Supreme Merchandise Co., Inc. v. Chemical Bank

• Decision Date: 05 June 1986
• Citation: 503 N.Y.S.2d 9,117 A.D.2d 424
• Parties: , 2 UCC Rep.Serv.2d 1627 SUPREME MERCHANDISE CO., INC., Petitioner-Respondent, v. CHEMICAL BANK, Respondent-Appellant.
• Court: New York Supreme Court — Appellate Division

Page 9

503 N.Y.S.2d 9

117 A.D.2d 424, 2 UCC Rep.Serv.2d 1627

SUPREME MERCHANDISE CO., INC., Petitioner-Respondent, v. CHEMICAL BANK, Respondent-Appellant.

Supreme Court, Appellate Division,

First Department.

June 5, 1986.

Robert T. Stephenson, of counsel (Harold Weisblatt, with him on brief; John B. Wynne, New York City, attorney), for respondent-appellant.

William E. Seeger, of counsel (Miller & Seeger, New York City, attorneys), for petitioner-respondent.

Before SANDLER, J.P., and FEIN, MILONAS, KASSAL and ELLERIN, JJ.

SANDLER, Justice.

In an appeal from a judgment in favor of petitioner, Supreme Merchandise Co., Inc. ("Supreme"), in a proceeding pursuant to CPLR 6214(d) to compel the delivery of certain funds alleged to have been the subject of two orders of attachment, the central issue presented is whether the interest of the beneficiary in an executory negotiable letter of credit constitutes under CPLR 6202 "[a]ny debt or property against which a money judgment may be enforced as provided in section 5201."

In a carefully considered opinion, in which it understandably relied on the analysis set forth by the Court of Appeals in ABKCO Industries, Inc. v. Apple Film, Inc., 39 N.Y.2d 670, 385 N.Y.S.2d 511, 350 N.E.2d 899, Special Term held that the interest of the beneficiary constituted property within the meaning of the relevant statutory sections and, being assignable, was subject to attachment. Recognizing the question to be a close one, we have come to a different conclusion. The distinctive characteristics of a negotiable letter of credit, particularly when considered in light of the critical role performed by such instruments in international transactions, distinguish the beneficiary's interest in an executory letter of credit from the situation addressed in ABKCO, and persuade us that such an interest is not "property" within the meaning of CPLR 6202 and 5201(b).

On or about March 1, 1984, Chemical Bank issued a letter of credit in the amount of $111,840. The account party was Supreme Importers (not to be confused with petitioner) and D.M. Sales Corp. The beneficiary was Iwahori Kinzoku Co., Ltd. ("Kinzoku"). In early March 1984, Supreme caused Chemical Bank to be served with an order of attachment and levy as a garnishee with respect to any property or debts due and owing Kinzoku. A preliminary records search failed to disclose any account held by Chemical in the name of Kinzoku, and the sheriff and Supreme's counsel were so informed. Thereafter, at a time not clearly specified in the record Chemical discovered a letter of credit relationship and so informed Supreme's counsel. On May 30, 1984, Chemical was served with a second order of attachment and levy dated May 25, 1984. Both orders of attachment were confirmed by Special Term.

The letter of credit was a "time" letter of credit--30 day sight--and allowed partial shipment of the goods covered thereunder. Under the terms of the letter of credit, documents and drafts drawn thereunder could be freely negotiated by any bank, which would then make a presentment to Chemical for acceptance and payment.

Chemical was presented with a draft in the amount of $55,000 and relevant documentation from the Fuji Bank Ltd. of Tokyo, Japan ("Fuji") on or about April 19, 1984. After the account party agreed to waive certain discrepancies in the documentation from the terms of the letter of credit, Chemical accepted the draft on or about April 27, 1984, and thereby engaged to pay the draft within the 30-day period. Payment was effected in favor of Fuji on or about May 29, 1984.

Chemical was also presented with a draft in the amount of $56,840 and relevant documentation from the Dai-ichi Kangyo Bank, Ltd. of Tokyo ("Dai-ichi") on or about April 5, 1984. Once again, after the account party agreed to waive certain discrepancies in the documentation from the terms of the letter of credit, Chemical determined on April 17, 1984 to accept the draft and engaged to pay the amount within a 30-day period. After acceptance, the draft was presented for payment. However, payment was not effected until after service upon Chemical of the second order of attachment.

It is alleged in Chemical's papers that both negotiating banks informed Chemical that they had negotiated the documents for value prior to the service upon Chemical of the second order of attachment, and that neither had knowledge at the time of such negotiation of the existence of an order of attachment. Chemical also asserts that it had no knowledge of the existence or identity of a negotiating bank prior to the presentments described above to Chemical.

In this proceeding pursuant to CPLR 6214(d) to compel delivery of funds representing the letter of credit amount of $111,840 plus interest, Supreme alleged that the first and second orders of attachment were applicable to the letter of credit proceeds. In response, Chemical argued that the first order of attachment was ineffective as to the proceeds of a purely executory letter of credit, and that the second order of attachment was served after Chemical had already "accepted" drafts presented to it by negotiating banks, thus establishing a direct obligation on the part of Chemical to effect payment in their behalf.

In granting the petition to the extent of directing Chemical to deliver to the Sheriff of New York County the amount of the two drafts paid to Fuji and Dai-ichi, with interest, Special Term addressed only the issue raised with respect to the first order of attachment, concluding, as we have observed, that the beneficiary's interest in the letter of credit constituted property within the meaning of CPLR 5201(b) and CPLR 6202.

As to that part of Supreme's claim that alleges Chemical's violation of the second order of attachment, served after Fuji and Dai-ichi had presented Chemical with drafts and accompanying documentation, little discussion is required. Whatever else may be in doubt, the record is clear that Chemical had accepted the drafts prior to the service of the second order of attachment. The precise issue was squarely addressed by the Court of Appeals under indistinguishable circumstances in First Commercial Bank v. Gotham Originals, Inc., 64 N.Y.2d 287, 486 N.Y.S.2d 715, 475 N.E.2d 1255, and the Court of Appeals held that on acceptance of such drafts the issuing bank, pursuant to Uniform Commercial Code § 4-303(1), "became directly, primarily and unconditionally obligated to the holder to pay them at maturity...." (at 297, 486 N.Y.S.2d 715, 475 N.E.2d 1255).

Turning then to the principal issue presented on appeal, analysis necessarily starts with a consideration of the controlling statutory provisions.

CPLR 6202 provides in pertinent part as follows: "Any debt or property against which a money judgment may be enforced as provided in section 5201 is subject to attachment."

Section 5201 in turn provides in pertinent part as follows:

(a) Debt against which a money judgment may be enforced. A money judgment may be enforced against any debt, which is past due or which is yet to become due, certainly or upon demand of the judgment debtor, whether it was incurred within or without the state, to or from a resident or non-resident, unless it is exempt from application to the satisfaction of the judgment. A debt may consist of a cause of action which could be assigned or transferred accruing within or without the state.

(b) Property against which a money judgment may be enforced. 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, unless it is exempt from application to the satisfaction of the judgment....

Also pertinent here is subdivision (c)(4), concerned with the designation of the proper garnishee for particular property or debt, which begins with the phrase "Where property or a debt is evidenced by a negotiable instrument for the payment of money," clearly indicating that an interest in a negotiable instrument may be either a debt or property.

The broad problem of construction presented by a consideration of CPLR 5201(a) and (b), which gives rise to the kind of issue here presented, appears on the face of the two subdivisions. On the one hand, subdivision (a) is explicit that a debt not yet due is not subject to enforcement (and therefore not attachable under section 6202) unless it is to become due "certainly or upon demand of the ... debtor." No similar limitation appears in subdivision (b) defining property. That subdivision permits enforcement (and therefore...