David Graubart, Inc. v. Bank Leumi Trust Co.

• Decision Date: 19 December 1979
• Citation: 48 N.Y.2d 554,423 N.Y.S.2d 899
• Parties: , 399 N.E.2d 930, 27 UCC Rep.Serv. 1184 DAVID GRAUBART, INC., Respondent, v. BANK LEUMI TRUST COMPANY of New York, Appellant.
• Court: New York Court of Appeals Court of Appeals

Page 899

423 N.Y.S.2d 899

48 N.Y.2d 554, 399 N.E.2d 930, 27 UCC

Rep.Serv. 1184

DAVID GRAUBART, INC., Respondent, v. BANK LEUMI TRUST COMPANY of New York, Appellant.

Court of Appeals of New York.

Dec. 19, 1979.

Amos Alter and Stephen F. Harmon, New York City, for appellant

Samuel W. Gilman, New York City, for respondent.

OPINION OF THE COURT

FUCHSBERG, Judge.

On this appeal, here on a question certified by the Appellate Division pursuant to CPLR 5602 (subd. (b), par. 1), we are called upon to determine the role played by article 4 of the Uniform Commercial Code in fixing rights and obligations arising out of a second presentment of a check previously returned for insufficient funds. The heart issue is whether a payor bank is relieved of liability for retaining such an instrument beyond its "midnight deadline" (see Uniform Commercial Code, § 4-302) when it does so pursuant to an agreement concordant with a practice among banks for a payor to hold a previously dishonored item long enough to provide an opportunity for sufficient funds to be deposited by the drawer to meet the check.

The operative facts are uncomplicated. Plaintiff David Graubart, Inc. (payee), was issued a check for $13,000 drawn by the Prins Diamond Company on the latter's account with the defendant Bank Leumi Trust Company (payor bank). Graubart then deposited the check in its own account with the National Bank of North America (depositary bank), which, pursuing normal collection channels, routed it to the payor bank via the New York Clearing House. ¹ When the payor bank found that the Prins account had been overdrawn, it marked the item "insufficient funds" and promptly returned it to the depositary bank, again through clearing house channels. Notified of the dishonor, the payee redeposited the check with its bank, which this time apparently chose to forward it directly to Leumi on a collection basis, thus bypassing the clearing house (see Uniform Commercial Code, § 4-204, subd. (2), par. (a)). The item was accompanied by an "advice to customer" slip a copy of which was also delivered to Graubart indicating, as with collection items generally, that credit would only be given on payment. In addition, in a space bearing the printed legend "Special Instruction: (Return immediately if not paid unless otherwise instructed)", the slip contained a typed direction that the payor bank was to "remit (its) cashiers' (sic) check when paid" (cf. Uniform Commercial Code, § 4-211, subd. (1), par. (b)). But when, after no more than seven banking days, the drawer's account remained bare of funds to permit the check to clear, Leumi again returned the check to the depositary bank. Sometime during the course of these transactions the drawer made an assignment for the benefit of creditors.

The gravamen of the fourth cause of action ² in the suit the payee thereafter commenced against Leumi, as well as of its subsequent motion for summary judgment, was that the latter's failure to return the resubmitted check to the depositary bank before its "midnight deadline" defined as midnight of the next banking day following that on which the item was received (Uniform Commercial Code, § 4-104, subd. (1), par. (h)) without more, rendered it liable to the payee for the face amount of the check under subdivision (a) of section 4-302 of the Uniform Commercial Code. This section, with seeming finality, provides, in pertinent part, that "if an item is presented on and received by a payor bank the bank is accountable ³ for the amount of * * * a demand item * * * if the bank * * * retains the item beyond midnight of the bank day of receipt without settling for it or * * * does not pay or return the item or send notice of dishonor until after its midnight deadline".

In opposition, and in support of its own cross motion, the payor bank submitted an affidavit by its assistant vice-president, who, after setting out his knowledge of banking practice, asserted that the "advice to customer" slip constituted a memorandum of an agreement requiring it to process the instrument in question in accordance with a common banking practice whereunder previously dishonored checks were to be held for such time as is reasonable under all the circumstances, even beyond the midnight deadline if necessary, to enable funds from which to pay them to come into the account. To this the payee's only reply was in the form of counsel's affirmation. Aside from a bald assertion, for which no foundation was supplied, challenging the existence of the custom, the affirmation merely interjected, for the first time, unsupported allegations of bad faith and collusion on Leumi's part. Though it stated that the drawer was indebted to Leumi at the time of the assignment for the benefit of creditors, it made no showing of any unfair conduct on the part of the payor bank whatsoever.

Special Term denied both motions, holding that triable issues existed, and the Appellate Division, over a vigorous dissent by Mr. Justice Joseph P. Sullivan, has since affirmed. In thereafter granting leave to appeal to this court, it posed the very broad question: "Was the order of the Supreme Court, as affirmed by this Court, properly made?" For the reasons that follow, we conclude a negative response is mandated.

The payor bank's assault on the conclusion of the courts below is grounded on the contention that there were no factual issues precluding summary judgment and that, on the undisputed facts, its actions were proper as a matter of law for two reasons: (1) on the authority of Leaderbrand v. Central State Bank, 202 Kan. 450, 450 P.2d 1, it need not have given the payee notice of dishonor upon representment of the previously dishonored item, and (2) its conduct in varying the code's midnight deadline pursuant to a valid agreement which accords with custom and usage in the banking community relieves it of the effect of the provisions of article 4 (citing, Inter alia, Uniform Commercial Code, § 4-103).

The preliminary dispute as to the existence of unresolved questions of fact need not detain us. The date of the contested transactions and the nonadherence to the midnight deadline, if applicable, were conceded for the purposes of the motion. The payor bank's officer established the custom as to collection of previously dishonored checks, and the payee's own submission of the "advice to customer" slip confirmed that the agreement had been made in contemplation of the custom. And, since Graubart's counsel's affirmation was made without personal knowledge of the facts, it was not competent to defeat the motion for summary judgment (Rotuba Extruders v. Ceppos, 46 N.Y.2d 223, 229, n. 4, 413 N.Y.S.2d 141, 144, 385 N.E.2d 1068, 1071; Columbia Ribbon & Carbon Mfg. Co. v. A-1-A Corp., 42 N.Y.2d 496, 500, 398 N.Y.S.2d 1004, 1007, 369 N.E.2d 4, 7; CPLR 3212, subd. (b); see, generally, Mallad Constr. Corp. v. County Fed. Sav. & Loan Assn., 32 N.Y.2d 285, 292-293, 344 N.Y.S.2d 925, 931-932, 298 N.E.2d 96, 100-101). Leumi's recitations therefore went undisputed.

Turning to the legal merits, we conclude first that Leumi's reliance on Leaderbrand v. Central State Bank, 202 Kan. 450, 450 P.2d 1, Supra, which held that no notice of dishonor need be given as to an item previously returned for insufficient funds, is unavailing. The Leaderbrand Court reasoned that subdivision (4) of section 3-511 of the code, in excusing further notice of dishonor with respect to "drafts" once dishonored by "nonacceptance", necessarily encompassed dishonor of "checks" by "nonpayment". But, while a check is a kind of draft (Uniform Commercial Code, § 3-104, subd. (2), par. (b)), "nonpayment" and "nonacceptance" are distinctly different concepts, the latter referring specifically to a payor's refusal to certify that it will honor a Time instrument when later presented for payment (Uniform Commercial Code, § 3-410, subd. 1; see Wiley v. Peoples Bank & Trust Co., 438 F.2d 513, 516-517 (5th Cir.); Comment, 18 Kan.L.Rev. 679, 682-684, n. 48). Since it would be futile to present for payment a draft that has been dishonored by nonacceptance (when the obligation is conditioned on acceptance (see Uniform Commercial Code, § 3-501, subd. (1), par. (a))), such presentment and further notice are excused as superfluous. In contrast, a Demand item such as a check may eventually be paid if resubmitted at a time when the drawer's account has an adequate balance. This possibility makes it entirely reasonable to afford redeposited checks the full panoply of a rticle 4 protections. (See, generally, Clark & Squillante, Law of Bank Deposits, Collections and Credit Cards (1970), pp. 71-72.)

Though its Leaderbrand point is, therefore, without merit, Leumi's argument that its retention of the check beyond its midnight deadline was consonant with its agreement with the depositary bank is another matter. In this connection, initially we note that section 4-301 of the code, ⁴ which establishes the procedural rules enforced by section 4-302, nowhere suggests that the deadline does not apply to previously dishonored items. But, it is well recognized that the code's requirements can be modified by agreement to conform them with commercial usage, in or out of banking circles, so that parties may advantage themselves of the "wisdom born of accumulated experience" (Bankers Trust Co. v. Dowler & Co., 47 N.Y.2d 128, 134, 417 N.Y.S.2d 47, 50-51, 390 N.E.2d 766, 769). ⁵ Thus, section 4-103 provides in part:

"(1) The effect of the provisions of this Article may be varied by agreement except that no agreement can disclaim a bank's responsibility for its own lack of good faith or failure to exercise ordinary care * * *.

"(4) The specification or approval of certain procedures by this Article does not constitute disapproval of other procedures which may be reasonable under the circumstances".

The concept of an "agreement" under the code is, as with contract law generally, broad enough to permit...