whether the notification requirements in the “Corporate Resolution” barred SOS’s claim under UCC 4-302.
2. Whether Norstar’s defenses of estoppel, account stated, contributory negligence, or illegality of the underlying transaction precluded liability under UCC 4-302.

Holding

1. No, because the “Corporate Resolution” applied to situations where Norstar acted as a depositary bank paying items drawn on its customer’s account, not where Norstar failed to properly process a check presented to it as a payor bank.
2. No, because Norstar failed to establish a factual basis for these defenses that would excuse its failure to meet the midnight deadline under UCC 4-302.

Court’s Reasoning

The court reasoned that UCC 4-302 imposes strict accountability on payor banks that fail to act on a check before the midnight deadline. The court stated: “Absent certain defenses, a payor bank, even when also functioning as a depositary bank, may by the operation of UCC 4-302 be held accountable to a payee for the amount of a check presented for immediate payment when it fails to pay, return or send notice of dishonor before the midnight deadline”. This rule promotes efficiency and certainty in commercial paper transactions. The court rejected Norstar’s argument that the “Corporate Resolution” barred SOS’s claim, finding the resolution applied to the bank’s role as a depositary bank, governing situations where the customer receives a statement and underlying instruments. The court stated that “By its very language, paragraph 9 plainly is directed to situations where Norstar is acting as depositary and the customer receives both a statement of account and the underlying instruments of payment, such as checks, that are the basis for the claim of error — not the situation at issue here.”
As for Norstar’s common-law defenses, the court found no factual basis to support them. The court rejected the estoppel argument, noting that “such a defense, if allowable at all under UCC 4-302, would require some factual showing that the bank’s failure to meet its midnight deadline was a consequence of justifiable reliance on a representation, action or failure to act on the part of SOS”. The court emphasized that comparative negligence is not applicable in UCC cases, citing Putnam Rolling Ladder v Manufacturers Hanover Trust Co., and that the legality of the underlying transaction was irrelevant to Norstar’s liability under UCC 4-302. Ultimately, the court prioritized the UCC’s objectives of certainty and predictability in commercial transactions, emphasizing that Norstar could have passed liability upstream to the encoding bank had it not been the same entity. The court concluded by observing that “It has been estimated that overwhelmingly all items first presented are paid; moreover, a payor bank ordinarily can minimize or avoid the remaining exposure by passing liability upstream to the bank that actually made the mistake.”