New York Law Review

Tag: Setoff

  • Murray v. City of New York, 64 N.Y.2d 676 (1984): Amending Pleadings and Judicial Discretion

    Murray v. City of New York, 64 N.Y.2d 676 (1984)

    A trial court’s decision to allow amendment of a pleading will only be overturned on appeal if the court abused its discretion as a matter of law.

    Summary

    This case concerns the propriety of a trial court’s decision to allow the City of New York to amend its answer to include defenses of setoff and apportionment. The lower courts granted the City’s motion, and the Appellate Division granted leave to appeal and certified the question of whether its order was properly made. The New York Court of Appeals affirmed, holding that, absent a clear lack of merit in the proposed defenses or a showing of prejudice to the plaintiff, the lower courts did not abuse their discretion. The Court of Appeals clarified that its review was limited to whether the Appellate Division had the power to grant such relief, not the underlying merits of the amendment.

    Facts

    The specific facts underlying the plaintiff’s claim against the City are not detailed in the Court of Appeals memorandum opinion. The key fact is that the defendant, City of New York, sought to amend its answer to include the defenses of setoff and apportionment. The trial court granted the City’s motion to amend.

    Procedural History

    1. The trial court granted the defendant City’s motion to amend its answer.
    2. The Appellate Division granted leave to appeal to the Court of Appeals.
    3. The Appellate Division certified the question of whether its order was properly made.
    4. The Court of Appeals affirmed the Appellate Division’s order.

    Issue(s)

    Whether the Appellate Division’s order, which upheld the trial court’s decision to allow the City of New York to amend its answer to include defenses of setoff and apportionment, was properly made.

    Holding

    Yes, because the Court of Appeals found no abuse of discretion as a matter of law in permitting the amendment. The Court reasoned that the proposed defenses did not plainly lack merit, and no showing of prejudice to the plaintiff had been made.

    Court’s Reasoning

    The Court of Appeals based its decision on the principle that the grant or denial of permission to amend pleadings is generally within the discretion of the lower courts. The Court stated that it could not overturn the lower court’s decision unless there was an abuse of discretion as a matter of law. The Court referenced Siegel, Practice Commentaries, McKinney’s Cons Laws of NY, Book 7B, C3025:6, p 477; C3025:ll, p 481, highlighting the standards for allowing amendments to pleadings. The Court emphasized it’s limited role: “In the absence of such abuse, this court has no power to review the grant of the discretionary remedy.” The Court explicitly limited its review to whether the Appellate Division had the *power* to grant the relief, not whether the decision to grant the relief was correct on the merits. The Court cited Brady v Ottaway Newspapers, 63 NY2d 1031 to reinforce this point.

  • Matter of Estate of Cohen v. State, 49 N.Y.2d 11 (1979): State’s Right to Setoff Against Malpractice Award

    Matter of Estate of Cohen v. State, 49 N.Y.2d 11 (1979)

    The State may set off the cost of care provided to a patient against a malpractice award obtained by the patient against the State, unless estopped or otherwise precluded by law or equity; attorney’s fees are not deducted pro rata from setoff.

    Summary

    This case addresses the State’s right to set off the cost of caring for an individual against a malpractice award that individual received from the State. The New York Court of Appeals held that the State could indeed offset the award by the amount it spent on the patient’s care after a specific date. The Court dismissed arguments that the setoff was barred due to the State’s failure to assert it as a counterclaim in the original malpractice suit, or that the State should be estopped or precluded from asserting the setoff under the doctrines of unclean hands. The court agreed that a specific portion of the setoff was incorrect and adjusted it, and affirmed the lower court’s decision in all other respects.

    Facts

    The appellant, Cohen, successfully sued the State of New York for malpractice in the Court of Claims. Subsequent to May 11, 1966, the State provided care to the appellant, incurring costs totaling $61,335.38. The State sought to set off this amount against the malpractice award.

    Procedural History

    The case originated in the Court of Claims, where Cohen was awarded damages for malpractice. The State then sought to set off the cost of care provided to Cohen against this award. The Appellate Division affirmed the State’s right to the setoff, with a minor adjustment. This appeal followed, challenging the Appellate Division’s decision.

    Issue(s)

    1. Whether the State’s failure to assert its claim for reimbursement of care costs as a counterclaim in the Court of Claims barred it from later asserting a setoff against the malpractice award.

    2. Whether the State should be estopped from asserting its setoff.

    3. Whether the State should be precluded from asserting its setoff under the doctrine of unclean hands.

    4. Whether the amount of the State’s setoff should be reduced by a pro rata share of attorney’s fees incurred by appellant in the successful prosecution of his malpractice claim.

    Holding

    1. No, because the State’s failure to assert the claim as a counterclaim does not bar the setoff.

    2. No, because the facts do not support the application of estoppel against the State.

    3. No, because the doctrine of unclean hands does not apply to preclude the State’s setoff.

    4. No, because there is no legal basis to reduce the setoff by a pro rata share of attorney’s fees.

    Court’s Reasoning

    The Court of Appeals agreed with the Appellate Division’s determinations, as articulated in Justice Casey’s opinion. The Court found no merit in the appellant’s arguments that the setoff was barred due to the failure to assert it as a counterclaim, or that the State should be estopped or precluded from asserting the setoff based on unclean hands. The court implicitly relied on principles of sovereign immunity and the State’s inherent right to recoup costs associated with the care it provides. The concession by the State regarding a specific portion of the setoff indicates a willingness to correct errors but does not undermine the overall principle. Further, no legal precedent or equitable principle required the State to reduce its setoff by a pro rata share of the attorney’s fees incurred by Cohen in prosecuting the malpractice claim. The court affirmed the order as modified, emphasizing the validity of the State’s setoff right in such circumstances.

  • Marine Midland Bank-New York v. Graybar Electric Co., 41 N.Y.2d 703 (1977): Bank’s Holder in Due Course Status and Setoff Rights

    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.

  • Chase Manhattan Bank v. State, 40 N.Y.2d 590 (1976): Actual Notice Required to Prevent Setoff by Account Debtor

    Chase Manhattan Bank v. State, 40 N.Y.2d 590 (1976)

    Under UCC § 9-318(1)(b), an account debtor can set off claims against the assignor that accrue before the account debtor receives actual notification of the assignment; constructive notice via UCC filing is insufficient to prevent setoff.

    Summary

    Chase Manhattan Bank, as assignee of Francis Brown, sought payment from the State for engineering services Brown provided. The State claimed a right to set off unpaid withholding and unemployment insurance taxes owed by Brown. Chase argued its perfected security interest, filed before the State’s tax claims arose, barred the setoff. The New York Court of Appeals held that the State could set off the tax debt because it did not receive actual notice of Chase’s assignment before the tax claims accrued. Constructive notice through UCC filing was insufficient; actual notice is required to preclude an account debtor’s right to set off subsequent debts.

    Facts

    In 1964, Brown contracted with the State Department of Transportation for highway survey and design work.

    In November 1964, Brown granted Chase a security interest in all his personal property, including contract rights and accounts receivable, to secure existing and future loans.

    Chase perfected its security interest by filing a financing statement on December 14, 1964.

    From 1966 to 1967, Chase made multiple loans to Brown totaling over $700,000.

    Brown completed his work for the State in 1968, but a payment dispute arose, leading to litigation and a judgment in Brown’s favor.

    In 1968 and 1969, the State accumulated claims against Brown for unpaid withholding and unemployment insurance taxes, totaling $14,087.97.

    Procedural History

    Chase, as Brown’s assignee, filed an Article 78 proceeding seeking payment of the judgment against the State.

    Special Term awarded judgment to Chase.

    The Appellate Division modified the judgment to allow the State’s setoff for unpaid taxes.

    Chase appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether, under the Uniform Commercial Code, a perfected assignment bars a subsequently arising setoff in favor of an account debtor who is without actual notice of the assignment.

    2. Whether filing with the Secretary of State constitutes actual notice of the assignment to the State when the State is both the account debtor and the official UCC filing repository.

    Holding

    1. No, because UCC § 9-318(1)(b) requires actual notice to the account debtor to preclude the right of setoff, and constructive notice through filing is insufficient.

    2. No, because filing with the Secretary of State as a UCC filing repository does not constitute actual notice to the State as an account debtor.

    Court’s Reasoning

    The court reasoned that UCC § 9-318(1)(b) subordinates the rights of an assignee to any claims of the account debtor that accrue before the account debtor receives notification of the assignment. UCC § 1-201(26) defines “receives” as when notice comes to the person’s attention or is duly delivered to their place of business. Taken together, these provisions establish a requirement of actual notice.

    The court emphasized that this interpretation aligns with the underlying policies of the UCC’s notice filing provisions. While the UCC simplifies secured transactions through filing, the protection afforded by filing is not absolute. “Section 9-318, in its first subdivision, which, as noted, subordinates the rights of assignees to defenses and claims of account debtors, was said by its drafters to make no substantial change in prior law”. Prior law required actual notice. The court reasoned that “receives notification” makes no sense except as a reference to actual notice rather than constructive notice.

    The court noted the assignee can protect its rights by verifying the specific accounts assigned and notifying account debtors of the assignment.

    Regarding whether filing with the Secretary of State constituted actual notice to the State, the court found this view unrealistic. A paper filed solely as a commercial repository to give constructive notice to all the world is not actual notice. The official receiving the financing statement has no duty beyond filing and indexing the statement; that indexing and filing is for the benefit of outsiders whose duty it may be to search the index and read the statements before they extend credit.

  • Hydrocarbon Processing Corp. v. Chemical Bank New York Trust Co., 16 N.Y.2d 147 (1965): Bank’s Duty of Care in International Draft Collection

    Hydrocarbon Processing Corp. v. Chemical Bank New York Trust Co., 16 N.Y.2d 147 (1965)

    A collecting bank owes its principal ordinary care in discharging its duty, but is not necessarily precluded from collecting its own debt by lawful means, so long as it acts in good faith and with due diligence.

    Summary

    Hydrocarbon Processing Corp. sued Chemical Bank for failing to remit funds from a draft collection in Cuba. Chemical Bank offset funds it held for a Cuban bank (Banco) against a debt owed to it by a nationalized Cuban entity (Electric). The court held that Chemical Bank was not liable to Hydrocarbon because it acted with ordinary care and in good faith. The bank’s actions regarding unrelated funds did not constitute a breach of duty to Hydrocarbon, and the plaintiff could not selectively benefit from the Cuban nationalization while preventing the bank from doing the same.

    Facts

    Hydrocarbon, a creditor-vendor, deposited a sight draft with Chemical Bank for collection from its debtor-vendee in Cuba. Funds reached Banco, a Cuban bank, but were not transmitted due to lack of an export permit and subsequent nationalization of Banco. Banco’s assets and liabilities were merged into Nacional by the Cuban government. Electric, also nationalized, owed Chemical Bank $750,000. Chemical Bank received instructions from Whitney National Bank to credit Banco’s account in London. Chemical Bank then charged Banco’s London account, credited Nacional, and offset the amount against Electric’s debt.

    Procedural History

    Hydrocarbon sued Chemical Bank, arguing the bank improperly offset the funds. The Appellate Division agreed with Hydrocarbon. Chemical Bank appealed to the New York Court of Appeals.

    Issue(s)

    Whether Chemical Bank, as a collecting bank, breached a duty to Hydrocarbon by offsetting funds held for a Cuban bank against a debt owed to it by a related, nationalized Cuban entity, when the funds collected on Hydrocarbon’s draft were blocked due to Cuban regulations.

    Holding

    No, because Chemical Bank acted with ordinary care and in good faith, and its actions regarding the unrelated funds did not constitute a breach of duty owed to Hydrocarbon as a collecting agent.

    Court’s Reasoning

    The court emphasized that the Cuban nationalization’s effect and the propriety of the bank’s offset were not the central issues. The key question was whether Chemical Bank, as a collecting agent, breached a duty to Hydrocarbon. The court cited Uniform Commercial Code § 4-202, stating a collecting bank owes its principal “ordinary care.” The bank fulfilled its duties under this section. The court reasoned that holding the bank liable would effectively make it a guarantor of the draft, which is not the intent of the law. Citing Thack v. First Nat. Bank & Trust Co., the court noted that a collecting bank is not precluded from collecting its own debt by lawful means, so long as it acts in good faith. The court found no evidence of collusion or bad faith. The fund in dispute came into the bank’s possession in good faith through an unrelated transaction. The court reasoned, “If, then, the defendant could properly apply the money to its own debt, at least as opposed to the plaintiff, there would be no purpose in requiring the bank to notify the plaintiff of the fund’s existence, and no liability would flow from the failure to do so.” The court rejected the argument that the bank was obligated to notify Hydrocarbon of the existence of the Banco credit. The court reversed the Appellate Division’s order and entered judgment for Chemical Bank.

  • James Talcott, Inc. v. Winco Sales Corp., 14 N.Y.2d 267 (1964): Counterclaims Allowed Against Assignees When Arising From the Same Transaction

    James Talcott, Inc. v. Winco Sales Corp., 14 N.Y.2d 267 (1964)

    A defendant can assert a counterclaim against an assignee of a contract if the counterclaim arises from the same transaction as the assigned claim, even if the counterclaim matures after the assignment.

    Summary

    Winco, a distributor, had an agreement with C&H, a manufacturer, regarding fan sales to Klein’s. C&H assigned its accounts receivable from Winco to Talcott. When Talcott sued Winco for the unpaid balance, Winco counterclaimed for freight charges and commissions. The lower courts disallowed the counterclaims because they matured after the assignment. The New York Court of Appeals reversed, holding that counterclaims arising from the same transaction as the assigned claim (recoupment) are allowed, even if they mature after the assignment. This distinguishes recoupment from setoff, which requires the claim to mature before assignment.

    Facts

    Winco was selling fans to Klein’s, purchased from C&H. C&H wanted to acquire Klein’s as a direct customer and negotiated an agreement with Winco.
    Winco was to become C&H’s distributor for sales to Klein’s in 1956, receiving a 50-cent commission per fan sold.
    Winco placed a written order with C&H on February 9, 1956, specifying the commission arrangement.
    On May 11, 1956, C&H shipped fans to Winco, with an invoice stating “Freight is allowed on this invoice upon receipt of paid freight bill.”
    C&H assigned the receivable from this invoice to Talcott on May 11, and Winco was notified.
    Winco paid the freight bill around May 28, 1956, and sent a copy to C&H.
    By July 16, 1956, Klein’s had paid for 5,229 fans handled by Winco.
    On August 14, 1956, Winco demanded commissions from C&H and sent a partial payment for the May 11 invoice.
    Winco received written notice of the assignment to Talcott on August 27, 1956.

    Procedural History

    Talcott, as assignee, sued Winco for the unpaid invoice balance.
    Winco counterclaimed for freight charges and commissions.
    The trial court ruled for Talcott but allowed Winco’s counterclaims for freight and commissions on 5,229 fans.
    The Appellate Term modified the judgment, striking out Winco’s counterclaims, reasoning that the claims matured after the assignment.
    The Appellate Division affirmed.
    Winco appealed to the New York Court of Appeals.

    Issue(s)

    Whether Winco’s counterclaims for freight charges and commissions, which matured after C&H assigned its receivable to Talcott, are allowable against Talcott.

    Holding

    Yes, because Winco’s counterclaims arose from the same contract or transaction that resulted in the receivable assigned to Talcott, making them valid counterclaims even though they matured after the assignment. The Court of Appeals reversed and ordered a new trial, holding that the counterclaims were in the nature of recoupment.

    Court’s Reasoning

    The Court distinguished between counterclaims in the nature of setoff and recoupment.
    Prior to 1936, Section 266 of the Civil Practice Act defined counterclaims as either arising out of the same transaction (recoupment) or any other cause of action on contract (setoff).
    Section 267 restricted setoff counterclaims against assignees to those existing at the time of assignment.
    Amendments in 1936 were intended to liberalize procedure, not restrict counterclaims in the nature of recoupment.
    The Court reasoned that restricting recoupment counterclaims “might in effect change the [defendant’s] contract by forcing him to give credit to the assignor where none had been intended or contemplated”.
    The Court cited Seibert v. Dunn, clarifying that recoupment claims are assertable against an assignee even if maturing after the assignment.
    The court found Winco’s counterclaims arose from the same contract as the assigned receivable, as evidenced by the order of February 9.
    Because the trial court made no findings of fact, a new trial was warranted to determine the exact amount of commissions owed and to address the unresolved issue of a $6,000 credit claimed by Talcott.