New York Law Review

Tag: UCC

  • Getty Petroleum Corp. v. American Express Travel Related Services Co., 67 N.Y.2d 619 (1986): Drawer’s Lack of Direct Action Against Depositary Bank for Improperly Endorsed Checks

    Getty Petroleum Corp. v. American Express Travel Related Services Co., 67 N.Y.2d 619 (1986)

    A drawer of a check generally does not have a direct cause of action against a depositary bank for collecting an improperly endorsed check.

    Summary

    Getty Petroleum Corp., as the drawer of certain checks, sued Citibank, the depositary bank, for improperly collecting the checks without the named payee’s endorsement. Citibank moved to dismiss, arguing it owed no direct duty to the drawer. The trial court denied the motion, but the Appellate Division reversed, dismissing the complaint. The New York Court of Appeals affirmed, holding that a drawer generally lacks a direct cause of action against a depositary bank for collecting improperly endorsed checks, unless certain limited exceptions apply, which were not present here. The court emphasized that this rule applies to any ineffective endorsement, not just forged endorsements, and that UCC 4-207(1) does not extend warranty benefits to drawers.

    Facts

    Getty Petroleum Corp. issued checks to payees. Citibank, acting as the depositary bank, collected these checks without the proper endorsement of the named payees. Getty Petroleum Corp., as the drawer of the checks, then sued Citibank for improper collection. The checks were ultimately paid without proper endorsement.

    Procedural History

    Getty Petroleum Corp. sued Citibank in the trial court. Citibank’s motion to dismiss was initially denied. The Appellate Division reversed the trial court’s decision and dismissed the complaint. Getty Petroleum Corp. appealed to the New York Court of Appeals. The Court of Appeals affirmed the Appellate Division’s decision, dismissing the case against Citibank.

    Issue(s)

    1. Whether a drawer of a check has a direct cause of action against a depositary bank for collecting a check with an ineffective endorsement.

    2. Whether the rationale prohibiting a direct cause of action by a drawer against a depositary bank is limited to situations where the payee’s name is forged.

    3. Whether UCC 4-207(1) provides a drawer with a cause of action against a depositary bank for breach of transfer and presentment warranties.

    Holding

    1. No, because a drawer generally does not have a direct cause of action against a depositary bank for collecting an improperly endorsed check.

    2. No, because the rationale applies whenever a check is ineffectively endorsed, not just in cases of forgery.

    3. No, because drawers do not constitute “other payors” within the meaning of UCC 4-207(1) and therefore cannot claim the benefit of its warranties.

    Court’s Reasoning

    The Court of Appeals relied on the general rule established in previous cases like Prudential-Bache Sec. v Citibank, Spielman v Manufacturers Hanover Trust Co., and Underpinning & Found. Constructors v Chase Manhattan Bank, which holds that a drawer lacks a direct cause of action against a depositary bank for collecting an improperly endorsed check. The court explicitly stated that “This case falls squarely within the general rule that a drawer does not have a direct cause of action against a depositary bank for collecting an improperly indorsed check.”

    The court rejected the argument that this rule only applies to forged endorsements, clarifying that it extends to any ineffective endorsement. The court stated: “Contrary to plaintiffs’ contention, the rationale underlying this rule is not limited to situations where the payee’s name is forged, but instead applies whenever a check is ineffectively indorsed.”

    The court also dismissed the plaintiff’s reliance on UCC 4-207(1), which establishes warranties for transfer and presentment. The court reasoned that drawers are not “other payors” as intended by the statute. As the court referenced: “Since plaintiffs, as drawers, do not constitute ‘other payors’ within the intendment of that statute, they cannot claim the benefit of its warranties.” The court cited Leonard Smith, Inc. v Merrill Lynch, Pierce, Fenner & Smith and White & Summers, Uniform Commercial Code to support this interpretation.

    The court distinguished Costello v Oneida Natl. Bank & Trust Co., noting that it involved a payee’s direct action under UCC 3-419, a provision not applicable to drawers. The court emphasized that no provision of the UCC grants a similar right to drawers.

  • Marine Midland Bank v. Price, Miller, Evans & Flowers, 57 N.Y.2d 220 (1982): Supplying Missing Indorsement & Holder in Due Course Status

    Marine Midland Bank v. Price, Miller, Evans & Flowers, 57 N.Y.2d 220 (1982)

    A bank that stamps a check “credited to the account of the payee” without verifying if the payee has an account, and then wire transfers the funds, does not give value consistent with the indorsement and thus cannot claim holder in due course status when payment is stopped.

    Summary

    Marine Midland Bank cashed checks made out to Leo Proctor Construction without Proctor’s endorsement, stamping them “credited to the account of the payee” and wire transferring the funds. Proctor had no account at Marine Midland. When the drawer, Price, Miller, Evans & Flowers (a law firm), stopped payment due to Proctor’s default, Marine Midland sued, claiming holder in due course status. The Court of Appeals held that while the bank could supply the missing indorsement, it failed to give value consistent with the indorsement because it wire-transferred funds instead of crediting an account, and thus could not be a holder in due course.

    Facts

    The defendant, a law firm, made progress payments to Leo Proctor Construction via checks totaling $36,906.54. The checks were drawn on a trust account at First National Bank of Jamestown, payable to Proctor. A Proctor employee presented the checks to Marine Midland Bank, requesting a wire transfer to Proctor’s account in Oklahoma. The checks lacked Proctor’s endorsement. Marine Midland stamped the checks “credited to the account of the payee herein named/Marine Midland Chautauqua National Bank” and wire transferred the funds. Proctor did not have an account with Marine Midland. The law firm, upon learning of Proctor’s default, stopped payment on the checks.

    Procedural History

    Marine Midland sued the law firm to recover on the stopped checks. The case was submitted directly to the Appellate Division on an agreed statement of facts. The Appellate Division ruled in favor of Marine Midland, holding that the bank had properly supplied the missing indorsement and was a holder in due course. The law firm appealed to the New York Court of Appeals.

    Issue(s)

    Whether a depositary bank that cashes a check without endorsement, stamps it “credited to the account of the payee,” and wire transfers the funds, can claim holder in due course status under the Uniform Commercial Code when the payee has no account with the bank and payment on the check is stopped.

    Holding

    No, because the bank did not pay or apply value given for the instrument consistently with the indorsement. The bank’s actions were inconsistent with the restrictive indorsement it supplied, preventing it from achieving holder in due course status.

    Court’s Reasoning

    To attain holder in due course status, a party must be a holder of a negotiable instrument, taking it for value, in good faith, and without notice of defenses. Under UCC § 4-205(1), a depositary bank may supply a missing indorsement of its customer. While Proctor was arguably a “customer” because Marine Midland agreed to collect the checks, the bank failed to satisfy all requirements for holder in due course status. The stamp served as an effective indorsement under UCC § 4-205(1), but the bank did not give value consistent with the indorsement. UCC § 3-206(3) requires a transferee under a restrictive indorsement (such as “for deposit”) to pay or apply value consistently with the indorsement. Because the bank wire-transferred the funds rather than crediting an account (which didn’t exist), it failed to give value as required. The court rejected the bank’s argument that no indorsement was required when the check is presented by the payee, stating that such an exception cannot be reconciled with the UCC’s requirement for predictable results. The court quoted UCC § 4-205 comment 1 that the purpose of the section is “to speed up collections by eliminating any necessity to return to a non-bank depositor any items he may have failed to indorse”. The court further observed: “It hardly seems unfair to penalize the bank when it fails to perform such a simple act and then seeks the unusual shelter of the holder in-due-course status”.

  • Rapp v. Dime Sav. Bank of New York, 48 N.Y.2d 658 (1979): Enforceability of Bank Collection Agreements

    Rapp v. Dime Sav. Bank of New York, 48 N.Y.2d 658 (1979)

    Parties can agree on what constitutes a reasonable time for a bank to grant a customer access to deposited funds, as long as the agreed-upon timeframe is not manifestly unreasonable.

    Summary

    This case addresses the enforceability of a bank’s collection policy that restricts a customer’s ability to draw against deposited checks before a certain time. The New York Court of Appeals held that banks and their customers are free to define a “reasonable time” for allowing access to deposited funds via agreement, provided that the agreed-upon time is not manifestly unreasonable. The plaintiffs failed to provide sufficient evidence to challenge the validity of the agreement or demonstrate the unreasonableness of the timeframes, and thus, the court affirmed the grant of summary judgment in favor of the bank.

    Facts

    The Dime Savings Bank of New York had a collection policy that governed when customers could draw against deposited checks. The bank argued that its customers had agreed to specific time frames as part of a collection agreement. Customers (plaintiffs) brought suit, presumably arguing that the bank’s hold policy was unlawful.

    Procedural History

    The lower court granted summary judgment to the bank. The Appellate Division affirmed. The New York Court of Appeals affirmed the Appellate Division’s order.

    Issue(s)

    Whether a bank and its customers can, by agreement, define what constitutes a “reasonable time” under UCC § 4-213(4)(a) for allowing a customer to draw against a deposited check.

    Holding

    Yes, because the Uniform Commercial Code allows parties to agree on the definition of “reasonable time” as long as the agreed-upon time is not manifestly unreasonable.

    Court’s Reasoning

    The court relied on Uniform Commercial Code (UCC) § 4-213(4)(a), which generally dictates that a bank cannot prohibit a customer from drawing against a check after a reasonable time has passed following the receipt of a provisional settlement. However, the court also cited UCC § 1-204, which permits parties to formulate their own definition of “reasonable time” by agreement, subject to the condition that the fixed time is not manifestly unreasonable.

    The court stated that the bank had demonstrated, prima facie, that its customers had agreed to a collection agreement containing specific time frames. Because the plaintiffs failed to present sufficient evidence to challenge the validity of the contract or the manifest unreasonableness of the time fixed, summary judgment was appropriately granted to the bank.

    The court emphasized the importance of upholding contractual agreements unless they are clearly unreasonable or invalid. The court held that absent sufficient evidence to the contrary, the bank’s collection policy, as agreed upon by its customers, should be enforced. The court referenced Connell v St. Mary’s Hosp. of Troy, 45 NY2d 944, 946 and Indig v Finkelstein, 23 NY2d 728 to support the concept that failure to raise factual questions leads to consequences of summary judgment.

    “Defendant, as a depository or collecting bank, generally may not prohibit a customer from drawing against a check deposited in his account after a reasonable time has elapsed from receipt of a provisional settlement for that item (Uniform Commercial Code, § 4-213, subd 4, par [a]). But the parties are free to formulate their own definition of ‘reasonable time’ by agreement, so long as the time fixed is not manifestly unreasonable (Uniform Commercial Code, § 1-204).”

  • Milau Associates, Inc. v. North Avenue Development Corp., 42 N.Y.2d 482 (1977): Hybrid Sales-Service Contracts and Implied Warranties

    42 N.Y.2d 482 (1977)

    When a contract is a hybrid of sales and services, the applicability of the Uniform Commercial Code’s implied warranties depends on whether the predominant purpose of the contract is the sale of goods or the provision of services.

    Summary

    This case addresses whether implied warranties under the Uniform Commercial Code (UCC) apply to a hybrid contract involving both the sale of goods and the provision of services. A burst pipe in a sprinkler system, installed by Higgins Fire Protection, Inc. (subcontractor) for Milau Associates (general contractor), caused water damage to textiles. The textile companies sued, alleging negligence and breach of implied warranty. The court held that because the contract’s predominant purpose was the provision of a construction service (installing a sprinkler system), rather than the sale of goods (the pipes), UCC implied warranties did not apply. The plaintiffs were limited to a claim of negligence.

    Facts

    Commercial tenants (textile companies) suffered water damage due to a burst pipe in a sprinkler system in their warehouse.
    Milau Associates was the general contractor for the warehouse construction.
    Higgins Fire Protection, Inc. was the subcontractor responsible for designing and installing the sprinkler system.
    The pipe burst due to a “water hammer” effect and a notch in the pipe allegedly caused during installation.
    The textile companies claimed the pipe was defective and unfit for its purpose, triggering warranty protections.

    Procedural History

    The trial court denied the plaintiffs’ request to charge the jury on implied warranty.
    The case was submitted to the jury solely on the issue of negligent installation.
    The jury found in favor of the defendants (Milau and Higgins), concluding there was no negligence.
    The Appellate Division affirmed, finding no evidence the pipe was unfit for its intended purpose, but suggested the UCC might apply to the “sale of goods” aspect of a hybrid contract in other cases.
    This appeal followed to the New York Court of Appeals.

    Issue(s)

    Whether the implied warranty provisions of the Uniform Commercial Code (UCC) apply to a hybrid contract for the sale of goods and services, specifically the installation of a sprinkler system.

    Holding

    No, because the predominant purpose of the contract was the provision of services, not the sale of goods. Therefore, UCC implied warranties do not apply.

    Court’s Reasoning

    The court applied the “predominant purpose” test to determine whether the UCC’s implied warranties applied. This test distinguishes between contracts for the sale of goods and contracts for services. Citing Perlmutter v. Beth David Hosp., the court stated, “when service predominates, and transfer of personal property is but an incidental feature of the transaction”, warranty standards for sales do not apply.

    The court emphasized that the contract between Milau and Higgins was primarily for the installation of a sprinkler system, a labor-intensive endeavor requiring specialized skills. The sale of the pipes was incidental to the overall service.

    The court acknowledged that parties are free to contractually agree to a higher standard of care or warranty. However, in this case, the textile companies chose to pursue a negligence claim and a claim for a warranty implied by law, rather than arguing that the defendants expressly warranted a particular result.

    The court distinguished this case from products liability cases involving personal injury, where policy considerations might favor imposing strict liability. Here, the plaintiffs sought to recover purely economic losses, which the court deemed insufficient to justify extending implied warranties to a service-oriented contract.

    The court referenced cases in other jurisdictions that applied implied warranties to service contracts, but noted that those cases typically involved a standard of care equivalent to a negligence standard. Here, the jury already found that Higgins was not negligent.

    The court reasoned that the absence of an enforceable contractual relationship for the technical sale of goods does not necessarily foreclose all remedies, especially where strict tort liability for defective products are present; however, the appellants did not seek to invoke such doctrines in this case.

    In conclusion, the court held that there was no reasonable basis in policy or in law for reading what would amount to a warranty of perfect results into the contractual relationships defined by the parties to this action.