New York Law Review

Tag: UCC Article 3

  • Vigilant Insurance v. Housing Authority, 87 N.Y.2d 36 (1995): Statute of Limitations for Stolen Bonds and Declaratory Judgment Actions

    87 N.Y.2d 36 (1995)

    In a declaratory judgment action regarding rights to stolen bearer bonds, the statute of limitations begins to run from the date the bonds mature, not from the date the theft was discovered, as bearer bonds are considered investment securities under UCC Article 8, not Article 3.

    Summary

    Vigilant Insurance, as subrogee of Drexel Burnham Lambert, sued the Housing Authority of El Paso seeking a declaration of superior right and title to stolen bearer bonds. Drexel had purchased the bonds, later found to be stolen, and was forced to replace them, receiving an assignment of rights. Vigilant, after indemnifying Drexel, sued when the Housing Authority refused to honor the bonds. The key issue was when the statute of limitations began to run. The Court of Appeals held that the statute began to run upon the bonds’ maturity date, not the date of discovery of the theft, as the UCC Article 8 governs investment securities like bearer bonds.

    Facts

    Drexel Burnham Lambert purchased bearer bonds issued by the El Paso Housing Authority in July 1983 from Chessed Anstalt.
    Drexel sold the bonds to Irving Trust Co., who discovered they were previously reported stolen.
    Under NYSE and SEC rules, Drexel reclaimed the stolen bonds and replaced them for Irving Trust Co.
    Irving assigned all rights to the stolen bonds to Drexel.
    Vigilant insured Drexel and paid Drexel’s claim after Drexel replaced the bonds. Drexel assigned its rights to Vigilant.
    The FBI seized the bonds in 1983 and returned them to Vigilant in 1989.
    Vigilant presented interest coupons in 1989, but the Housing Authority refused payment and confiscated the coupons, maintaining a “stop” on the bonds.

    Procedural History

    Vigilant sued the Housing Authority in 1990, seeking declaratory judgment, damages for conversion, and breach of contract.
    The Supreme Court dismissed the complaint based on the statute of limitations, ruling the claims accrued in 1983 when Drexel learned of the theft.
    The Appellate Division reversed, reinstating the complaint, holding that the statute of limitations accrued on the maturity date of the bonds.

    Issue(s)

    1. What is the applicable statute of limitations period for a declaratory judgment action concerning rights to bearer bonds?
    2. When does the statute of limitations accrue in such an action: when the theft is discovered, when the bonds are presented for payment and refused, or on the bonds’ maturity date?

    Holding

    1. The applicable statute of limitations is six years, per CPLR 213(1), because no other specific statute of limitations applies. No because CPLR 211(a) (20 years) is inapplicable because the bonds are not secured *only* by the faith and credit of the issuer, and CPLR 213(4) is inapplicable as the bonds are not secured by mortgage upon real property.

    2. No, because the statute of limitations begins to run on the day after the bonds’ maturity date, July 2, 1997, as bearer bonds are investment securities governed by Article 8 of the UCC and the injury occurs when payment is due but refused.

    Court’s Reasoning

    The Court of Appeals analyzed the statute of limitations for declaratory judgment actions, noting that New York law requires courts to examine the underlying claim to determine the applicable period (Solnick v. Whalen, 49 N.Y.2d 224). Although CPLR 211(a) provides a 20-year limitation for actions on bonds of public corporations, it does not apply here because these bonds are backed by the “full faith and credit of the United States,” and not just the issuer. CPLR 213(4) does not apply because the bonds are not secured by a mortgage. The court determined that the six-year catch-all statute of limitations under CPLR 213(1) was appropriate.

    Crucially, the court rejected the argument that UCC Article 3, which governs negotiable instruments, applied, because UCC 3-103 explicitly excludes “investment securities.” Instead, the court looked to UCC Article 8, which governs stocks, bonds, and other evidences of indebtedness. UCC 8-102 defines a security as an instrument issued in bearer or registered form that is traded on exchanges or markets, fitting the description of the bonds in this case. Thus, the accrual provision of UCC 3-122(1), which would have set the accrual date as the day after maturity, was deemed inapplicable.

    Despite the inapplicability of UCC Article 3, the court held that the cause of action accrued on the bonds’ maturity date, reasoning that a cause of action accrues when all facts necessary to sustain the action have occurred (Aetna Life & Cas. Co. v. Nelson, 67 N.Y.2d 169). The court analogized to Phoenix Acquisition Corp. v. Campcore, Inc., 81 N.Y.2d 138, where the right to sue on a debt accrued at maturity, even though an earlier default could have triggered acceleration. The court stated that “since the right to sue on the bond’s principal debt does not accrue until the debt is ‘due and payable’… we perceive no reasonable basis to bar on Statute of Limitations grounds plaintiffs’ opportunity to seek a declaration of those seriously disputed rights on the debt instrument prior to maturity of the bond.”

    However, the court agreed with the Supreme Court that the causes of action for tortious conversion and breach of contract were time-barred. The court noted that an action for conversion is subject to a three-year limitation period (CPLR 214[3]), accruing from the date of the conversion (Sporn v. MCA Records, 58 N.Y.2d 482), which it deemed to be July 1983, when the Housing Authority first placed “stops” on the bonds.

    Lastly, the court noted that regarding past-due coupon interest, the Statute of Limitations runs on each installment from the date it becomes due (Phoenix Acquisition Corp. v. Campcore, Inc., 81 N.Y.2d 138).

  • Israel Discount Bank Ltd. v. L. Blankstein & Son, Inc., 58 N.Y.2d 436 (1983): Notice of Voidable Obligations and Holder in Due Course Status

    Israel Discount Bank Ltd. v. L. Blankstein & Son, Inc., 58 N.Y.2d 436 (1983)

    A holder of a promissory note is not a holder in due course if they had notice that the obligation of any party is voidable in whole or in part, but knowledge that a note was issued in return for an executory promise does not give the holder notice of a defense unless they know a defense has arisen from the terms thereof.

    Summary

    Israel Discount Bank (the Bank) sued L. Blankstein and Son, Inc. (Blankstein) and Jacob Klein and Son, Inc. (Klein) to recover on promissory notes. The notes were initially issued to Leo Siegman, a diamond merchant, who then endorsed and delivered them to the Bank as security for a loan. Blankstein and Klein argued that the Bank was not a holder in due course because it knew the notes were related to diamond sale agreements where Siegman could refuse delivery, or they could return diamonds without obligation. The New York Court of Appeals held that the Bank was a holder in due course because Blankstein and Klein failed to prove the Bank had actual knowledge that the notes were predicated on voidable obligations, not binding executory contracts. Therefore, the Bank took the notes free of personal defenses.

    Facts

    Leo Siegman, a diamond merchant, received promissory notes from Blankstein and Klein for diamond sales/consignments. Siegman endorsed these notes in blank and delivered them to Israel Discount Bank as security for a loan. When the Bank presented the notes for payment, they were dishonored (returned unpaid). The Bank then sued Blankstein and Klein.

    Procedural History

    The Supreme Court initially denied the Bank’s motion for summary judgment. The Appellate Division reversed and granted summary judgment to the Bank, holding that the Bank was a holder in due course and parol evidence was inadmissible to contradict the notes. The New York Court of Appeals affirmed the Appellate Division’s order granting summary judgment to the bank, but based its holding on different reasoning regarding the Bank’s status as a holder in due course and the knowledge it possessed.

    Issue(s)

    Whether the Bank was a holder in due course of the promissory notes, and therefore took the notes free of personal defenses asserted by Blankstein and Klein.

    Holding

    Yes, the Bank was a holder in due course, because Blankstein and Klein failed to present sufficient evidence that the Bank had actual knowledge that the notes were based on voidable obligations, rather than binding executory contracts. Consequently, the Bank took the notes free of the makers’ personal defenses.

    Court’s Reasoning

    The court reasoned that under UCC § 3-302, a holder in due course takes an instrument (1) for value; (2) in good faith; and (3) without notice that it is overdue or has been dishonored or of any defense against or claim to it. The court found that the Bank gave value and acted in good faith. The critical issue was whether the Bank had “notice of a claim or defense.” Under UCC § 3-304(1)(b), a holder has notice of a defense if they know the obligation is “voidable.” Blankstein and Klein argued the notes were referable to nonbinding agreements. The Bank countered that its knowledge of an executory promise (future diamond delivery) did not constitute notice of a defense unless it knew a defense had arisen (UCC § 3-304(4)(b)).

    The court distinguished between executory promises and voidable obligations. An executory contract is one where a party binds itself to perform in the future. Knowledge of an executory contract alone is insufficient to defeat holder in due course status. However, knowledge that an agreement is rescindable at will provides notice that a defense has arisen. The burden was on Blankstein and Klein to prove the Bank had actual knowledge that the notes were predicated on voidable obligations. The court emphasized that while the defendants alleged a general custom in the diamond trade that notes were merely evidence of transactions, they failed to provide evidentiary facts showing the bank had *actual knowledge* of the voidable nature of the instruments. The court stated, “Summary judgment on a note will be defeated only where material issues of fact are raised which are ‘genuine and based on proof, not shadowy and conclusory statements’.” Because they failed to demonstrate this, the Bank was a holder in due course and took the notes free of personal defenses. The court also clarified that parol evidence is admissible to show a holder did not take the instrument for value, in good faith, or without notice of claims/defenses, even if the note is unconditional on its face; this evidence isn’t to vary the terms of the note, but to show the bank wasn’t a holder in due course.