Case Name: Hydrocarbon Processing Corp., Respondent, v. Chemical Bank New York Trust Company, Appellant
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1965-07-09
Citations: 16 N.Y.2d 147
Docket Number: 
Parties: Hydrocarbon Processing Corp., Respondent, v. Chemical Bank New York Trust Company, Appellant.
Judges: 
Reporter: New York Reports
Volume: 16
Pages: 147–155

Head Matter:
Hydrocarbon Processing Corp., Respondent, v. Chemical Bank New York Trust Company, Appellant.
Argued April 21, 1965;
decided July 9, 1965.
John W. Barnum, Richard S. Simmons, Harry H. Voigt and Robert G. Fisher for appellant.
I. Chemical did not have any duty to notify Hydrocarbon that Chemical had received unrelated funds for the account of Banco. (Kirkham v. Bank of America, 165 N. Y. 132; Bown Bros. v. Merchants Bank of Rochester, 243 N. Y. 366; Grant County Deposit Bank v. Greene, 200 F. 2d 835; Carson v. Federal Reserve Bank of N. Y., 254 N. Y. 218.) II. The facts in this case do not support the imposition upon Chemical of any special duty to notify Hydrocarbon of the receipt of unrelated funds for the account of Banco. (Wiese v. Corn Exch. Bank Trust Co., 240 App. Div. 198, 265 N. Y. 582; Graham v. White-Phillips Co., 296 U. S. 27; First Nat. Bank of Odessa v. Fazzari, 10 N Y 2d 394; Thack v. First Nat. Bank & Trust Co., 206 F. 2d 180; Jackson v. First Nat. Bank, 80 Cal. App. 733; Freeman v. Citizens’ Nat. Bank, 78 Iowa 150; Canal Bank & Trust Co. v. Denny, 172 La. 839.) III. Chemical had the right to set off the unrelated funds held for the account of Banco against the debt of Electric, in preference to Hydrocarbon. (United States v. National City Bank of N. Y., 90 F. Supp. 448; Banco Nacional de Cuba v. Sabbatino, 376 U. S. 398; Burns v. Lopez, 256 N. Y. 123; United States Nat. Bank v. Westervelt of Omaha, 55 Neb. 424; Freeman v. Citizens’ Nat. Bank, 78 Iowa 150; Jackson v. First Nat. Bank, 80 Cal. App. 733; Balsa Ecuador Lbr. Corp. v. Security Nat. Bank, 141 F. Supp. 470; Carpenter v. National Shawmut Bank, 187 F. 1; First Nat. Bank of Abilene v. Naill, 52 Kan. 211.) IV. Hydrocarbon has not shown — and cannot show—that either Chemical’s alleged breach of duty to notify or the setoff caused any damage to Hydrocarbon. (First Nat. Bank of Meadville v. Fourth Nat. Bank of City of N. Y., 77 N. Y. 320; National Revere Bank of Boston v. National Bank of Republic of N. Y., 172 N. Y. 102; Howard v. Bank of Metropolis, 95 App. Div. 342; Mott v. Havana Nat. Bank of Havana, N. Y., 22 Hun 354; First Huntington Nat. Bank v. Salt Lick Deposit Bank, 58 F. 2d 553; Indig v. National City Bank of Brooklyn, 80 N. Y. 100; Hoffower v. Pennsylvania Exch. Bank, 16 A D 2d 1032; Stark v. Public Nat. Bank of N. Y., 123 Misc. 647; Benthall v. Washington Hog Market, 257 N. C. 748; Bank of Keo v. Bank of Cabot, 173 Ark. 1008; Royal Bank of Canada v. Universal Export Corp., 10 F. 2d 669; Old Company’s Lehigh v. Meeker, 294 U. S. 227; Griggs v. Day, 136 N. Y. 152; Carson v. Federal Reserve Bank of N. Y., 254 N. Y. 218; National Butchers & Drovers’ Bank v. Hubbell, 117 N. Y. 384; Leonardi v. Chase Nat. Bank of City of N. Y., 263 App. Div. 552; Matter of Bank of Cuba in N. Y., 198 App. Div. 733; Friedman v. Irving Trust Co., 164 Misc. 811; Friede v. National City Bank of N. Y., 250 N. Y. 288; Dakin v. Bayly, 290 U. S. 143; Perutz v. Bohemian Discount Bank in Liquidation, 304 N. Y. 533; Anderson v. N. V. Transandine Handelmaatschappij, 289 N. Y. 9; Werfel v. Zivnostenska Banka, 260 App. Div. 747, 287 N. Y. 91.) V. Despite knowledge of the circumstances, Hydrocarbon failed to act and, therefore, is not entitled to shift its loss to Chemical. (Bank of Washington v. Triplett, 1 Pet. [26 U. S.] 25; Federal Reserve Bank v. Malloy, 264 U. S. 160; Henderson v. Lincoln Rochester Trust Co., 303 N. Y. 27; Savidge v. Metropolitan Life Ins. Co., 380 Pa. 205; National Park Bank of N. Y. v. Seaboard Bank, 114 N. Y. 28; Scott v. Ocean Bank, 23 N. Y, 289; Crouse v. First Nat. Bank of Penn Yan, 137 N. Y. 383; Wilson & Co. v. Smith, 3 How. [44 U. S.] 763; Florida Citrus Exch. v. Union Trust Co. of Rochester, 244 App. Div. 68; Columbia Overseas Corp. v. Banco Nacional Ultramarino, 198 App. Div. 699; National Bank v. Merchants’ Bank, 91 U. S, 92; United States Nat. Bank v. Westervelt of Omaha, 55 Neb. 424; Freeman v. Citizens’ Nat. Bank, 78 Iowa 150.)
Norman Winer and Kurt J. Wolff for respondent. I. The credit which defendant seized was property of Banco.
(Gonzalez v. Industrial Bank [of Cuba], 12 N Y 2d 33; Banco Nacional de Cuba v. Sabbatino, 376 U. S. 398.) II. Defendant had no right to Banco’s credit. (McCloskey v. Chase Manhattan Bank, 11 N Y 2d 936; McGranery v. Agency of Chartered Bank of India, 104 F. Supp. 964, 201 F. 2d 368; Republic of China v. National Bank, 208 F. 2d 627, 348 U. S. 356; United States v. First Nat. City Bank, 321 F. 2d 14.) III. Plaintiff was entitled to set off against Banco. (National Butchers & Drovers’ Bank v. Hubbell, 117 N. Y. 384; Carson v. Federal Reserve Bank of N. Y., 254 N. Y. 218; Leonardi v. Chase Nat. Bank of City of N. Y., 263 App. Div. 552; Matter of Bank of Cuba in N. Y., 198 App. Div. 733; Curtis v. Davidson, 215 N. Y. 395; Rothschild v. Mack, 115 N. Y. 1; Hughitt v. Hayes, 136 N. Y. 163; DeForest Radio Tel. & Tel. Co. v. Triangle Radio Supply Co., 243 N. Y. 283; Burns v. Lopez, 256 N. Y. 123; Bank of United States v. Braveman, 259 N. Y. 65; Loudee Iron & Metal Co. v. Alper & Co., 286 App. Div. 707.) IV. Defendant, as plaintiff’s agent for collection, was obligated either to set off for plaintiff or to give plaintiff notice to act. (Grant County Deposit Bank v. Greene, 200 F. 2d 835; Bown Bros. v. Merchants Bank of Rochester, 243 N. Y. 366.) V. Apart from breach of its agency duties, defendant must disgorge as one holding property to which it has no right and to which plaintiff does have a right. (Village of Elmira Hgts. v. Town of Horseheads, 234 App. Div. 270, 260 N. Y. 507; Roberts v. Ely, 113 N. Y. 128; Fowler v. Bowery Sav. Bank, 113 N. Y. 450.) VI. Defendant’s failure to give plaintiff notice makes defendant liable for the amount of the draft.
William C. Pierce and Ronald O. Dederick for New York Clearing House Association, amicus curiœ.
I. The depositary or collecting bank is not a collector of bad debts. The bank does not owe any obligation to notify its customer of funds received outside of the collection process. (Henderson v. Lincoln Rochester Trust Co., 303 N. Y. 27.) II. Plaintiff’s collection was subject to foreign exchange controls; having assumed the risk, of nonconvertibility, it cannot now shift the burden of its decision. III. Voluntary disclosure by a bank of accounts held by it subjects it to liability. (Peterson v. Idaho First Nat. Bank, 83 Idaho 578; Tournier v. National Provincial & Union Bank of England, [1924] 1 K. B. 461; Taylor v. Commercial Bank, 174 N. Y. 181; Cunningham v. Merchants Nat. Bank, 4 F. 2d 25, 268 U. S. 691; Sparks v. Union Trust Co., 256 N. C. 478; Peoples Nat. Bank v. Southern States Fin. Co., 192 N. C. 69; Brex v. Smith, 104 N. J. Eq. 386.) IV. Affirmance of the decision below would jeopardize the international trading position of New York.

Opinion:
Dye, J.
In September of 1959, the plaintiff, a creditor-vendor, in the course of trade, deposited a sight draft in the amount of $2,467.63 with the defendant for collection from the plaintiff's debtor-vendee in Cuba. Although funds in payment of the draft reached a Cuban bank, Banco Continental Cubano (hereinafter Banco), they have never been transmitted to the defendant or the plaintiff, initially for lack of a necessary export permit from the Currency Stabilization Fund in Cuba, and, eventually, due to the nationalization of Banco by the Cuban government in October of 1960. Significantly, the nationalization decree merged Banco's assets and liabilities into Banco Nacional de Cuba (hereinafter Nacional), which is wholly owned, dominated and controlled by the Republic of Cuba and, by the same mandate, nationalized the Cuban Electric Company (hereinafter Electric), a Florida corporation operating as a public utility in Cuba, which, when nationalized, was indebted to the defendant on matured loans totaling $750,000.
The question now posed arose when, in November of 1960, the defendant received a cable from the Whitney National Bank of New Orleans, Louisiana, instructing it to charge WThitney's account, maintained with the defendant, in the sum of $38,607.43, and to credit Banco with a like amount at the defendant's branch office in London, England. The defendant complied and then, on its own initiative, (1) charged the Banco account in London for $38,607.43, credited the same amount to Nacional at its main office, and (2) charged the $38,607.43 against Nacional as an offset against Electric's debt to itself. In other words, by treating Electric, Banco and Nacional as a single entity (Cuba) as a result of the nationalization, the defendant secured payment of a portion of Electric's debt to itself.
The plaintiff asserts, and the Appellate Division has agreed in result, that the defendant has no right to offset the Banco credit against the Electric debt, that the plaintiff does have such a right, and that the defendant, as the plaintiff's agent for collection, was obligated to either set off for the plaintiff or to give the plaintiff notice of the Banco credit so that the plaintiff might act for itself. Failure to give this notice allegedly makes defendant liable for the amount of the draft.
The effect of the Cuban nationalization and the propriety of the defendant's act in appropriating the Banco credit to the Electric debt are irrelevant to the present question. The parties stipulated that payment by Banco to the defendant was subject to the prior approval of the Currency Stabilization Fund in Cuba. If the situation is to be altered as a result of the national ization, it must be because the nationalization, in fact, nullified the possibility of obtaining the export permit and merged, as the parties agree it did, all the assets and liabilities of Banco into Nacional. If this be the case, then Electric, whose assets and liabilities were assumed by the same act, also became part of the same entity. In short, the plaintiff cannot take advantage of the confiscation to reach an otherwise unavailable Banco fund, and at the same time disown it to prevent the defendant from doing the same thing. Moreover, if the defendant acted improperly in appropriating the Banco credit, that wrong was a wrong against Banco or Cuba, and they are not parties to this suit. If the plaintiff is to recover from the defendant, it must show that the defendant, in its role as an agent for collection, breached a duty which it owed to the plaintiff, and it is of no avail to merely show that the defendant has improperly appropriated an unrelated fund.
A collecting bank owes its principal " ordinary care " in the discharge of its duty (Negotiable Instruments Law, § 350-d; Uniform Commercial Code, § 4-202). It is responsible for presenting an item or sending it for presentment, sending notice of dishonor or nonpayment after learning of nonpayment or nonacceptance, settling for an item, making necessary protest, and notifying its transferor of any loss or delay in transit within a reasonable time after discovery thereof (Uniform Commercial Code, § 4-202). The defendant bank fulfilled these requirements and, subject thereto, subdivision (3) of section A-202 of the code provides that " a bank is not liable for the insolvency, neglect, misconduct, mistake or default of another bank or person or for loss or destruction of an item in transit or in the possession of others ' '.
Since drafts do not, of themselves, operate as an assignment of the funds of the drawee in the hands of a third party (see Thack v. First Nat. Bank & Trust Co., 206 F. 2d 180), it remains only to consider whether an extra-statutory obligation is properly applicable to these funds in the defendant's hands or whether the defendant's conduct with respect to these funds constitutes less than " ordinary care " within the meaning of section 4-202 of the code. Numerous factors militate against such a holding. As was pointed out in the dissenting opinion below, "To so bold would in effect prevent any collecting bank from doing its routine business if, by the law of the sovereignty having jurisdiction over it, it is prevented from remitting after the collection of a draft. # [S]uch a holding would [not] be conducive to free international commercial intercourse ". More significant difficulties are readily perceived. Each bank in the collecting chain would, in effect, become a guarantor of the draft— at least to the extent that they had possession of, or access to, other funds of a prior party who received payment. Due care for the protection of their own financial dealings with a drawee would often impel them to decline a part in the collection process, to say nothing of the difficulties inherent in correlating every collection item with their own accounts. The collection process does not lend itself to such a conclusion and cases have so held (Thack v. First Nat. Bank & Trust Co., supra; Balsa Ecuador Lbr. Corp. v. Security Nat. Bank, 141 F. Supp. 470; Jackson v. First Nat. Bank, 80 Cal. App. 733). Nor is this a case in which the facts tend to establish collusion or bad faith by the defendant (cf. Dern v. Kellogg, 54 Neb. 560). In Thack v. First Nat. Bank (supra, p. 183) the court stated the principle thusly: ' ' Although, as collecting agent for the drafts, the appellee bank owed appellants the duty of due diligence, good faith and impartiality, appellee was not necessarily precluded thereby from collecting its own debt by lawful means, so long as it was guilty of no bad faith. It owed appellants no duty to notify them that it was also a creditor of [the drawee] unless suppression of that fact would amount to bad faith, which, in the circumstances here present, it does not. Having acted in good faith and with due diligence in the performance of its duties as collecting agent, and being unable to pay appellants' drafts because the drawee had not accepted them, appellee was at liberty to apply the [drawee's] available funds to the payment of his debt to the bank ". So in the present case, there is no question but that the appellant bank acted properly throughout the collection process and that the fund in dispute came into their possession in " good faith " through a transaction unrelated to the agency relationship. If, then, the defendant could properly apply the money to its own debt, at least as opposed to the plaintiff, there would be no purpose in requiring the bank to notify the plaintiff of the fund's existence, and no liability would flow from the failure to do so.
The order of the Appellate Division should be reversed, with costs in this court and in the Appellate Division, and judgment entered in favor of the defendant.
Chief Judge Desmond and Judges Fuld, Van Voorhis, Burke, Scileppi and Bergan concur.
Order reversed, with costs in this court and in the Appellate Division, and matter remitted to the Appellate Division to direct the entry of a judgment in accordance with the opinion herein.