Gillman v. Chase Manhattan Bank, N.A.
| Decision Date | 22 December 1988 |
| Court | New York Court of Appeals Court of Appeals |
| Parties | , 534 N.E.2d 824, 7 UCC Rep.Serv.2d 945, 15 A.L.R.5th 1039 Seymour GILLMAN, as Assignee for the Benefit of Creditors of Jamaica Tobacco & Sales Corp., Appellant, v. CHASE MANHATTAN BANK, N.A., Respondent. |
This appeal presents questions concerning actions taken by Chase Manhattan Bank, N.A. (Chase) with respect to the commercial bank account of a customer Jamaica Tobacco and Sales Corp. (Jamaica Tobacco) which Chase contends were authorized by the terms of a security agreeme executed by the customer in applying for a letter of credit. Chase issued a $400,000 irrevocable letter of credit to Jamaica Tobacco as account party for the benefit of Aetna Casualty and Surety Company (Aetna). Aetna required the letter of credit for its issuance of a surety bond to enable Jamaica Tobacco to purchase cigarette stamps on credit from State and local governmental agencies. The security agreement, Chase contends, gave it a security interest in all bank deposits maintained in Chase by Jamaica Tobacco.
This lawsuit brought by the assignee for the benefit of creditors of Jamaica Tobacco stems from actions taken by Chase without notice to Jamaica Tobacco in segregating a $372,920.57 bank deposit by transferring it from a checking account to an account over which Jamaica Tobacco had no control and on which it could not draw. These actions were authorized under the agreement, Chase contends, because of Jamaica Tobacco's precarious financial condition. Chase claims further that they were commercially reasonable steps necessary to secure it from potential loss because of the absolute obligation it had assumed under the letter of credit.
After a nonjury trial, Supreme Court concluded that the security agreement was unconscionable and, therefore, unenforceable. Accordingly, it held that Chase acted illegally in transferring the funds from the checking account to the other account and thereby putting the funds beyond the reach of Jamaica Tobacco. The court awarded compensatory, consequential and punitive damages to the assignee, finding that Chase had acted in bad faith and that it had caused or contributed to Jamaica Tobacco's subsequent business collapse by failing to notify it of the transfer of the account, dishonoring checks payable to the company's creditors, and preventing Jamaica Tobacco from using the funds in its business.
The Appellate Division reversed on the law and the facts and dismissed the complaint, holding that the security agreement was neither substantively nor procedurally unconscionable. It reversed Supreme Court's finding that Chase had acted in bad faith and held that "there is no support for the finding that it had converted funds or wrongfully dishonored Jamaica Tobacco's checks" (135 A.D.2d 488, 492, 521 N.Y.S.2d 729). Finally, the Appellate Division rejected the assignee's arguments that segregation of the account constituted a preferential transfer in violation of Debtor and Creditor Law § 15(6-a) (id., at 492-493, 521 N.Y.S.2d 729).
In his appeal by leave of this court, the assignee contends that the Appellate Division erred in rejecting his arguments concerning the unconscionability of the security agreement and Chase's alleged bad faith in segregating the account without notice and dishonoring the checks. He also argues that, even assuming the validity of the security agreement and insufficient proof of bad faith, the segregation of the deposit should, nonetheless, be set aside as a preferential transfer in violation of the Debtor and Creditor Law. For reasons which follow, we reject these arguments and conclude that there should be an affirmance.
Jamaica Tobacco, for many years prior to this proceeding, was engaged in the wholesale distribution of tobacco products in the New York City metropolitan area. It was a closely held, family run business. From 1964 on, the company had been managed primarily by Steven Frohlich, its president and majority stockholder.
As part of its regular business of distributing tobacco products, Jamaica Tobacco purchased tax stamps from the city and State. Before they would issue tax stamps on credit, the taxing authorities insisted on a security bond of a surety company. The surety company (here, Aetna) required, as a condition for its assumption of liability under the bond, that Jamaica Tobacco provide it with a bank letter of credit to secure Jamaica Tobacco's promise to reimburse it for any payments that it might be required to make under the bond.
Prior to August of 1981, Jamaica Tobacco had obtained a $300,000 letter of credit from Marine Midland. When it requested an increase to $400,000, Marine Midland declined and Jamaica Tobacco applied to Chase. In late July 1981, Chase sent an application for a letter of credit to Stephen Frohlich who signed it on behalf of Jamaica Tobacco. Directly above Frohlich's signature on the application was a printed legend in bold-faced type stating: "The Security Agreement on the reverse hereof is hereby accepted and made applicable to this Application and the Credit."
The security agreement, in paragraph 7, provided, in part, that "[a]s security for the payment or performance of any and all * * * obligations and/or liabilities" of Jamaica Tobacco under the letter of credit, whether "absolute or contingent, due or to become due", Jamaica Tobacco "pledges to the Bank and/or gives the Bank a general lien upon and/or right of set-off against, all right, title and interest of the Applicant in and to the balance of every deposit account, now or at any time hereafter existing, of the Applicant with the Bank, and any other claims of the Applicant against the Bank, and in and to all property, claims and demands and rights and interests therein of the Applicant * * * which * * * shall * * * come into the Bank's possession, custody or control * * * for any purpose, whether or not for the express purpose of being used by the Bank as collateral security or for * * * any other or different purpose".
Paragraph 8 of the security agreement stated, in part, that if Chase "shall in good faith deem itself insecure at any time * * * any and all obligations and liabilities of the Applicant to the Bank * * * shall become and be due and payable forthwith without notice or demand; and the Applicant * * * expressly authorizes the Bank * * * to apply * * * any balance of deposits and any sums credited by or due from the Bank to the Applicant in general account or otherwise, to the payment of any and all of such obligations and/or liabilities" (emphasis added).
On August 10, 1981, Chase issued an irrevocable letter of credit in favor of Aetna for Jamaica Tobacco as account party. Its one-year term was renewable automatically unless Chase elected not to renew and gave Aetna the required notice prior to the renewal date. Under the letter of credit, Chase assumed a binding obligation to pay up to $400,000 to Aetna upon presentation by Aetna of proper documentation. As the account party, Jamaica Tobacco undertook to reimburse Chase for any payments made on its behalf to Aetna.
As security for the letter of credit--in addition to the pledge of and general lien upon its bank accounts--Jamaica Tobacco provided Chase with the following: a "Negative Pledge" agreement confirming that it would not allow anyone else to file against the company under the Uniform Commercial Code while Jamaica Tobacco was indebted to Chase, a "Loan Restriction" agreement confirming that Jamaica Tobacco would not incur any loan debts while indebted to Chase, personal guarantees of amounts then or thereafter owed from Jamaica Tobacco to Chase signed by the principal officers of Jamaica Tobacco and their wives, and a "Subordination Agreement" stating that Jamaica Tobacco was indebted to Frohlich in the amount of $450,000 and that that debt was subordinated to Jamaica Tobacco's obligations to Chase.
After the letter of credit had been renewed in August 1982 for an additional year, Chase learned that Jamaica Tobacco was experiencing serious financial and managerial difficulties. In October 1982, Chase received information indicating that Jamaica Tobacco had repaid part of its debt to Frohlich in violation of the "Subordination Agreement", had borrowed $110,000 from Frohlich's parents in violation of the "Loan Restriction", and had permitted a UCC filing in favor of Frohlich's parents in contravention of the "Negative Pledge" agreement.
On the basis of such information, Chase deemed itself to be insecure with respect to Jamaica Tobacco's financial condition and its ability to meet its commitments under the letter of credit. Acting under the security agreement, Chase, on October 25, 1982, transferred the funds on deposit in Jamaica Tobacco's checking account to an account entitled "Other Demand Deposits". Jamaica Tobacco had no access to the transferred funds. Because no funds remained in the checking account, checks drawn on it were subsequently dishonored. Some months later, in June 1983, Aetna presented its sight draft and was paid by Chase in accordance with the letter of credit. After these transactions, Jamaica Tobacco remained in debt to Chase in the approximate sum of $27,000.
Jamaica Tobacco executed a deed of assignment for the benefit of creditors on November 5, 1982 and the assignee commenced this action in May of 1984 to nullify the segregation of the bank account as a "preferential transfer" and for damages and other relief.
We address first the basic determination of the trial court on which its grant of relief is...
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