Chemical Bank of Rochester v. Haskell

• Citation: 432 N.Y.S.2d 478,411 N.E.2d 1339,51 N.Y.2d 85
• Decision Date: 09 October 1980
• Docket Number: No. 3,No. 2,No. 1,1,2,3
• Parties: , 411 N.E.2d 1339, 29 UCC Rep.Serv. 1529 CHEMICAL BANK OF ROCHESTER, Appellant, v. John HASKELL, Respondent. (Action) Paddy CHAYEFSKY, as a Limited Partner in Quarry Square Associates, Individually and on Behalf of All Others Similarly Situated, Respondent, v. CHEMICAL BANK OF ROCHESTER, Appellant. (Action) Halsey F. SHERWOOD et al., as Limited Partners in Quarry Square Associates, Individually and on Behalf of All Others Similarly Situated, Respondents, v. CHEMICAL BANK OF ROCHESTER, Appellant. (Action)
• Court: New York Court of Appeals

Page 478

432 N.Y.S.2d 478

51 N.Y.2d 85, 411 N.E.2d 1339, 29 UCC

Rep.Serv. 1529

CHEMICAL BANK OF ROCHESTER, Appellant, v. John HASKELL, Respondent. (Action No. 1.)

Paddy CHAYEFSKY, as a Limited Partner in Quarry Square

Associates, Individually and on Behalf of All

Others Similarly Situated, Respondent, v. CHEMICAL BANK OF ROCHESTER, Appellant. (Action No. 2.)

Halsey F. SHERWOOD et al., as Limited Partners in Quarry

Square Associates, Individually and on Behalf of All Others Similarly Situated, Respondents, v. CHEMICAL BANK OF ROCHESTER, Appellant. (Action No. 3.)

Court of Appeals of New York.

Oct. 9, 1980.

Richard B. Callen, Rochester, for appellant

Frank A. Aloi, Rochester, for respondents.

OPINION OF THE COURT

WACHTLER, Judge.

The issue on this appeal is whether the plaintiff Chemical Bank of Rochester (Chemical) acquired the status of a holder in due course as to several notes executed by defendants Paddy Chayefsky, John Haskell, Halsey F. Sherwood and Arthur Giliotti. The trial court held in these three related cases, that Chemical was a holder in due course and in that capacity took the notes free of all defenses raised by the makers. The Appellate Division reversed, 68 A.D.2d 347, 417 N.Y.S.2d 541, based on its conclusion that Chemical did not act in good faith in purchasing the notes. Chemical appeals.

In 1972 defendants became involved in the organization of a limited partnership, Quarry Square Associates (Quarry), for the purpose of developing an apartment complex in Buffalo, New York. Stanndco Developer's, Inc. (Stanndco), and David J. Quigley, among others, were general partners in the enterprise. The defendants, among others, were limited partners who made capital contributions to the partnership by execution of the notes in issue on this appeal.

In 1973 Quigley approached T. Richard Olney in an attempt to borrow money using the notes as collateral. Olney, who at the time was an officer of Chemical's predecessor, the State Bank of Hilton (State Bank), declined to enter a debtor-creditor relationship with Stanndco, but offered instead to buy the notes outright. Stanndco agreed to the transfer for a discount on their face value. On May 25, 1973, the transaction was consummated by Stanndco, through its agent Quigley, and acting as general partner of Quarry, indorsing the notes to itself as an individual, and then indorsing the notes to the State Bank of Hilton. In return, State Bank drew a check for $274,390 to the order of Stanndco. It is noteworthy that this check was not drawn to the order of Stanndco as general partner of Quarry, nor did it otherwise indicate that Stanndco was to be handling the funds in a representative capacity. On July 26, 1973, Chemical notified the makers that it had become a holder of the notes. The makers did not respond, and the first payments under the notes were made on schedule by all except Haskell during December, 1973. By February, 1974, however, Quigley and Stanndco had filed in bankruptcy. Chemical then sued Haskell on his notes and Chayefsky sued Chemical on behalf of himself and the other limited partners seeking, inter alia, to prevent Chemical from attempting to collect on the paper. Sherwood and Giliotti brought an action similar to Chayefsky's and seeking the same relief. The bank counterclaimed in the suits by the makers, and, because the three cases presented similar issues, they were tried together.

In order for Chemical to recover it first had to establish its status as a holder of the notes. This it did by production of the notes in its possession, which had been transferred to Chemical by another holder with all necessary indorsements (Uniform Commercial Code, § 1-201, subd. (20); § 3-202, subd. (1)). There is no merit to the argument by defendants that Chemical cannot be a holder because Stanndco had no actual authority to indorse the instruments for nonpartnership purposes (cf. Uniform Commercial Code, § 3-404). The code contemplates that it is possible for a person to have the power to indorse an instrument even though the signing is beyond actual authority, if the signer is clothed with apparent authority (see Uniform Commercial Code, § 3-207; McKinney's Cons.Laws of N.Y., Book 62 1/2, Uniform Commercial Code, § 3-403, official comment No. 1). Clearly, as the organizer and managing general partner for Quarry, Stanndco had at least apparent authority to deal with negotiable instruments which were the property of the partnership. Thus, as a holder, Chemical is entitled to recover unless the makers established a defense (Uniform Commercial Code, § 3-307, subd. (2)). Several have been alleged, including fraud, failure of consideration, and breach of fiduciary duty, all arising out of the activities of Stanndco. The makers contend that as a transferee of Stanndco, Chemical, too, is subject to these defenses (see Uniform Commercial Code, §§ 3-201, 3-306). However, even assuming their validity, these defenses, none of which, incidentally, are even colorably of the real defense variety, ¹ they are to no avail, because Chemical has established itself as a holder in due course (Uniform Commercial Code, § 3-305).

A holder in due course is a holder who 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 or claim against it on the part of another (Uniform Commercial Code, § 3-302, subd. (1)). There is no question that value was given for the notes in question. Nevertheless, the Appellate Division did not deem Chemical a holder in due course because that court considered the facts and circumstances surrounding the negotiation of the notes to Chemical as sufficiently indicative of irregularities so as to put Chemical on inquiry as to the purposes for which Stanndco was acting. We disagree.

The conclusion of the Appellate Division concerning Chemical's duty to inquire raises important questions as to the meaning of the terms "in good faith" and "without notice" as used in section 3-302. Good faith under the code is defined as "honesty in fact in the conduct or transaction concerned" (Uniform Commercial Code, § 1-201, subd. (19)) and it is clear that the draftsmen intended that this language set a subjective and not objective standard. In fact, so that no confusion would persist on this score, a proposed draft of section 3-302 which explained good faith in terms related to commercial reasonableness was amended to delete the offending language (White and Summers, Uniform Commercial Code (2d ed.), § 14-6, p. 563; 1954 Report of N.Y.Law Rev.Comm., vol. 1, pp. 203-205). Thus, the inquiry is not whether a reasonable banker in Chemical's position would have known, or would have inquired concerning the alleged breach by Stanndco of its partnership duties, but rather, the inquiry is what Chemical itself actually knew. If Chemical did not have...