Supreme Merchandise Co., Inc. v. Chemical Bank

• Decision Date: 15 October 1987
• Citation: 514 N.E.2d 1358,70 N.Y.2d 344,520 N.Y.S.2d 734
• Parties: , 514 N.E.2d 1358, 5 UCC Rep.Serv.2d 416 In the Matter of SUPREME MERCHANDISE CO., INC., Appellant, v. CHEMICAL BANK, Respondent.
• Court: New York Court of Appeals Court of Appeals

Page 734

520 N.Y.S.2d 734

70 N.Y.2d 344, 514 N.E.2d 1358, 5 UCC

Rep.Serv.2d 416

In the Matter of SUPREME MERCHANDISE CO., INC., Appellant, v. CHEMICAL BANK, Respondent.

Court of Appeals of New York.

Oct. 15, 1987.

William E. Seeger, New York City, for appellant.

Robert T. Stephenson and Kenneth J. Kelly, New York City, for respondent.

OPINION OF THE COURT

KAYE, Judge.

A beneficiary's interest in an executory negotiable letter of credit supporting an international sale of goods is not property of the beneficiary for purposes of attachment by a party in unrelated litigation.

In connection with a sale of disposable lighters by Iwahori Kinzoku Co. (Kinzoku), a Japanese company, to Supreme Importers and D.M. Sales Corp. of New York City, on March 1, 1984, Chemical Bank issued an irrevocable letter of credit, expiring March 30, 1984, in the amount of $111,840, identifying Kinzoku as the beneficiary. The document provided that drafts drawn against it could be negotiated by any bank, which could then present the drafts together with the conforming documents to Chemical for acceptance and payment.

In an action for a money judgment against Kinzoku wholly unrelated to the letter of credit or the sale underlying it, petitioner served Chemical with an order attaching all debts and property of Kinzoku. Upon a search of its records, Chemical found no accounts in the name of Kinzoku and so advised both the Sheriff and petitioner's counsel. Chemical thereafter discovered the letter of credit, informed petitioner, and in late May was served with a second order of attachment. Both orders of attachment were confirmed by Special Term.

Meanwhile, on April 12, 1984, Fuji Bank Ltd. (Fuji) in Japan negotiated a draft in the sum of $55,000 for Kinzoku, notwithstanding certain discrepancies between the documents presented and the documents required by the letter of credit, and paid Kinzoku. When it made payment, according to Fuji, it had no knowledge of the attachment or dispute between Kinzoku and petitioner. Fuji the following week presented Chemical with the draft and documents; Chemical obtained a waiver of the discrepancies from the account party and, on April 27, accepted the draft, thereby engaging to make payment within a 30-day period. Chemical paid Fuji $55,000 on May 29, 1984.

On April 5, 1984, Dai-ichi Kangyo Bank Ltd. (Dai-ichi) presented Chemical with a second draft it had negotiated for Kinzoku in Japan, in the sum of $56,840 together with relevant documentation. Dai-ichi had before that time paid the full draft to its customer and claims it had no knowledge of the attachment or dispute with petitioner. Again the documents contained discrepancies from the terms of the letter of credit which were waived by the account party. On April 17, Chemical accepted the draft, thereby engaging to pay it within a 30-day period. Actual payment was not made until after service of the second attachment order. Prior to the two presentments, Chemical apparently had no knowledge of the interest of the negotiating banks.

Appellant commenced this proceeding against Chemical pursuant to CPLR 6214(d) to compel the delivery of funds representing the letter of credit, alleging that both attachment orders were applicable to the proceeds of the letter of credit. Chemical responded that the second order of attachment had been served too late because it had already accepted both drafts, and that the first order was ineffective because attachment cannot reach the proceeds of executory letters of credit.

Special Term, addressing only the first order of attachment, concluded that the beneficiary's interest constituted attachable property and granted the petition to the extent of directing Chemical to deliver to the Sheriff the amount of the drafts plus interest. The Appellate Division reversed, holding as to the second order of attachment, that there was nothing attachable at the time it was served because Chemical had by then accepted the drafts and thereby become unconditionally obligated to pay them upon maturity. With respect to the first order of attachment, however, the court ruled that CPLR 5201(b) and 6202 could not be read "as authorizing creditors to reach a debtor's contingent interest as property where the effort to do so will often preclude the maturing of that interest, is likely on a repetitive basis to impair the rights of third parties, and is certain to raise a disquieting doubt as to the capacity of letters of credit to discharge their critically important function in international transactions." (117 A.D.2d 424, 431, 503 N.Y.S.2d 9.) The Appellate Division granted leave to appeal to this court (126 A.D.2d 994, 510 N.Y.S.2d 997). We now affirm.

As to the second order of attachment, we agree with the court below that the issue has already been decisively determined against petitioner. In First Commercial Bank v. Gotham Originals, 64 N.Y.2d 287, 486 N.Y.S.2d 715, 475 N.E.2d 1255, we recognized that an issuing bank's obligation to pay in a commercial letter of credit transaction is fixed upon presentation of drafts and the documents specified in the letter of credit. Once the issuer accepts the drafts it becomes "directly, primarily and unconditionally obligated to the holder" and any order subsequently served on the issuer seeking to enjoin payment is too late (id., at 297, 486 N.Y.S.2d 715, 475 N.E.2d 1255). Here, Chemical accepted the drafts under the credit, and the negotiating banks held the acceptances, before service of the second order of attachment. There having been nothing to attach at the time of service of the attachment order (CPLR 6214[b] ), Chemical plainly did not violate that order when it made payment to the negotiating banks rather than directing the funds to the Sheriff.

The issues with respect to effectiveness of the first order of attachment, however, cannot be so readily resolved. The first order was served before Fuji or Dai-ichi negotiated the drafts for value and presented them to Chemical for payment. The letter of credit was therefore executory at the time the attachment order was served upon Chemical. If an order of attachment can reach a beneficiary's interest in an executory letter of credit, Chemical would have violated that order when it accepted the drafts and paid the negotiating banks rather than turning over the proceeds to the Sheriff.

While letters of credit have for centuries been in wide use, this issue has not arisen often in the case law. It has been the subject of two Federal court decisions--Matter of Diakan Love v. Al-Haddad Bros. Enters., 584 F.Supp. 782 and Sisalcords Do Brazil v. Fiacao Brasileira De Sisal, 450 F.2d 419 (5th Cir.1971), cert. denied 406 U.S. 919, 92 S.Ct. 1771, 32 L.Ed.2d 118, both denying attachment--but has not previously been passed on by this court.

CPLR 6214(d) provides that a levy by service of an order of attachment on a person other than defendant "is effective only if, at the time of service, such person owes a debt to the defendant or such person is in the possession or custody of property in which such person knows or has reason to believe the defendant has an interest". The core issue here is whether Kinzoku's interest in the letter of credit constituted a "debt" or "property" within the purview of the statute.

"Any debt or property against which a money judgment may be enforced as provided in section 5201 is subject to attachment." (CPLR 6202.) The statute requires that a "debt" for this purpose be a fixed obligation (CPLR 5201[a] ). If a debt, Kinzoku's interest was plainly contingent and would not be subject to attachment under CPLR 5201(a); indeed, petitioner does not contend that the interest was attachable as a debt. Petitioner focuses on the further provision that "[a] money judgment may be enforced against any property which could be assigned or transferred, whether it consists of a present or future right or interest and whether or not it is vested." (CPLR 5201[b].) The word "property" is undefined. To say--as petitioner does--that Kinzoku's interest in the letter was assignable and is therefore attachable property begs the question whether the interest is "property" in the first instance. We therefore turn to the case law construing the statutory term "property."

In ABKCO Indus. v. Apple Films, 39 N.Y.2d 670, 673, 385 N.Y.S.2d 511, 350 N.E.2d 899, this court considered whether a contract right to net profits from future promotion of the Beatles film "Let It Be" was "property" within CPLR 5201(b), so as to support an attachment for purposes of securing jurisdiction. We rejected the argument that the debtor's contract right was too contingent because it might have no value, and held that the interest was "property" notwithstanding the uncertainties affecting its actual ultimate value. The "fact of value or lack of it", we concluded, "has no legal effect on the validity of the attachment". (39 N.Y.2d, supra, at 675, 385 N.Y.S.2d 511, 350 N.E.2d 899.) Dispositive instead is whether such an interest has potential economic value to the creditor. The right to receive profits from the Beatles film was deemed worthy of pursuit by the creditor, was assignable, and hence was attachable.

Petitioner urges that because Kinzoku's interest could be assigned, ABKCO dictates the invariable conclusion that it is attachable property. We disagree. Such a mechanical application of ABKCO to all questions concerning attachable interests not only would swallow up CPLR 5201(a) in its entirety but also would require us to blind ourselves in every instance to the nature of the interest involved. We determine, therefore, that the mere assignabilityof Kinzoku's interest does not warrant the conclusion that it is "property" for purposes of CPLR 5201(b), and that in the circumstances the interest is not subject to attachment.

A guiding principle in our analysis is that, while CPLR 5201 is obviously intended to have broad reach, still the Legislature...