Met Frozen Food Corp. v. National Bank of North America

• Decision Date: 15 March 1977
• Citation: 393 N.Y.S.2d 643,89 Misc.2d 1033
• Parties: MET FROZEN FOOD CORP., Plaintiff, v. NATIONAL BANK OF NORTH AMERICA and Bankers Trust Company, Defendants. MET FOOD CORP., Plaintiff, v. NATIONAL BANK OF NORTH AMERICA and Manufacturers Hanover Trust Company, Defendants.
• Court: New York Supreme Court

Page 643

393 N.Y.S.2d 643

89 Misc.2d 1033

MET FROZEN FOOD CORP., Plaintiff, v. NATIONAL BANK OF NORTH AMERICA and Bankers Trust Company,

Defendants.

MET FOOD CORP., Plaintiff, v. NATIONAL BANK OF NORTH AMERICA and Manufacturers Hanover

Trust Company, Defendants.

Supreme Court, Special Term, Nassau County, Part I.

March 15, 1977.

Finkel, Nadler & Goldstein, New York City, for plaintiffs in Both actions.

Cole & Deitz, New York City, for defendants in Both Actions.

ALEXANDER BERMAN, Justice.

$14,835,917,339,000, an impressive amount, even in an age of superlatives. It represents the total dollar value of commercial paper cleared through the sixteen Federal Reserve Banks in the major cities of the United States during the 1975 calendar year. In New York City alone, the average daily exchange at the New York Clearing House amounts to $5,642,306,382.51. Each day, then, more than five billion dollars changes hands in the metropolitan area by means of abstract transactions involving bank debits and credits. Were 'hard cash' required for each of the transactions involved, the economy of this country would grind to a halt. It is apparent that regardless of the relative merits of gold in times of distress, in a functional economy paper is king.

This fluidity of exchange is made possible by the country's 'banking system.' It provides the machinery and the personnel which makes the transfer of funds possible and workable.

Any check, be it a $10 cash item scrawled during a night on the town or a multimillion dollar item given to close a corporate merger finds its way into what is known as the 'collection process.' On the surface the process appears deceptively simple. Under normal circumstances, a check is deposited by the payee in his bank and a conditional credit is made to his account. Some two or three days later, those funds are available for withdrawal. On occasion, a depositor will receive a notice that the check which he deposited has been returned by the maker's bank because it was drawn on 'insufficient' or 'uncollected' funds. Often, in the normal course of events, after a large amount of energy has been expended in rather heated discussions with the maker and a number of truly imaginative excuses has been given, the payee is prevailed upon to redeposit the check which then hopefully clears.

The steps between deposit and final payment are many or few depending on the individual circumstances. The number of banks actually involved in the collection can range from one, as in the case of a check drawn on the bank in which it is deposited, to half a dozen, as in the case where a check is drawn on an out-of-state bank and intermediary banks are required for collection. The banks perform different functions at different times and can, in certain instances, perform different functions simultaneously. Each of the functions gives rise to separate responsibilities. Key to the workings of the system are the Federal Reserve Bank and the local clearing houses. These perform the vital function of servicing the local banks within their geographic area and act as a master correlator and dispatcher. They are the indispensible middlemen in the process around which all of the collection activity revolves. Checks drawn on banks other than the bank in which they are deposited are forwarded to them for distribution to the banks upon which they are drawn for payment or rejection. They are also the conduit through which unpaid items are returned.

It is apparent that were each jurisdiction permitted to have its own rules and regulations fixing the rights and obligations of the various parties, chaos would result and the integrity and free exchange of commercial paper would be undermined. It is just such a chaotic situation which prompted a majority of the states to enact the Uniform Commercial Code more particularly, Article 4 thereof (Bank Deposits--Collections). Article 4, which was enacted in this State in 1962 to take effect on September 27, 1964 (L.1962, C. 553), is divided into five parts and deals with the collection process and the relationship between benks and their customers. Part I ( §§ 4--101 thru 4--109) defines the various capacities of the banks involved in a particular transaction and sets forth general provisions with respect to receipt of items, delays and posting; Part II ( §§ 4--201 thru 4--214) deals with depositary banks and collecting banks; Part III ( §§ 4--301 thru 4--303) deals with payor banks; Part IV ( §§ 4--401 thru 4--407) deals with the relationship between payor banks and their customers; and Part V ( §§ 4--501 thru 4--504) deals with the collection of documentary drafts. Some of the relevant definitions contained in Article 4 are: A payor bank is defined as a 'bank by which an item is payable as drawn or accepted' (UCC § 4--105(b)); a depositary bank is the 'first bank to which an item is transferred for collection, even though it is also the payor bank' (UCC § 4--105(a)); a collecting bank is 'any bank handling the item for collection except the payor bank' (UCC § 4--105(d)); a presenting bank is 'any bank presenting an item except a payor bank' (UCC § 4--105(e)). A banking day is defined as 'that part of any day on which a bank is open to the public for carrying on substantially all of its bank functions' ( § 4--104(1)(c)). The term 'midnight deadline,' which has particular significance to this opinion, is defined as the 'midnight on its next banking day following the banking day on which it (payor bank) receives the relevant item or notice or from which the time for taking action commences to run, whichever is later.' ( § 4--104(1) (h)).

Of paramount importance to the holdings here are the provisions of § 4--302, which read as follows:

'Payor Bank's Responsibility for Late Return of Item.

In the absence of a valid defense such as breach of a presentment warranty (subsection (1) of Section 4--207), settlement effected or the like, if an item is presented on and received by a payor bank the bank is accountable for the amount of

(a) a demand item other than a documentary draft whether properly payable or not if the bank, in any case where it is not also the depositary bank, retains the item beyond midnight of the banking day of receipt without settling for it, or, regardless of whether it is also the depositary bank, does not pay or return the item or send notice of dishonor until after its midnight deadline; or

(b) any other properly payable item unless within the time allowed for acceptance or payment of that item the bank either accepts or pays the item or returns it and accompanying documents.'

The Court has set forth this rather lengthy background material in order to place the issues involved in this case in their proper perspective. We now turn to the motions before this Court, and the facts giving rise to the two actions involved.

In the early part of 1972, Met Food Corp. (plaintiff in action bearing Index #3938/74 and Met Frozen Food Corp. (plaintiff in action bearing Index #19113/73) were transacting business on a daily basis with Skilmart's Supermarkets, Inc. These actions arise out of 15 checks of Skilmart's, totaling $215,884.34, drawn in March of 1972 on its account at National Bank of North America (National) and payable to eithr Met Foods or Met Frozen and deposited at Bankers Trust (Index #19113/73) or Manufacturers Hanover (Index #3938/74). The checks were then transmitted to the New York branch of the Federal Reserve, where they were forwarded to National. They were subsequently dishonored by National and returned to the Fed for re-transmittal to the forwarding banks. It appears that at the times involved, National was utilizing the assets of Skilmart on deposit with it as a set-off against monies owed by Skilmart. On April 5, 1972, within fifteen days of the periods involved, Skilmart filed a Chapter XI bankruptcy petition, and was subsequently adjudicated a bankrupt. (It should be noted that details with respect to what transpired in that proceeding are virtually non-existent).

These actions followed. In each, the complaint alleges three causes of action--the first, for wrongful cancellation and return of the checks; the second, on the checks themselves on the grounds that dishonor was untimely; and third, on the grounds of a conspiracy between the banks involved. The answers which contain denials of the material allegations of the complaint do not contain affirmative defenses or counterclaims. The answer of Bankers Trust does, however, contain a cross-claim against National. The Court now has before it a motion by plaintiffs and cross-motion by defendants for summary judgment in each of the actions. Before reaching the merits of these motions, it should be pointed out that counsel for defendant National, despite the apparent conflict of interest represents all of the banks involved, and any subsequent reference to defendant in this opinion shall be taken to mean National Bank of North America.

Of the three causes of action, only plaintiffs' claims with respect to liability under Section 4--302 merits discussion. Because of the similarity of the claims and the defenses thereto, the Court will, before reaching the factual details of the individual transactions, deal first with the question of plaintiffs' rights against National.

It is clear that if plaintiffs can establish that National (a payor bank) failed to timely return a check of Skilmart's within the deadline set forth in § 4--302 (midnight of the banking day following receipt) it, National, is liable for the face amount of the item (see Sunshine v. Bankers Trust Company, 34 N.Y.2d 404, 358 N.Y.S.2d 113, 314 N.E.2d 860; Fromer Distributors, Inc. v. Bankers Trust Company & Chemical Bank, 36 A.D.2d 840, 321 N.Y.S.2d 428; Rock Island Auction Sales v. Empire Packing Co., 32 Ill.2d 269, 204 N.E.2d 721; United States v. Loskocinski, D.C., 403 F.Supp. 75) less any payment received (see UCC § 4--213).

The...