author: Fuchsberg, J.

text:
    In the Matter of David Abramovich, Appellant, v Board of Education of Central School District No. 1 of the Towns of Brookhaven and Smithtown, Also Known as Three Village Central School District No. 1, Respondent.
    Argued January 8, 1979;
    decided February 13, 1979

      POINTS OF COUNSEL

      Francis. M. Neary, P. C., and Jeffrey Michael Conforte for appellant.
    I. The stipulation of settlement which purported to authorize the removal of appellant, David Abramovich, a tenured teacher, without a hearing or notice of charges is void and unenforceable because it contravenes the statutory policy of this State. (Matter of Boyd v Collins, 11 NY2d 228; Matter of Kobylski v Agone, 37 Misc 2d 255, 19 AD2d 761; Matter of Monan v Board of Educ., 280 App Div 14; Matter of McMaster v Owens, 275 App Div 506; Matter of Glass v Board of Educ., 21 AD2d 891; Matter of Mannix v Board of Educ., 21 NY2d 455; Bevan v New York State Teachers’ Retirement System, 44 AD2d 163.) II. The settlement stipulation violates the public policy of this State by requiring appellant to waive his tenure rights and, therefore, such waiver and stipulation are void and unenforceable. (Estro Chem. Co. v Falk, 303 NY 83; Matter of Baer v Nyquist, 71 Misc 2d 471; Caravaggio v Retirement Bd. of Teachers’ Retirement of City of N. Y., 36 NY2d 348; Matter of Cedar v Commissioner of Educ. of State of N. Y., 30 AD2d 882; Matter of Mannix v Board of Educ., 21 NY2d 455.) III. The board of education was without authority to delegate its responsibility for making tenure decisions to John Burns, a school principal. (Matter of Cohoes City School Dist. v Cohoes Teachers Assn., 40 NY2d 774.) IV. The board of education, by dismissing David Abramovich, a tenured teacher, without charges or a prior hearing, deprived him of his property rights without due process of the law. (Bevan v New York State Teachers’ Retirement System, 74 Misc 2d 443, 44 AD2d 163; Matter of Harris v Mechanicville Cent. School Dist., 86 Misc 2d 144; Matter of Jerry v Board of Educ., 75 Misc 2d 461.) V. The court below based its decision on facts not contained in the record.

      Peter V. Snyder and Kevin A. Seaman for respondent.
    I. The stipulation provided a reasonable and proper method of disposing of the dispute. (Estro Chem. Co. v Falk, 303 NY 83; Wood Co. v Horgan, 291 NY 422; Caravaggio v Retirement Bd. of Teachers’ Retirement of City of N. Y, 36 NY2d 348; Matter of New York, L. & W. R. R. Co., 98 NY 447; Mount St. Mary’s Hosp. of Niagara Falls v Catherwood, 26 NY2d 493; Morse v Morse Dry Dock & Repair Co., 249 App Div 764; Board of Educ. v Commack Teachers Assn., 56 AD2d 620; Board of Educ. v Associated Teachers of Huntington, 30 NY2d 122; Matter of Auburn Police Local 195, Council 82, Amer. Federation of State, County & Municipal Employees, AFL-CIO v Helsby, 91 Misc 2d 909; Antinore v State of New York, 49 AD2d 6.) II. Should the court hold the stipulation invalid as to the disposition of the charges, the hearing on these charges should be rescheduled. (Matter of Frutiger, 29 NY2d 143.)
   OPINION OF THE COURT

Fuchsberg, J.

We hold that, in appropriate circumstances such as exist in this case, a tenured teacher may, as part of a stipulation in settlement of a disciplinary proceeding brought against him, waive his or her continued right to the protections afforded by section 3020-a of the Education Law.

In this article 78 proceeding, petitioner, David Abramovich, an elementary school teacher, challenged such a stipulation as violative of public policy, a view with which Special Term agreed. Following appeal, the Appellate Division entered a unanimous order of reversal. On further appeal to this court by petitioner pursuant to CPLR 5601 (subd [a], par [ii]), we now uphold that determination.

In May, 1975, the petitioner was charged with 49 specific counts of insubordination, incompetency and neglect of his teaching duties. In due course, a hearing on the charges as required by section 3020-a got underway. Petitioner was not only represented by counsel but advised as well by a union field representative and the president of the teachers’ association of which he was a member. On the third day of the hearing, after the board of education had presented written and oral testimony in support of the charges and after consultation between the petitioner and those representing him, the parties, with the concurrence of their representatives, entered into the settlement in question.

The stipulation of settlement, in essence, provided that Abramovich was to continue as a teacher, thus avoiding the substantial risk of dismissal that was entailed in allowing the hearing to go to decision, but left him subject to future dismissal, if, after a designated period of employment, his work was not found satisfactory. In implementation of the stipulation the board was to withdraw all of its charges with prejudice, thereby surrendering its right to have tried him on any of the 49 charges that had been brought against him. For his part, petitioner was to take an unpaid leave of absence until the commencement of the 1976 fall school term, when he would be re-employed, but at a different school and under a new principal. Moreover, to reinforce the likelihood that his future teaching skills would show improvement, it was agreed that, at least nine months prior to the commencement of petitioner’s re-employment, the board would provide him with a written list of areas in which he was considered deficient and the new school principal would supply written criteria setting forth the standards by which his future performance was to be judged. During his leave of absence, in order to improve his capabilities, the board also undertook to utilize this time to afford him instruction in speciality teaching areas such as remedial reading along with the opportunity to observe the teaching techniques utilized by other members of his new school’s faculty. After all this, at the conclusion of the four-month term starting with the teacher’s September, 1976 reassignment and ending that Christmas, the new principal was to appraise petitioner’s performance and determine whether his services were to be retained. This decision was to be unappealable by either the petitioner or the board.

It is not disputed that the board carried out its part of the bargain. But, when, in December, 1976, the evaluation made by the principal of the new school was unfavorable to the teacher and he was dismissed, he thereafter instituted the present proceeding. Emphasizing that section 3020-a establishes the exclusive means for the dismissal of a tenured teacher and relying largely on Matter of Boyd v Collins (11 NY2d 228), he contends that, no matter the circumstances under which it may be arrived at, even the most voluntary of agreements between the parties waiving the protections of the section is an impermissible bypass of the very thing the statute is intended to secure. It is in this claimed circumvention that he would have us find public policy is offended.

Clearly, the statute does form a critical part of the system of contemporary protections that safeguard tenured teachers from official or bureaucratic caprice (see People ex rel. Callahan v Board of Educ., 174 NY 169, 178; Matter of Monan v Board of Educ., 280 App Div 14, 18). To that end, section 3020-a and the regulations promulgated thereunder by the Commissioner of Education (8 NYCRR 82.10, 82.11) attempt to harmonize the method of removing tenured teachers with the dictates of procedural due process (see Matter of Amos v Board of Educ., 54 AD2d 297, 304, affd 43 NY2d 706; Hodgkins v Central School Dist. No. 1, 48 AD2d 302, 304-305). These regulations are specific. Among other things, they require that all charges be in writing; that a determination that probable cause exists be made by a vote of a majority of all the members of the employing board before a formal written notice specifying the charges in detail and outlining the accused employee’s rights is served upon him; and that an opportunity be provided for a hearing at which the teacher has the right to be represented by counsel, to testify and to subpoena and cross-examine witnesses (Education Law, § 3020-a, subds 1-3). Indisputably, up to the point at which a mutually agreeable disposition was reached between the parties in the case before us, each of these steps had been followed faultlessly.

We do not gainsay the importance of these standards both in terms of their role in protecting the rights of individual teachers whose years of satisfactory service have earned them this security and in fostering an independent and professional corps of teachers. It follows that the shield of section 3020-a is not lightly to be put aside. But that does not mean that it is never waivable. For, when a waiver is freely, knowingly and openly arrived at, without taint of coercion or duress, the sturdy public policy underpinnings of section 3020-a are not undermined.

Indeed, the contention that public policy absolutely forbids waiver of section 3020-a rights is negated by examination of the statute itself. In that connection, we first observe that the statute contains no express provision preventing a teacher from waiving its benefits (cf. Estro Chem. Co. v Falk, 303 NY 83, 86-87). At least somewhat to the contrary, subdivision 2 expressly conditions waiver of the right to a hearing upon the teacher’s "unexcused failure” to notify the board of the desire for such a hearing within 10 days of receipt of the charges; having authorized waiver by simple neglect, the statute need not be so broadly read as to prohibit the petitioner from doing so of his own free will, particularly when acting with the assistance of counsel. Especially is this so when the waiver serves as the quid pro quo for countervailing benefits, here the dismissal of the flood of charges for which the teacher was already on trial, so that he might have what he apparently regarded as a better opportunity, albeit on mutually and carefully delineated terms, to retain his position. And, as petitioner himself concedes, obviously a tenured teacher always has the option to resign, whether for the reason to which we have alluded or for any other that pleases him; so the waiver in the present case may be viewed as no more than a voluntary resignation in futuro. In thus indicating that section 3020-a is not so sacrosanct as to be impervious to waiver under all circumstances, we overrule Matter of Boyd v Collins (11 NY2d 228, supra).

Moreover, our holding today conforms with a competing public policy favoring the nonjudicial resolution of legal claims — a means of facilitating the vindication of rights without having to endure the travail and vicissitudes of litigation (see, e.g., Matter of Beekman-Downtown Hosp. v Whalen, 44 NY2d 124, 134; Yonkers Fur Dressing Co. v Royal Ins. Co., 247 NY 435, 445 [common-law litigation]; cf. Matter of Maye [Bluestein], 40 NY2d 113, 117-118; Antinore v State of New York, 49 AD2d 6, 8, affd 40 NY2d 921 [arbitration]). It is no derogation of the trial process to recognize that voluntary composition of differences, arrived at, in whole or in part, by parties themselves, does not necessarily result in a lesser order of justice than an all-or-nothing decision imposed by judicial or other authority. Not surprisingly then, the comprehensive range of matters on which agreements between litigants or potential litigants is enforceable long ago came to include "stipulating] away statutory, and even constitutional rights” (Matter of New York, L. & W. R. R. Co., 98 NY 447, 453; see, also, Martin v City of Cohoes, 37 NY2d 162, 165-166; Cullen v Naples, 31 NY2d 818).

Judicial acceptance of compromises in which the most fundamental of rights are waived is not uncommon. Plea bargaining — to focus on one obvious example — may entail a compromise whereby the accused in return for sentence leniency may voluntarily and knowingly waive his right to have the State prove his guilt beyond a reasonable doubt (see, generally, People v Francis, 38 NY2d 150, 155-156, and authorities cited therein). Similarly, litigation settlements, if "not lightly, inadvertently, inadvisedly or improvidently” entered into, may be effective waivers of legal claims (Yonkers Fur Dressing Co. v Royal Ins. Co., supra, at p 446). The binding effect of agreements to submit disputes to arbitration, for most purposes forgoing resort to the courts, provides yet another illustration (see Rico Tit. Co. v Persichilli Homes, 64 Misc 2d 306, 307; cf. Matter of Writers Guild of Amer. East [Prockter Prods.], 1 NY2d 305, 308). Of the latter, relevant for the public employment case before us has been the approval of arbitration as a substitute for some of the statutory procedures safeguarding civil service employees from arbitrary, capricious and unreasonable removal (see Antinore v State of New York, supra; cf. Matter of Boyd v Collins, 11 NY2d 228, 235 [dissenting opn], supra), and, more particularly, our sanctioning of arbitration as an alternative to the review procedures of section 3020-a (subd 5) (see Board of Educ. v Associated Teachers of Huntington, 30 NY2d 122, 131-132). Thus, the principles that pervade our treatment of compromise stipulations and waivers in other areas reinforce our conclusion that section 3020-a need not be construed as prohibiting petitioner’s waiver.

Returning to the facts of this case, we emphasize that the settlement here could hardly have manifested a clearer instance of a petitioner’s voluntary relinquishment of known rights. The stipulation was reached only after exhaustive discussion among counsel for the board, petitioner, his lawyer, the hearing officer and the teachers’ union representative. The record discloses that its ramifications were fully explored. At various points in the articulation of the agreement, petitioner conferred with his counsel and the others. Furthermore, at the teacher’s personal request, the entire stipulation was reread point by point for his approval even after it had been put on the record.

To further insure that petitioner fully comprehended the import of what was being reread, the hearing officer painstakingly and in no uncertain terms inquired not only into the petitioner’s understanding of its precise conditions but also as to his grasp of the nature and extent of the rights he was waiving. It was not until the officer was satisfied on these that he accepted and approved it. Certainly, the undisputed facts before us, the careful and counseled negotiations between the parties and, particularly, the absence of any claim of duress on the part of the board, leaves no possibility that there was other than a voluntary and effective waiver. Indeed, even now, from the vantage point of hindsight, petitioner does not seriously controvert his acceptance and understanding of the terms of the stipulation or the board’s good faith in entering into it.

For all these reasons, the order of the Appellate Division should be affirmed.

Chief Judge Cooke and Judges Jasen, Gabrielli, Jones and Wachtler concur with Judge Fuchsberg.

Order affirmed, with costs.

       For example, this exchange forms part of the record:
      'THE HEARING OFFICER: * * * Do you understand, Mr. Abramov
      that you have a right not to settle
      this case, that you have a right
      to continue with this hearing?
      'THE WITNESS: Yes
      'THE HEARING OFFICER: And defend yourself on the pending
      charges?
      'THE WITNESS: Yes
      'THE HEARING OFFICER: You have a right, in other words,
      to put the School Board to the proof
      and prove the charges against you.
      'THE WITNESS: Yes
      'THE HEARING OFFICER: All right. And, that your rights are
      guaranteed under Section 3020A of the
      Education Law?
      'THE WITNESS: Yes I do.
      'THE HEARING OFFICER: All right. And, in entering into
      the setttlement, you understand that
      you are giving up your right to
      have a continuance of this hearing?
      'THE WITNESS: Yes.”


source: Caselaw Access Project

author: Gabrielli, J.

license: Public Domain

text:
    Underpinning & Foundation Constructors, Inc., Respondent, v Chase Manhattan Bank, N.A., et al., Defendants, and Bank of New York, Appellant.
    Argued January 9,1979;
    decided February 8, 1979

      POINTS OF COUNSEL

      Joseph A. Kilbourn and James R. Sullivan for appellant.
    I. The drawer (Underpinning) cannot state a cause of action against Bank of New York which collected the checks bearing forged indorsements from the drawee. (Lynch v First Nat. Bank of Jersey City, 107 NY 179; Fidelity & Guar. Fire Corp. v Marine Midland Trust Co. of N. Y., 162 Misc 12; Trojan Pub. Corp. v Manufacturers Trust Co., 273 App Div 843, 298 NY 771; Chartered Bank v American Trust Co., 48 Misc 2d 314, 26 AD2d 623; Low v Merchants Nat. Bank & Trust Co. of Syracuse, 24 AD2d 322; Aritor Corp. v Chase Manhattan Bank, 39 Misc 2d 427; Brokerage Data Processing Corp. v Eastchester Sav. Bank, 39 AD2d 895; Central Cadillac v Stern Haskell, Inc., 356 F Supp 1280.) II. The decision by the court below was erroneous. (Soma v Handrulis, 277 NY 223; Palsgraf v Long Is. R. R. Co., 248 NY 339; Kimbar v Estis, 1 NY2d 399; Federal Ins. Co. v Groveland State Bank, 37 NY2d 252.) III. Allegations of bad faith in the complaint are legally insufficient. IV. Underpinning is not without a remedy and there is no compelling reason to fashion an additional remedy which alters drastically the existing law. (Shipman v Bank of State of N. Y., 126 NY 318.)

      Tony Berman and Roger S. Markowitz for respondent.
    I. The courts below properly denied appellant’s motion to dismiss the complaint. (Dulberg v Mock, 1 NY2d 54; Foley v D’Agostino, 21 AD2d 60; Lavigne v Allen, 36 AD2d 981; Soma v Handrulis, 277 NY 223; Board of Higher Educ. v Bankers Trust Co., 86 Misc 2d 560; Federal Ins. Co. v Groveland State Bank, 44 AD2d 182, 37 NY2d 252; Fidelity & Cas. Co. of N. Y. v Hellenic Bank Trust Co., 181 Misc 40, 44; Matter of Quantum Dev. Corp., 397 F Supp 329.) II. The cases cited by appellant do not support its position. (Trojan Pub. Corp. v Manufacturers Trust Co., 273 App Div 843, 298 NY 771; Fidelity & Guar. Fire Corp. v Marine Midland Trust Co. of N. Y, 162 Misc 12; Low v Merchants Nat. Bank & Trust Co. of Syracuse, 24 AD2d 322; Chartered Bank v American Trust Co., 47 Misc 2d 694, 48 Misc 2d 314, 26 AD2d 623; Brokerage Data Processing Corp. v Eastchester Sav. Bank, 39 AD2d 895; Titan Air Conditioning Corp. v Chase Manhattan Bank, N.A., 61 AD2d 764; Aritor Corp. v Chase Manhattan Bank, 39 Misc 2d 427; Central Cadillac v Stern Haskell, Inc., 356 F Supp 1280.) III. The dissenting opinion is both erroneous and inaccurate. (Henderson v Lincoln Rochester Trust Co., 303 NY 27; Low v Merchants Nat. Bank & Trust Co. of Syracuse, 24 AD2d 322; Matter of Quantum Dev. Corp., 397 F Supp 329.) IV. The complete immunity that the bank contends for would be directly contrary to public policy.
   OPINION OF THE COURT

Gabrielli, J.

We are called upon to determine when, if ever, the drawer of a check may sue a depositary bank which accepts the check and pays out the proceeds in violation of a forged restrictive indorsement. We conclude that in such a circumstance the drawer may have a cause of action against the depositary bank, based on either money had and received or conversion, at least in those cases in which the indorsement, albeit forged, is nonetheless "effective”.

Defendant Bank of New York appeals from a nonfinal order of the Appellate Division pursuant to leave granted by that court, which certified the following question: "Was the order of the Supreme Court, as affirmed by this Court, properly made?” The order of the Appellate Division affirmed an order of Supreme Court, New York County, which denied defendant’s motion to dismiss the complaint for failure to state a cause of action. For the reasons discussed below, the order appealed from should be affirmed and the question certified should be answered in the affirmative.

Initially, we would emphasize that defendant challenges the legal sufficiency of the complaint on its face and before answering, without at this point either conceding or denying any of the factual allegations in the complaint. Due to this procedural context, we of course deem the allegations contained in the complaint to be true (see Siegel, New York Practice, § 265). Moreover, plaintiff is entitled to the benefit of all favorable inferences which may be drawn from the complaint and is deemed to have alleged whatever may reasonably be implied from the complaint (see Westhill Exports v Pope, 12 NY2d 491, 496). So viewed, the complaint alleges the facts described below.

Plaintiff Underpinning & Foundation Constructors, Inc., employed one Walker in its accounting department. His duties included the examination and verification of bills and invoices submitted to plaintiff for payment, the preparation of checks in payment of those debts, the submission of the prepared checks and verified invoices to the appropriate officers of plaintiff for signature, and the forwarding of signed checks to the named payees. From April, 1975 through September, 1976, Walker, acting either alone or in concert with others, embezzled over a million dollars by means of various devices. One of these schemes involved the making of false invoices from firms with which plaintiff did considerable business. Walker would then prepare checks purportedly in payment of those invoices and obtain the necessary signatures from plaintiff’s officers. Rather than sending the checks to the named payees, who of course had no interest in them, Walker forged the indorsements of the named payees by means of stamps apparently similar to those used by the named payees. These stamps contained restrictive indorsements of a type often used in the collecting process, such as "for deposit only”, which require that the checks be deposited in the indorser’s account only (see Uniform Commercial Code, § 3-206, subd [3]). The checks were then either cashed or deposited in savings accounts opened at various banks by Walker or his associates, in names other than the names of the named payee-indorsers. Each of the banks seems to have accepted the checks for collection in complete disregard of the restrictive indorsements, and presented them for payment by the payor bank, which accepted and paid them and charged plaintiff’s account accordingly.

When plaintiff learned of the embezzlement, it commenced this suit against each of the depositary banks which had accepted the checks in disregard of the restrictive indorsement. One named defendant was the Bank of New York, which had accepted 10 such checks with a total face value of $452,979.27. Rather than serving an answer, Bank of New York moved to dismiss the complaint, arguing that the drawer of a check may never sue a depositary bank, but is instead limited to whatever claims it may have against the drawee bank. Supreme Court denied the motion to dismiss and the Appellate Division sustained that determination. It is from the order of the Appellate Division that defendant Bank of New York now appeals.

Whether the drawer of a check has any cause of action against a depositary bank which wrongfully pays on the check is a question which has long divided the courts (see Bailey, Brady on Bank Checks [4th ed], § 15.12; Beutel, Brannan’s Negotiable Instruments Law [7th ed], § 23, pp 447-448). Prior to the enactment of the Uniform Commercial Code, the rule in this State apparently was that the drawer had no cause of action against the depositary bank, and could only seek to recover from the drawee bank (see Trojan Pub. Corp. v Manufacturers Trust Co., NYLJ, May 15, 1947, p 1914, col 5, affd without opn 273 App Div 843, affd without opn 298 NY 771). The code itself contains nothing which directly or specifically changed this rule, but certain provisions thereof have required a re-examination of the prior rule in light of other changes made by the code. Unfortunately for the concept of uniformity in commercial law, the decisions in other States which have reconsidered the situation in light of the code have been far from unanimous in either result or rationale. Thus, in Massachusetts and New Jersey it is still the law that in no situation will a drawer be able to sue a depositary bank (Stone & Webster Eng. Corp. v First Nat. Bank & Trust Co., 345 Mass 1; Life Ins. Co. of Va. v Snyder, 141 NJ Super 539). In California and Georgia, on the other hand, the opposite result has been reached by extending the definition of the term "payor” so as to include the drawer, who is thus given the benefit of the various warranties running to the payor (Sun 'N Sand v United California Bank, 21 Cal 3d 671; Insurance Co. of North Amer. v Atlas Supply Co., 121 Ga App 1). Whatever the ultimate validity of these various rationales, we need not, and accordingly we do not, reach them today. Rather, our examination of the reasons for precluding a drawer from proceeding against the depositary bank in the normal case, convinces us that such a bar should not apply in those situations in which the indorsement, although forged, is effective.

Simply stated, the reason why a drawer is normally held to have no cause of action against a depositary bank which wrongfully paid over a forged indorsement, is that the depositary bank is not deemed to have dealt with any valuable property of the drawer. In those cases in which the forgery is effective, however, this is not true. There are at least three theoretical grounds upon which the depositary bank could be deemed liable to the drawer: (1) conversion of proceeds of the check; (2) liability for money had and received to the extent of such proceeds; and (3) conversion of the instrument itself. Possibly there are others: plaintiff alleges liability based on "gross negligence amounting to bad faith”. Each theory, however, requires that the depositary bank have dealt with property of the drawer, be that property the check itself or the proceeds thereof. In the typical forged indorsement case, the indorsement will be ineffective, and thus the check will not authorize the drawee bank to pay it from the drawer’s account. Absent such authority, the drawee may not charge the drawer’s account — and any payment made on the check is deemed to have been made solely from the property of the drawee, not the drawer. The drawer’s property is thus not converted, and indeed no damages suffered, until the drawee refuses to honor a subsequent authorized draft upon the drawer’s account which is deemed to have remained untouched by the prior payment. Since the money received by the depositary bank from the drawee is the property not of the drawer, but rather of the drawee alone, nothing the depositary bank does with those funds can be considered a conversion of the drawer’s property. Similarly, insofar as the proceeds are the property of the drawee rather than the drawer, the depositary bank has not had and received any money of the drawer. With respect to the possibility of conversion of the check itself, since the drawer is not a holder, and could not present the check for payment, the drawer is normally considered as having no interest in the check. Moreover, since the check cannot be paid over a forged indorsement, the drawer is viewed as having no valuable interest in whatever right the check might otherwise be seen as transferring to the payee and to subsequent holders, for the simple reason that there exists no such right (see Britton, Bills and Notes [2d ed], § 145; 6 Michie, Banks and Banking, ch 10, §§ 87-88).

Whatever the intrinsic validity of these arguments in the typical forged indorsement case in which the forged indorsement is "wholly inoperative” (Uniform Commercial Code, § 3-404), the applicable considerations change when the indorsement, although forged, is yet effective. In such cases, the check is both a valuable instrument and a valid instruction to the drawee to honor the check and debit the drawer’s account accordingly. Since the result of valid payment on the check is the cancellation of a debt otherwise owed the drawer and the payment of funds otherwise claimable by the drawer, the drawer obviously does have an interest in the funds paid on the check. Where the indorsement is ineffective, the drawee is deemed to be paying out its own money because it cannot charge the drawer’s account without authorization. Where, however, the indorsement is deemed effective, then the drawee is in fact paying out funds in which the drawer does have an interest and which may serve as the basis for an action against a depositary bank which has wrongfully obtained that money. Naturally, in such a case, since the indorsement is effective, no action would lie against the depositary bank for payment over the forged indorsement. Moreover, if the check was tainted in some other way which would put the drawee on notice, and which would make its payment unauthorized and subject it to suit, then the above rationale would not apply, since the payment would once again be from the drawee’s funds rather than the drawer’s account, and thus no action would lie against the depositary bank in favor of the drawer. Hence, it is only in those comparatively rare instances in which the depositary bank has acted wrongfully and yet the drawee has acted properly that the drawer will be able to proceed directly against the depositary bank.

Applying these principles to this case, we conclude that plaintiff has stated a cause of action against defendant Bank of New York sufficient to withstand a motion to dismiss for failure to state a cause of action. The allegations in the complaint indicate that the forgery involved in the case falls within the ambit of section 3-405 (subd [1], par [c]) of the Uniform Commercial Code, which provides as follows: "An indorsement by any person in the name of a named payee is effective if * * * (c) an agent or employee of the maker or drawer has supplied him with the name of the payee intending the latter to have no such interest.” Thus, assuming as we must that these allegations are true, the indorsement was effective, and hence the traditional reasons for refusing to allow a drawer to sue a depositary bank directly in a forged indorsement situation are inapplicable, as the money paid to the depositary bank by the drawee was property in which the drawer had a very real interest.

This does not end our inquiry, however, since the drawer would nonetheless be precluded from suit against the depositary bank unless the other factors discussed above are present: namely, that the check serve as a valid instruction to the drawee to charge the drawer’s account and yet that the depositary bank has acted in such a way as to make it liable to the drawer. These factors are presented by the allegations in this case, since the misconduct involved was payment in disregard of a restrictive indorsement, something with respect to which, of the various banks involved in the collection process, only the depositary bank may be held liable (Uniform Commercial Code, § 3-419, subd [4]; § 3-206, subd [2]). Prior to enactment of the Uniform Commercial Code in this State, any bank in the collection process which took the check following payment in disregard of a restrictive indorsement was deemed liable (Soma v Handrulis, 277 NY 223). This result has been changed by the code, which effectively places liability solely upon the bank which first takes the check with the restrictive indorsement (Uniform Commercial Code, § 3-206, subd [2]). This was done in the belief that it is that bank which is in the best position to ensure that the restriction is satisfied (Uniform Commercial Code, § 3-206, comment 3). Subsequent banks were thus relieved of responsibility to investigate prior restrictive indorsements. Applying this rule to the instant case, it is evident that the drawee cannot be held liable on the basis of the restrictive indorsement; hence the drawee properly honored the check. The depositary bank on the other hand was responsible for checking all restrictive indorsements, and is liable for payment made in violation thereof.

This does not mean that the depositary bank is liable in the instant case as a matter of law, since it is not impossible that it may be able to provide a valid defense. In light of the procedural posture in which this case reaches us, we are, of course, unable to determine whether in fact the depositary bank has any such defense. We have previously held that in an action for money had and received a depositary bank is entitled to any defenses which may be created by the drawer’s failure to use due care in examining his bank statement and returned checks (Federal Ins. Co. v Groveland State Bank, 37 NY2d 252, 258-259). While it may well be that the forgery could not have been discovered by the use of reasonable care, or that in any case the depositary bank’s failure to use due care itself precludes such a defense, that question is not now before us. At any rate, we note that one reason why several courts have been reluctant to allow a drawer to proceed directly against a depositary bank has been the belief that the drawee is normally in the best position as a practical matter to assert such defenses (e.g., Stone & Webster Eng. Corp. v First Nat. Bank & Trust Co., 345 Mass 1, supra; see White & Summers, Uniform Commercial Code, § 15-4, pp 500-501). While this may be true, we do not deem it sufficient to shield a depositary bank from all liability in a situation such as this in which it would appear that the depositary bank is the only entity purposely not completely protected by the provisions of the Uniform Commercial Code from liability for paying in disregard of a restrictive indorsement.

In summary, we hold today that a drawer may directly sue a depositary bank which has honored a check in violation of a forged restrictive indorsement in situations in which the forgery is effective. This result is not only theoretically viable, but is in accord with principles of equity and sound public policy. It is basic to the law of commercial paper that as between innocent parties any loss should ultimately be placed on the party which could most easily have prevented that loss. Hence, in most forged indorsement cases, the party who first took the check from the forger will ultimately be liable, assuming of course that there is no solvent forger available. This is so because it is the party who takes from the forger who is in the best position to verify the indorsement. This is not always true, however, and if the forgery is the result of some other interested party’s negligence, the burden may ultimately be placed on that party (see Uniform Commercial Code, § 3-406). In certain instances in which it is clear that the loss could have been most readily prevented by the drawer, the code may place the loss upon the drawer as a matter of law (Uniform Commercial Code, § 3-405). One such situation might be that alleged to be present in this case, in which the indorsement of a named payee has been forged by "an agent or employee of the maker or drawer [who] has supplied him with the name of the payee intending the latter to have no such interest” (Uniform Commercial Code, § 3-405, subd [1], par [c]). In such cases, the indorsement is deemed to be effective and the drawer is thus precluded from recovering solely on the basis of the forgery from banks which honor the check. The reason for this rule is that it is believed that as a practical matter the drawer is in a better position to prevent the fraud by utilizing proper accounting methods, than is even the first party to take from the forger. Although this presumption is not free from criticism, and may in some instances be less than sound, the language of the code makes it applicable.

Had the forger in this case not forged a check with a restrictive indorsement, it would appear that the loss might properly be placed upon the drawer alone. A restrictive indorsement, however, imposes a new and separate duty upon a transferee to pay the check only in accord with the restriction. In this case, the restrictive indorsements required that the checks be deposited only in the accounts of the respective restrictive indorsers, the named payees. This was not done and the failure to do so serves as a basis for liability independent of any liability which might be created by payment over a forged indorsement alone.

It has been suggested that it is illogical to reach a different result dependent only on whether the forger adds a restriction to the indorsement or not. Although superficially attractive, this argument could as readily serve as a challenge to the soundness of the code provisions imposing a liability upon the drawer where the forger has chosen to act in one way rather than another (see Uniform Commercial Code, § 3-405). The obvious flaw in the argument made is that it ignores the prime function of all these rules and distinctions: to impose liability on the party which could most readily have prevented the fraud. Where the only defect is the forgery itself and the forgery could and should have been prevented by the drawer, liability is imposed on the drawer. Where, however, as here, the indorsement is not only forged, but is also restrictive, and the check is presented in what appears on its face to be an obvious violation of that restriction, then the situation is different, and the balance of obligations and potential liabilities shifts. That an indorsement is forged does not serve to justify a failure to apply normal commercial standards with respect to any restrictions imposed by the indorsement. The presence of a restriction imposes upon the depositary bank an obligation not to accept that item other than in accord with the restriction. By disregarding the restriction, it not only subjects itself to liability for any losses resulting from its actions, but it also passes up what may well be the best opportunity to prevent the fraud. The presentation of a check in violation of a restrictive indorsement for deposit in the account of someone other than the restrictive indorser is an obvious warning sign, and the depositary bank is required to investigate the situation rather than blindly accept the check. Based on such a failure to follow the mandates of due care and commercially reasonable behavior, it is appropriate to shift ultimate liability from the drawer to the depositary bank.

Accordingly, the order appealed from should be affirmed, with costs, and the question certified should be answered in the affirmative.

Chief Judge Cooke and Judges Jasen, Jones, Wachtler and Fuchsberg concur with Judge Gabrielli.

Order affirmed, etc.

      . We note that the complaint in this case states only one cause of action against defendant Bank of New York, and does not indicate the theory of recovery relied upon. This is no longer fatal, however, and we proceed on the assumption that the claim is based on one or all of these theories, each of which is compatible with the allegations of the complaint (see Diemer v Diemer, 8 NY2d 206; Siegel, New York Practice, § 209).

      . Insofar as the drawer is deemed to have no interest in the check since he is not a holder, this rationale is suspect in situations such as this in which the payee has no interest in the check and the only person with any beneficial interest in the check at the time of its acceptance by the depositary bank was the drawer. Insofar as the instrument is deemed valueless because it does not serve to authorize payment from the drawer’s account, this particular criticism of the traditional rule would be inapplicable.


text:
    Magaly Ugarriza, Appellant, v Glenn R. Schmieder et al., Respondents.
    Submitted January 5, 1979;
    decided February 13, 1979

      POINTS OF COUNSEL

      Jack Weiss and Robert Topper for appellant.
    I. The undisputed facts in this negligence action clearly support Special Term’s grant of summary judgment on the question of liability. (Andre v Pomeroy, 35 NY2d 361; Axelrod v Armitstead, 36 AD2d 593; Donlon v Pugliese, 27 AD2d 786; Gerard v Inglese,
      11 AD2d 381; Rogers v Glassman Mem. Home, 27 AD2d 542.) II. The position of appellant is bolstered by her freedom from contributory negligence. (Koroluck v Giordano’s Serv. Center, 34 AD2d 1013.) III. Factual issues were not raised of a genuine and substantial nature sufficient to defeat the motion. (Leumi Fin. Corp. v Richter, 24 AD2d 855, 17 NY2d 166; Shapiro v Health Ins. Plan of Greater N. Y., 7 NY2d 56; Indig v Finkelstein, 23 NY2d 728.)

      John J. Brant, Stephen W. O’Leary and Robert Devine for respondents.
    Summary judgment is inappropriate where the facts permit conflicting inferences as to negligence and contributory negligence. (Andre v Pomeroy, 35 NY2d 361; Axelrod v Armitstead, 36 AD2d 593; Esteve v Abad, 271 App Div 725; Gammarano v De Luca, 56 AD2d 590; Mitchell v Parks, 54 AD2d 895; Velten v Kirkbride, 20 AD2d 546; Schneiderman v Metzger, 30 AD2d 829; Clark v Traver, 205 App Div 206, 237 NY 544; Rossman v La Grega, 28 NY2d 300.)
   OPINION OF THE COURT

Gabrielli, J.

The legal issue squarely presented is whether plaintiff in this automobile negligence action is entitled to summary judgment on the issue of liability, or whether there exist genuine and substantial triable issues of fact which serve to preclude summary judgment. Supreme Court, Suffolk County, granted plaintiff’s motion to strike defendants’ answer and set the case down for a hearing on the issue of damages only, stating that "there are no triable issues of fact”. A majority of the Appellate Division reversed and denied plaintiff’s motion, with one Justice dissenting. Plaintiff now appeals from that nonfinal order, pursuant to leave granted by that court, which certified the following question: "Was the order of this court, dated March 13, 1978, properly made?” For the reasons discussed below, the order appealed from should be affirmed and the certified question answered in the affirmative.

Although there once were significant limitations upon the type of action in which summary judgment was available (see Siegel, New York Practice, § 280), this is no longer true (see CPLR 3212). Indeed, as of January 1, 1979, the final prohibition was removed, and it is now possible for a plaintiff to obtain summary judgment even in a matrimonial action (L 1978, ch 532). That summary judgment is an available remedy in an appropriate negligence case has been accepted since 1959 (see 4 Weinstein-Korn-Miller, NY Civ Prac, par 3212.03). Summary judgment has been termed a drastic measure, however, since it deprives a party of his day in court and will normally have res judicata effects (see Siegel, New York Practice, § 287). Thus, it may be granted without a trial only if no genuine, triable issue of fact is presented (Werfel v Zivnostenska Banka, 287 NY 91; CPLR 3212, subds [b], [c]). Negligence cases by their very nature do not usually lend themselves to summary judgment, since often, even if all parties are in agreement as to the underlying facts, the very question of negligence is itself a question for jury determination. Only if it can be concluded as a matter of law that defendant was negligent, may summary judgment be granted in a negligence action. The matter before us is not such a case.

The parties are not in disagreement as to the pertinent underlying facts. Plaintiff, defendant Glenn Schmieder, and two other young people who had gathered at a local discotheque decided to travel to a diner several miles away in a car owned by defendant George Schmieder and operated by Glenn Schmieder. Plaintiff sat in the front passenger seat. It was then about 4 o’clock in the morning; the night was clear and traffic was light. Schmieder states that he was quite sober, having had only one drink during the course of the night, and plaintiff does not deny this. The driver had never been at the diner before, and was being given instructions by one of the other passengers. The diner was located on the south side of the highway, and to reach it Schmieder was required to make a left turn off the road. For some reason, not specified in the record, it was impossible to turn directly into the diner. Instead at another passenger’s instructions, defendant made a left turn into the parking lot of a shopping center adjacent to and just past the diner. He then turned left once again, and began to drive across the parking lot towards the diner at a speed of between 20 and 25 miles per hour. There were no other vehicles in the unilluminated and blacktopped parking lot. Defendant states that he was alert and paying attention to his path, and plaintiff does not dispute this. Suddenly, all four persons in the car simultaneously saw something a few feet ahead, and each uttered an appropriate exclamation. Defendant applied the brakes, but was unable to stop before striking an unpainted, concrete divider separating two sections of the parking lot. The divider is variously described as being between 1 foot and 18 inches high, about 6 feet wide, and extending almost the length of the parking lot. As a result of the collision, both plaintiff and defendant were thrown into the windshield, and plaintiff allegedly sustained serious injuries.

Plaintiff now contends that on the basis of these facts, essentially concurred in by all parties, she is entitled to summary judgment on the issue of liability. In other words, plaintiff argues that the actions and omissions of defendant as described above constitute negligence as a matter of law. We disagree. Plaintiff places considerable reliance upon our latest statement in this area of the law, Andre v Pomeroy (35 NY2d 361). Her reliance is apparently based more on the specific result in that case, than on its rationale, and is hence sorely misplaced. There, as here, plaintiff was a passenger in defendant’s car. That, however, is the only significant similarity between the cases. Andre involved an automobile accident in which defendant’s car had run into the rear of the car in front of her. There, defendant admitted that although she was driving in heavy traffic and knew that the other car was in front of her, she nonetheless took her eyes off the road and looked down into her purse for her compact. When she looked back at the road, she found that she had driven too close to the other car, which had either stopped or slowed significantly, and she was unable to avoid striking it. We concluded in that case that in light of the conceded unusual facts it was proper to find as a matter of law that defendant was negligent, and thus to award plaintiff summary judgment.

Andre did not serve as a departure from prior law, nor was it intended as a signal that the prerequisites for a grant of summary judgment had been further modified. Rather, it indicates merely that if the admitted facts are such that no conclusion other than negligence can be drawn, summary judgment is not precluded in a negligence action. We cautioned, however, that even in those negligence cases in which "the facts are conceded there is often a question as to whether the defendant or the plaintiff acted reasonably under the circumstances. This can rarely be decided as a matter of law” (35 NY2d, at p 364). Accordingly, we declared that "when the suit is founded on a claim of negligence, the plaintiff will generally be entitled to summary judgment 'only in cases in which there is no conflict at all in the evidence, the defendant’s conduct fell far below any permissible standard of due care, and the plaintiff’s conduct either was not really involved (such as with a passenger) or was clearly of exemplary prudence in the circumstances’ ” (35 NY2d, at pp 364-365, quoting 4 Weinstein-Korn-Miller, NY Civ Prac, par 3212.03).

In the instant case, unlike Andre, we cannot say as a matter of law that defendant’s conduct fell far below any permissible standard of due care. Indeed, although not necessarily dispositive, we would note that here plaintiff has failed to suggest any affirmative act or even any articulable omission by defendant which could be characterized as negligent. She has merely made conclusory allegations of undefined negligence. It would appear that plaintiff seeks to have us conclude as a matter of law that there was negligence simply because there was an accident. Such would be contrary to both law and logic. In Andre, the accident was a result of defendant’s conceded action in purposefully looking away from the road while driving in heavy traffic. We had no hesitation in denominating such conduct to be negligent as a matter of law. Here, however, defendant’s negligence, if any, is not as evident. Thus, plaintiff is not entitled to summary judgment.

Accordingly, the order appealed from should be affirmed, with costs, and the question certified answered in the affirmative.

Chief Judge Cooke and Judges Jasen, Jones, Wachtler and Fuchsberg concur with Judge Gabrielli.

Order affirmed, etc.

       It should be noted that contributory negligence upon the part of plaintiff would have barred any recovery by plaintiff in Andre. This is no longer true, since with respect to any cause of action accruing on or after September 1, 1975, any "culpable conduct” by a plaintiff merely diminishes, without precluding, recovery (CPLR art 14-A). The accident in this case took place on November 1, 1975, and would thus appear to fall within the ambit of the statute. Interestingly, counsel for neither party mentioned this, nor did they discuss the possible significance or ramifications of the abolition of the contributory negligence bar upon the third element of the standard we enunciated in Andre. In light of our disposition of this appeal, and the absence of any argument by counsel on this issue, we find it neither appropriate nor necessary to reach it at this time.


author: Per Curiam.

text:
    Alexandra T. Bacon, an Infant by Her Mother Janice T. Bacon, et al., Appellants, v Varick Bacon, Respondent.
    Argued January 11, 1979;
    decided February 15,1979

      POINTS OF COUNSEL

      Steven L. Siskind for appellants.
    Subdivision c of section 516 of the Family Court Act is unconstitutional and violates the rights of illegitimate children to equal protection of the laws under the Fourteenth Amendment to the Constitution of the United States and section 11 of article I of the Constitution of the State of New York. (Keve v Steinberg, 64 Misc 2d 141; Matter of Ferrer v Ferrer, 58 AD2d 529; Trimble v Gordon, 430 US 762; Levy v Louisiana, 391 US 68; Weber v Aetna Cas. & Sur. Co., 406 US 164; Labine v Vincent, 401 US 532; Gomez v Perez, 409 US 535; Matter of Lalli, 38 NY2d 77; Matter of Storm v None, 57 Misc 2d 342.)

      Christopher S. Rooney, Lawrence P. McGauley and Albert G. Lingelbach for respondent.
    Section 516 of the Family Court Act bears a reasonable relationship to a proper State objective and is constitutional. (Mathews v Lucas, 427 US 495; Trimble v Gordon, 430 US 762; Matter of Lalli, 43 NY2d 65; Matter of Mores v Feel, 73 Misc 2d 942; Matter of Piccola v Hibbard, 51 AD2d 674, 40 NY2d 1035; Matter of Maureen K. v Kinglsey

      P., 51 AD2d 744; Matter of Suzanne "J. ” v Russell "K. ”, 46 AD2d 935; Matter of Van Order v Hawley, 34 AD2d 591.)

      Robert Abrams, Attorney-General (Samuel A. Hirshowitz and Robert J. Schack of counsel), amicus curiae.

    I. Section 516 of the Family Court Act shows a strong and rational relationship to the substantial, legitimate governmental interests it is intended to serve. (Moncrief v Ely, 19 Wend 405; Todd v Weber, 95 NY 181; Bunn v Winthrop, 1 Johns Ch 329; Matter of Shan F. v Francis F., 88 Misc 2d 165, revd sub nom. Matter of Ferrer v Ferrer, 58 AD2d 529; Trimble v Gordon, 430 US 762; Fiallo v Bell, 430 US 787; Yarborough v Yarborough, 290 US 202; Rhyne v Katleman, 206 Misc 202, 285 App Div 1140; Matter of Bancroft v Court of Gen. Sessions of City of N. Y., 278 App Div 141, 303 NY 728.) II. Subdivision c of section 516 of the Family Court Act satisfies the equal protection standards established by this court and the United States Supreme Court. (Matter of Lalli, 43 NY2d 65; Alevy v Downstate Med. Center of State of N. Y., 39 NY2d 326; Montgomery v Daniels, 38 NY2d 41; Trimble v Gordon, 430 US 762; Mathews v Lucas, 427 US 495; Fiallo v Bell, 430 US 787.)
   OPINION OF THE COURT

Per Curiam.

The order of the Appellate Division should be affirmed, with costs.

Section 516 of the Family Court Act permits a mother and putative father, upon fulfillment of certain requirements, to enter into a binding agreement for the support of their out-of-wedlock child. Complete performance of such an agreement "bars other remedies of the mother or child for the support and education of the child” (Family Ct Act, § 516, subd c). Because this rule differs from the principles governing support of legitimate children, plaintiffs mother and child claim the statute is constitutionally infirm on equal protection grounds.

Not every legislatively created classification runs afoul of the constitutional guarantee of equal protection of the laws (see, e.g., Montgomery v Daniels, 38 NY2d 41, 63). Statutory classifications premised upon illegitimacy will withstand judicial scrutiny so long as they are "substantially related to permissible state interests” (Lalli v Lalli, 439 US 259, affg 43 NY2d 65; see Trimble v Gordon, 430 US 762). Measured against this standard, section 516 is unquestionably valid.

At least two important and legitimate ends are fostered by the challenged legislation. Initially, the statute encourages putative fathers to settle paternity claims, thereby reducing the necessity for legal proceedings. Certainty as to the father’s future obligation is achieved by affording the settlement agreement binding effect. Yet, the interests of the child and mother are protected by the requirement that the agreement be judicially reviewed and approved. Moreover, since the statute does not mandate or prohibit the inclusion of any particular term in the contract, the parties are free to make the agreement modifiable and thus provide for unforeseen contingencies.

More important, the challenged statute helps to ensure that the child will not be without support from his father. Paternity proceedings have traditionally involved complex and difficult problems of proof, and uncertainty as to the outcome is ever present (see, e.g., Trimble v Gordon, supra, at p 771; Gomez v Perez, 409 US 535, 538). By furnishing an incentive to settle, the statute serves to prevent the illegitimate child’s support from becoming lost in the intricacies of the adjudicatory process. The statute is thus related, in a substantial respect, to permissible and salutary governmental interests and represents a balanced approach to the sensitive problem it addresses.

Chief Judge Cooke and Judges Jasen, Gabrielli, Jones, Wachtler and Fuchsberg concur in Per Curiam opinion.

Order affirmed.


author: Chief Judge Cooke.

text:
    Gramatan Home Investors Corp., Successor in Interest to Gramatan Co., Ltd., Home Investors Trust, Appellant, v Louis N. Lopez et al., Respondents.
    Argued January 10,1979;
    decided February 15,1979

      POINTS OF COUNSEL

      Thomas A. Dussault for appellant.
    The judgment in the consumer fraud action is not in itself interposable as a defense to the complaint in this case pursuant to subdivision 5 of section 403 of the Personal Property Law and accordingly respondents’ motion for summary judgment should have been denied. (Matter of Commercial Cas. Ins. Co., 257 App Div 536, 1080; Schwartz v Public Administrator of County of Bronx, 24 NY2d 65; Matter of Lefkowitz v Bull Inv. Group, 46 AD2d 25, 35 NY2d 647; Ettlinger v National Sur. Co., 221 NY 467; Telford v Metropolitan Life Ins. Co., 223 App Div 175; Falk v Goodman, 7 NY2d 87.)

      Joseph E. Rosch for respondents.
    The intent of subdivision 5 of section 403 of the Personal Property Law is to afford consumers a viable and effective defense in actions commenced by assignees of retail installment obligations; therefore summary judgment was properly granted herein. (Litchfield v Goodnow, 123 US 549; Watts v Swiss Bank Corp., 27 NY2d 270; Schwartz v Public Administrator of County of Bronx, 24 NY2d 65; Hartford Acc. & Ind. Co. v Wesolowski, 33 NY2d 169.)
   OPINION OF THE COURT

Chief Judge Cooke.

The ultimate issue presented is whether the grant of summary judgment in favor of defendants was proper. The courts below reasoned that the judgment in a consumer fraud action prosecuted successfully by the Attorney-General against plaintiff’s assignor collaterally estopped plaintiff from raising certain matters determined there in this subsequent litigation. We hold to the contrary, since the assignment to plaintiff was made prior to the initiation of the Attorney-General’s suit and therefore plaintiff was not privy to that judgment and is not bound by its terms.

In August, 1974, defendants Barbara and Louis Lopez purchased vinyl siding for their home in Saratoga County from two men who claimed they were the principals of Vinyl Engineering, Inc., a concern affiliated with the B.F. Goodrich Company. To finance the purchase, defendants entered into a retail installment contract with Vinyl Engineering and gave a mortgage on their home as security for the purchase price. Vinyl Engineering then assigned the contract and mortgage to Home Investors Trust, plaintiff’s predecessor in interest, in September, 1974.

Almost two years after the assignment from Vinyl Engineering to plaintiff, the Attorney-General commenced a consumer fraud action pursuant to subdivision 12 of section 63 of the Executive Law in Supreme Court, Albany County, against a number of home solicitation sales firms, including plaintiff’s assignor and its principals. Neither Vinyl Engineering nor its principals appeared in that action and a judgment was subsequently entered enjoining them from soliciting or making any further sales of siding in the State. Significantly, the judgment specifically declared void a number of contracts, including the one between Vinyl Engineering and defendants (Matter of State of New York v Taillon, Supreme Ct, Albany County, June 14, 1976, Williams, J. [No. 4837-76]).

This action by plaintiff seeking to recover moneys allegedly due on the installment sales contract was commenced during the pendency of the consumer fraud action. Defendants appeared and asserted a number of affirmative defenses, inter alia: that Vinyl Engineering fraudulently induced them to enter into the contract and mortgage; that fraudulent representations were made as to the quality of the siding; and that the finance charges were so onerous as to render the contract unconscionable. Following entry of judgment in the consumer fraud action, defendants moved for summary judgment and dismissal of the complaint. This request for relief was grounded on the theory that the judgment in the consumer fraud action voiding the contract between defendants and Vinyl Engineering collaterally estopped plaintiff from maintaining that the contract was enforceable. Saratoga County Court granted defendants the relief requested (89 Misc 2d 285) and the Appellate Division affirmed, without opinion (59 AD2d 1069). We granted leave to appeal to consider the collateral estoppel effect of a judgment or decree as against an assignee where the rights of the assignee have vested prior to the commencement of the action against the assignor (see 43 NY2d 647).

Collateral estoppel, together with its related principles, merger and bar, is but a component of the broader doctrine of res judicata which holds that, as to the parties in a litigation and those in privity with them, a judgment on the merits by a court of competent jurisdiction is conclusive of the issues of fact and questions of law necessarily decided therein in any subsequent action (Matter of Shea, 309 NY 605, 616; cf. Matter of McGrath v Gold, 36 NY2d 406, 410-411). This principle, so necessary to conserve judicial resources by discouraging redundant litigation, is grounded on the premise that once a person has been afforded a full and fair opportunity to litigate a particular issue, that person may not be permitted to do so again (B. R. DeWitt, Inc. v Hall, 19 NY2d 141, 144; Good Health Dairy Prods. Corp. v Emery, 275 NY 14, 18). Collateral estoppel is a corollary to the doctrine of res judicata; it permits in certain situations the determination of an issue of fact or law raised in a subsequent action by reference to a previous judgment on a different cause of action in which the same issue was necessarily raised and decided (Statter v Statter, 2 NY2d 668; Siegel, New York Practice, § 464, p 614; 9 Carmody-Wait 2d, NY Prac, § 63:204, pp 208-209; cf. Ashe v Swenson, 397 US 436, 443).

As the consequences of a determination that a party is collaterally estopped from litigating a particular issue are great, strict requirements for application of the doctrine must be satisfied to insure that a party not be precluded from obtaining at least one full hearing on his or her claim. Although the previous requirement that there be mutuality of estoppel is now a "dead letter” (see Schwartz v Public Administrator of County of Bronx, 24 NY2d 65, 70), the party seeking to invoke the benefits of the principle must still prove two necessary elements. First, it must be shown that the party against whom collateral estoppel is sought to be invoked had been afforded a full and fair opportunity to contest the decision said to be dispositive of the present controversy. Additionally, there must be proof that the issue in the prior action is identical, and thus decisive, of that in issue in the current action (24 NY2d, at p 71, supra).

One of the fundamental principles of our system of justice is that every person is entitled a day in court notwithstanding that the same issue of fact may have been previously decided between strangers. Generally, therefore, a person may not be precluded from litigating issues resolved in an action in which that person was not a party (see Blonder-Tongue v University Foundation, 402 US 313, 339; Hansberry v Lee, 311 US 32, 40; Dull v Blackman, 169 US 243, 248). Considerations of due process prohibit personally binding a party by the results of an action in which that party has never been afforded an opportunity to be heard (Postal Tel. Cable Co. v Newport, 247 US 464, 476). This prohibition, of course, is not unconditional and identity of the parties, as opposed to identity of the issues, is not an absolute.

Thus, it is well settled that the term parties to a judgment within the contemplation of the rule of collateral estoppel is not confined to those who are named in the record or enter an appearance. Yet, although the party sought to be collaterally estopped in the current action need not have been the one for or against whom judgment was rendered in the previous action, the relationship does bear a critical significance. For example, collateral estoppel bars not only parties from a previous action from litigating an issue decided therein, but those in privity with them as well (Downey v Seib, 185 NY 427, 433). The underlying question in this case, therefore, is whether plaintiff, which received an assignment from Vinyl Engineering prior to the institution of the consumer fraud action against its assignor is a privy to the judgment rendered in the previous action. In this context, it has been observed that privity is an amorphous term not susceptible to ease of application (Watts v Swiss Bank Corp., 27 NY2d 270, 277). However, the term does denote a mutually successive relationship of the same rights to the same property (see Downey v Seib, supra; Bigelow v Old Dominion Copper Co., 225 US 111, 129), and permits utilization of collateral estoppel for the benefit of or against persons who were not parties to the previous action but who were connected with it to such an extent that they are treated as if they were parties. The crucial inquiry focuses upon the juncture at which the relationship between the party to the first action and the person claimed to be his or her privy is established.

In the assignor-assignee relationship, privity must have arisen after the event out of which the estoppel arises. Hence, an assignee is deemed to be in privity with the assignor where the action against the assignor is commenced before there has been an assignment. In that situation, at the time the assignee succeeded to the rights of the assignor, the subject matter of the assignment was then embroiled in litigation and was subject to the claims of third parties and the assignee is charged with notice that his rights to the assignment are subject to competing claim. Conversely, an assignee is not privy to a judgment where the succession to the rights affected thereby has taken place prior to the institution of the suit against the assignor (Masten v Olcott, 101 NY 152, 161; Matter of Commercial Cas. Ins. Co. v Tremaine, 257 App Div 536, 538-539, mot for lv to app den 281 NY 885; Dull v Blackman, 169 US 243, 248, supra; Restatement, Judgments 2d, § 90, Comment f [Tent Draft No. 3]). In the present case, since there is no dispute that the assignment was made well before commencement of the consumer fraud action against plaintiff’s assignor, plaintiff is not bound by the terms of that judgment.

Finally, we note that defendants’ principal reliance on subdivision 5 of section 403 of the Personal Property Law is misplaced. That statute provides in relevant part that "the assignee of a retail installment contract or obligation shall be subject to all claims and defenses of the buyer against the seller arising from the sale notwithstanding any agreement to the contrary”. Both its express terms and legislative history (see Governor’s Memorandum of Approval, NY Legis Ann, 1970, p 490), make plain that section 403 was enacted to remove the frequently asserted holder in due course defense from the field of consumer credit sales. Thus, while the statute certainly permits defendants to assert against plaintiff any defenses they may have against Vinyl Engineering, it works no change on any of the traditional principles of collateral estoppel or res judicata or in the requirement that defendants prove the defense thus made available to them.

Accordingly, the order of the Appellate Division should be reversed, with costs, defendants’ motion for summary judgment denied and the case remitted to Saratoga County Court for further proceedings on the complaint.

Judges Jasen, Gabrielli, Jones, Wachtler and Fuchsberg concur with Chief Judge Cooke.

Order reversed, etc.


text:
    In the Matter of Walter J. Sheerin et al., Respondents-Appellants, v New York Fire Department Articles 1 and 1B Pension Funds et al., Appellants-Respondents.
    Argued January 3, 1979;
    decided February 22, 1979

      POINTS OF COUNSEL

      Murray A. Gordon and Walter M. Meginniss, Jr., for respondents-appellants.
    The doctrine of laches is inapplicable here and it was error for the courts below to limit petitioners’ recovery on the basis of that doctrine. (Pollitz v Wabash R. R.

      Co., 207 NY 113; Matter of Ayman v Teachers’ Retirement Bd. of City of N. Y., 19 Misc 2d 355, 10 AD2d 835, 9 NY2d 119; Appleton v National Park Bank of N. Y, 211 App Div 708; Fuchs & Lang Sun Chem. de Venezuela, C. A. v Schenectady Chems., 43 AD2d 881; Great Northern Ry. Co. v Erie R. R. Co., 58 F2d 414; Toscano v McGoldrick, 300 NY 156; Zaccaro v Congregation Tifereth Israel of Forest Hills, 20 NY2d 77; Weiss v Mayflower Doughnut Corp., 1 NY2d 310; Galway v Metropolitan El. Ry. Co., 128 NY 132.)

      Allen G. Schwartz, Corporation Counsel (Alfred Weinstein and L. Kevin Sheridan of counsel), for appellants-respondents.
    I. Subdivision c of section 207-i of the General Municipal Law (L 1967, ch 546) bars the cumulation of its benefits upon cost of living benefits provided by other law. The Administrative Code provisions invoked by petitioners are inherently such benefits. Unlike the benefit involved in Rivington, the increased minimum allowance here afforded by the Administrative Code has no other rationale. Long sustained, unchallenged administrative practice strongly supports the conclusion that paragraph c is a bar to recovery. (Matter of Rivington v Lowery, 70 Misc 2d 155, 41 AD2d 703, 32 NY2d 613; Matter of Augello v Lindsay, 40 AD2d 815, 32 NY2d 621; Matter of Kolb v Holling, 285 NY 104.) II. In the context of petitioners’ delay and the hardship to the city, it was not an abuse of discretion, in this proceeding in the nature of mandamus, to limit retroactive relief. (Matter of Durr v Paragon Trading Corp., 270 NY 464; Matter of Coombs v Edwards, 280 NY 361; Matter of Hellerstein v Assessor of Town of Islip, 37 NY2d 1; Matter of Andresen v Rice, 277 NY 271; Matter of Cash v Bates, 301 NY 258; Matter of Ahern v Board of Supervisors of County of Suffolk, 7 AD2d 538, 6 NY2d 376; Matter of Baily v Gerosa, 26 Misc 2d 558; Matter of Pruzan v Valentine, 282 NY 498.)
   OPINION OF THE COURT

Fuchsberg, J.

By this article 78 proceeding in the nature of mandamus, petitioners, New York City firemen retired for service-incurred disabilities, challenge the authority of the administrators of the pension funds of which they are members to deny each of them a "supplemental retirement allowance * * * determined on the basis of the consumer price index” as provided by section 207-i of the General Municipal Law. In refusing to make payment, the funds had taken the position that it would be impermissible for them to do so because it would be duplicative of one otherwise provided by New York City local laws. The resolution of this dispute turns on the construction of section 207-i and the relevant provisions of the New York City Administrative Code.

All the petitioners retired prior to July 1, 1965. Each one’s pension had been fixed at three fourths of his annual "compensation or salary” as of the time of retirement (Administrative Code of City of New York, § B19-4.0, subd a, pars 1, 2; § B19-7.89). The years that intervened between that date and the time when the controversy before us arose witnessed the adoption of a series of State and local laws, including section 207-i. Both the statutes and the economic, political and public employment climate in which they came into being are relevant to our analysis (see, generally, Tilove, Public Employee Pension Funds [1976], esp pp 274-280, 291-294).

Threading our way through the legislation, we start in 1966, when the city increased pension benefits for all disability retirees to the greater of either their prior pensions or "one-half of the earnable salary or compensation of a first grade fireman on July first, nineteen hundred and sixty-five” (Administrative Code, §§ B19-4.1, B19-7.891 [amd 1973]). These sections, however, expressly specified that the benefits were to be "in lieu of any supplemental retirement allowance which would otherwise be payable * * * under the provisions of any other law”.

It was in the following year, 1967, that, by enacting section 207-i of the General Municipal Law, the State Legislature established a uniform cost of living escalator for retirees of all city fire departments. After providing that city firemen’s supplemental retirement allowances "shall be determined on the basis of the consumer price index (all items — United States city average), published by the United States Bureau of Labor Statistics” and shall be paid by the municipality that had employed the retirees, section 207-i, like the New York City plan, went on to speak in terms of an alternative allowance. In that regard, its subdivision c read (L 1967, ch 546): "The benefits hereinabove provided for shall be in lieu of the benefits presently provided by any other general, special or local law unless such benefits are in excess of those provided by this section, in which latter case such benefits shall be paid by the retirement system pursuant to this action”. The somewhat confusing mandate of subdivision c has been construed as not barring payments under section 207-i if the pensioner enjoys the benefits of any other law that provides "equalizer” as distinguished from supplemental cost of living payments (Matter of Rivington v Lowery, 70 Misc 2d 155, affd without opn 41 AD2d 703, mot for lv to app den 32 NY2d 613).

On December 27, 1973, a major revision of the New York City code became effective. Local Laws 92 and 93 of that year increased the minimum pension from one half to three fourths of the annual salary payable to a first grade fireman as of July 1, 1965. At the same time, it also removed the code’s restriction against a pensioner’s eligibility for its benefits while also receiving pension payments under any other law (Administrative Code, §§ B19-4.1, B19-7.891 [current version]).

This was the state of the statutory law when, on February 12, 1974, petitioner Walter Sheerin, President of the "Retired Line of Duty” New York Police and Firemen’s Association, wrote the Chairman of the Mayor’s Pension Committee to request that pensions under the revised code be supplemented by section 207-i cost of living payments. The response, made by the city’s Corporation Counsel on the ensuing April 25, took the form of a formal opinion that petitioners were entitled to receive only whichever was greater, i.e., either the section 207-i benefits or the amounts payable under the amended code sections, but not both. Despite this official advice, more than two years were to pass before the petitioners took further action. When they did, on July 28, 1976, it was by written demand for payment of the section 207-i increments made upon the chairman of the pension funds by counsel for the retirees.

The funds’ rejection, dispatched on September 21, was closely followed by the initiation of this proceeding on September 28. Granting the petition, Special Term ordered the commencement of section 207-i payments as of July 1, 1977, the first scheduled payment date that would follow the entry of judgment. The Appellate Division, one Justice dissenting on the merits, modified only to the extent of making the payments retroactive to the date upon which the demand was deemed to have been made, August 1, 1976 (60 AD2d 555). For the ensuing reasons, we believe the order of modification should be upheld.

Initially, we note our agreement with Matter of Rivington v Lowery (70 Misc 2d 155, supra) in its construction of the term "benefits” as it is employed in subdivision c of section 207-i. Rivington held that subdivision c did not bar payment of section 207-i benefits to retirees receiving "equalizer” supplements under other laws, i.e., those enjoying special allowances as a result of corrective changes in their pension base. This interpretation recognizes that the purpose of the statute was to allay the devastating effect on pensioners of the monetary inflation which even by then had already reached substantial proportions (cf. Governor’s Memorandum on Approving L 1967, ch 727, NY Legis Ann, 1967, p 290). Obviously, that purpose would be advanced by including cost of living payments to retirees whose pension base, though adjusted, remained a fixed sum constantly undermined by the pressure of unremitting increases in living costs; such payments are to be contrasted with the duplication that might be regarded as inherent in allowing section 207-i benefits to pensioners already receiving cost of living increments. Moreover, this construction of the term "benefits” acknowledges that, as a statute intended to apply to a great number of differing local programs, subdivision c of section 207-i could not employ a more specific or limited description of what it prohibited without running the risk of causing further conflicts and ambiguities (see Matter of Rivington v Lowery, 70 Misc 2d 155, 158, supra).

To read the statute more restrictively would also call upon us to ignore the peculiar nature of the hardships which inflation was then visiting on public employees. In the 1960’s, wages in the public sector were still lagging considerably behind those in private industry. The promise of a secure retirement, a major countervailing benefit of public employment, was turning out to be illusory, since inflation strikes with particular virulence at retirees and others living on fixed incomes. For public employees, whose pensions were then based on over-modest salaries to begin with, it was all the worse. Legislators could hardly have been oblivious to these facts, all the more so since increasingly active public employee organizations made no secret of the problems. It was therefore neither illogical nor unexpected that the legislative response was to both increase the base and provide a cost of living adjustment. (See, Rosow, Public Sector Pay and Benefits, 36 Pub Admin Rev 538, 539; see, also, Munnell, Private Pensions and Savings: New Evidence, 84 J Political Economy, 1013, 1014 [1976].)

The timeliness and the extent of the Legislature’s expressed concern with the cost of living is borne out further by the fact that between July, 1965, the date by which all the petitioners had retired, and 1973, the year when Local Laws 92 and 93 were enacted, the cost of living index rose to a point at which consumer prices had increased by almost half again over what they had been at the outset of that interval (see US Department of Labor, Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers [1979]). In taking note of these public records, it may not be amiss to observe that recognized authorities regard the consumer price index as a too conservative measure of the full increase in living costs for older people, who of course include most pensioners (Borzilleri, The Need for a Separate Consumer Price Index for Older Persons, 18 Gerontologist 230; see, also, Shiskin, Updating the Consumer Price Index — An Overview, 97 Monthly Labor Rev [July, 1974], p 3).

All this leads us to reject the argument that the Legislature intended to withhold its section 207-i grant of cost of living supplements from pensioners who were not already receiving inflation escalators under other laws. Instead, we conclude that, unless the benefits payable to disability retirees under the city code as amended in 1973 are transitory cost of living supplements, petitioners are entitled to section 207-i payments. Turning then to the code sections, although it appears clear these too were enacted with full awareness of the problem of inflation, we hold that benefits received thereunder are not such transitory cost of living supplements.

Rivington again is helpful to our analysis. In that case, an amendment to the code had changed the retirees’ pension base from one half of the average of their final five years’ compensation to one half of their annual salary on the date of retirement. The court there found this to be a "corrective payment” designed to equalize treatment of different groups of retirees. As such, it became a vested component of the pension res, and, even though the adjustment also had the effect of offsetting inflation, it was not deemed to be the sort of cost of living supplement that would bar corresponding payments under section 207-i (see 70 Mise 2d, pp 157, 158).

Similarly, Local Laws 92 and 93 act upon the base, in this instance by changing the percentage of the salary on which the pensions are to be computed. This one-shot adjustment simply cannot be compared with periodically readjusted and renewed payments directly pegged to the fluctuating cost of living index, such as those in section 207-i itself.

Corroborative of this determination is the city’s deletion of the "in lieu of other supplemental allowances” clause when it amended sections B19-4.1 and B19-7.891 in 1973. Although these local enactments could not supersede the terms of a State statute were it otherwise applicable, the circumstances suggest a local legislative intent that Local Laws 92 and 93 not be construed as an attempt to provide a cost of living supplement.

The main issue resolved, we now treat with the Appellate Division’s denial of relief with respect to payment periods prior to petitioners’ demand on August 1, 1976. Doing so, we first observe that, while invocation of the equitable defense of laches ordinarily requires a showing of prejudice (Siegel, New York Practice, § 36, p 39), when the doctrine is invoked in an article 78 proceeding in the nature of mandamus, proof of unexcused delay without more may be enough (Austin v Board of Higher Educ., 5 NY2d 430, 442; Matter of Peruzzin v Test, 282 App Div 550; see, generally, 8 Weinstein-Korn-Miller, NY Civ Prac, par 7804.02, pp 78-108; 24 Carmody-Wait 2d, NY Prac, § 145:245).

Moreover, even where a petitioner’s legal right to the relief sought is clearly established, issuance of a writ of mandamus is a matter reserved for the sound discretion of the court (Matter of Crane Co. v Anaconda Co., 39 NY2d 14, 18). In appropriate cases, incident to the exercise or withholding of relief thus dependent on their favor, courts are possessed of power to apply the doctrine of laches in fashioning a remedy. And we may review only "those rare cases * * * where the circumstances leave no possible scope for the reasonable exercise of discretion” (Matter of Durr v Paragon Trading Corp., 270 NY 464, 469).

Nevertheless, the petitioners appear to contend that while laches, in proper circumstances, may be invoked to deny mandamus, once the right is established, laches is unavailable to restrict — or presumably, to enlarge — the remedy to cover a period longer or shorter than that prescribed by any available Statute of Limitations. This is too broad an assertion. Though functioning for purposes of equitable relief as the counterpart of a Statute of Limitations, to which it may be analogized but to whose provisions it owes no necessary obeisance, laches is designed to introduce flexibility into the process of determining when rights have been asserted so unseasonably that a point at which they should be barred has been reached (see, generally, 2 Pomeroy, Equity Jurisprudence [5th ed], § 419a; Buswell, Limitations and Adverse Possessions, §§ 19-20).

So, in instances of enforcement of zoning regulations or deed restrictions, delay in instituting legal proceedings to enforce recognized rights may result in a denial of injunctive relief and a limitation of the remedy to one at law (Matter of Eberhart v La Pilar Realty Co., 45 AD2d 679 [zoning]; Ufier v Baldwin, 33 Misc 2d 848 [zoning]; Thompson v Diller, 161 App Div 98 [restrictive covenant]; Cummins v Colgate Props. Corp., 2 Misc 2d 301, affd 2 AD2d 749, mot for lv to app den 2 AD2d 810, mot for lv to app den 2 NY2d 707 [restrictive covenant]). Comparable too, and not unlike the case before us, would be an action at law on an installment obligation in which the Statute of Limitations is applied to preclude recovery of payments past due while collection of amounts accruing after the effective date of the time bar is permitted (cf. Walsh v Andorn, 33 NY2d 503). Withal, of course, the power to invoke laches is not untrammeled. For, while a time bar is usually said to affect the remedy, the practical consequence of its interposition is at least as often the difference between life or death for the right as well (see Buswell, Limitations and Adverse Possessions, § 1; Siegel, New York Practice, § 34).

These principles were not abused in the present case. Significantly, the petitioners here offered not the slightest hint of an explanation for the two-year lapse between the time the city first made its refusal to pay evident and the time the petition was served. Indeed, the position of the city — and, therefore, of the pension funds — was clear from almost the very enactment of Local Laws 92 and 93. Additionally, though it is not a sine qua non, the city may well have suffered prejudice from the delay; it argues that its ability to plan and budget its expenditures — and even its ability to undertake a timely correction of the allegedly unforeseen problems caused by its 1973 action — would have been unfairly disrupted by awarding retroactive relief. Under all these circumstances, the Appellate Division cannot be faulted for determining that the relief be effective as of the date of demand.

Accordingly, the order appealed from should be affirmed, without costs.

Chief Judge Cooke and Judges Jasen, Gabrielli, Jones and Wachtler concur with Judge Fuchsberg.

Order affirmed.

      . These funds were established pursuant to section B19-1.0 et seq. and section B197.0 et seq. of the New York City Administrative Code and are known as the New York City Fire Department Articles 1 and IB Pension Funds.

      . Or "retirement allowance”, which, for the purposes of this appeal, is identical.

      . Subsequent amendments of section 207-i of the General Municipal Law were confined largely to enlarging the class of retirees to which it applied by advancing the date before which those eligible had to have' retired.

      . Section B19-4.1 of the Administrative Code: "Service incurred disability benefits in the case of retirements prior to July 1, 1965. * * * [I]n any case where a pension was awarded * * * by reason of the retirement of a member for disability caused or induced by the actual performance of the duties of his position, prior to July 1, 1965, such member shall be entitled to a pension of not less than three-fourths the annual salary or compensation payable to a first grade fireman as of July 1, 1965. In the case of any member receiving a pension less than three-fourths the annual salary or compensation of a first grade fireman as of July 1, 1965, his pension will be increased to an amount which will equal three-fourths the annual salary or compensation of a first grade fireman as of July 1, 1965.”.
      Section B19-7.891 of the Administrative Code contains identical language except that it refers to "retirement allowances” payable to members of the Article IB Pension Fund.

      . The demand, mailed on July 28, 1976, was treated as though received three days later (CPLR 2103, subd [b], par 2).

      . The trend so evident then has continued to escalate to a point where the consumer price index for December, 1978 is now 114.3% over that for June, 1965.


author: Wachtler, J.

text:
    United States Fidelity and Guaranty Company, Appellant, v E. W. Smith Co., Respondent.
    Argued January 4, 1979;
    decided February 22, 1979

      POINTS OF COUNSEL

      Morris Block for appellant.
    I. Where this action in conversion accrued in favor of Hutton, a New York partnership, on November 1, 1968 against defendant, a foreign corporation not then amenable to process in New York State, the Statute of Limitations was tolled until November 18, 1974, the date upon which defendant became registered as a broker-dealer in securities in the State of New York. Accordingly, service of process on defendant within three years of November 18, 1974 confers jurisdiction over defendant in the State of New York as being within the time provided for action in conversion. II. Plaintiff is the subrogee of W. E. Hutton & Co., the owner of the subject stock certificates, and not the assignee. Accordingly, the subject action is concerned with the rights and remedies of W. E. Hutton & Co., the subrogor, and not United States Fidelity and Guaranty Company, the subrogee. (Liberty Mut. Fire Ins. Co. v Perricone, 54 AD2d 975; Ocean Acc. & Guar. Corp. v Hooker Electrochemical Co., 240 NY 37; Fidelity & Deposit Co. of Md. v Queens County Trust Co., 226 NY 225; American Sur. Co. of N. Y. v Town of Islip, 268 App Div 92.) III. Under CPLR 1004, this action might have been brought in the name of the subrogor, i.e., W. E. Hutton & Co., the New York partnership. Accordingly, the viability of plaintiffs cause of action is not affected by bringing the action in the name of the subrogee. (Leone v Lohmaier, 205 Misc 467; Wick Co. v Lee Dyeing Co. of Johnstown, 71 Misc 2d 82, 41 AD2d 905.) IV. CPLR 205 has no application to the within matter. V. CPLR 202 is inapplicable herein as this action is concerned with the rights and remedies of W. E. Hutton & Co., the New York partnership and subrogor, a resident of the State of New York. As a resident of the State of New York, W. E. Hutton & Co. comes within the exception of CPLR 202 and the rights and remedies of plaintiff, as subrogee, are determined by the rights and remedies of W. E. Hutton & Co., the New York resident, as subrogor. (Fidelity & Deposit Co. of Md. v Queens County Trust Co., 226 NY 225; American Sur. Co. of N. Y. v Town of Islip, 268 App Div 92.)

      Charles A. Crocco, Jr., for respondent.
    I. E. W. Smith is no more subject to jurisdiction now than it was 10 years ago. II. It is agreed by both sides that the applicable Statute of Limitations is three years. That time has long since run. III. CPLR 207, as the lower court pointed out, has no applicability to this case. (Fullmer v Sloan’s Sporting Goods Co., 277 F Supp 995.) IV. The action having accrued outside the State, CPLR 202 bars USF&G, even if CPLR 207 applies. (American Lumbermens Mut. Cas. Co. of Ill. v Cochrane, 284 App Div 884, 309 NY 1017; Korn v Merrill, 403 F Supp 377.) V. USF& G is estopped by its complaint to deny that it is the assignee and transferee of the cause of action herein. Therefore, under section 13-105 of the General Obligations Law, it has the infirmities of its residence. (Allstate Ins. Co. v Babylon Chrysler, Plymouth, 75 Misc 2d 604, 45 AD2d 969; Wagner v Braunsberg, 5 AD2d 564.) VI. Even if USF&G had brought the case in the name of W. E. Hutton, it would still be subject to dismissal because USF&G would be the real party in interest. VII. USF&G does not dispute that it has not brought this present action within the six months allowed under CPLR 205.
   OPINION OF THE COURT

Wachtler, J.

In October, 1968, 20 stock certificates, representing 2,000 shares of Standard Oil of Indiana, were stolen from the New York offices of W. E. Hutton and Company, a New York brokerage firm. Later that month, defendant E. W. Smith Company, a Pennsylvania corporation not then registered to do business in New York, allegedly obtained those certificates through a Philadelphia bank and sold them, on behalf of one of Smith’s customers, to two Philadelphia brokerage houses.

In 1970, the plaintiff in this case, United States Fidelity and Guaranty Company (a Maryland corporation), brought an action against Smith in Supreme Court, New York County, alleging that it, Fidelity, was the subrogee of Hutton, having paid Hutton for its loss under an insurance bond, and that Smith had converted the certificates stolen from Hutton by transferring them to the Philadelphia brokerage firms. In personam jurisdiction over Smith was predicated upon CPLR 302 (subd [a], par 2, commission of a tort in New York). Special Term dismissed the complaint in that case on the ground that Smith had committed no tort in New York, and there had been no allegation of facts sufficient to show how Smith could be brought within the jurisdiction of the court. The order and judgment of Special Term were unanimously affirmed by the Appellate Division (United States Fid. & Guar. Co. v Coca-Cola Co., 54 AD2d 550), and a subsequent motion for leave to appeal to this court was dismissed as untimely (40 NY2d 808, 1080).

In November of 1974 Smith registered to do business in New York as a broker-dealer pursuant to article 23-A of the General Business Law and subsequently filed additional statements and notices pursuant to section 359-e of the General Business Law.

Claiming that the courts of this State acquired personal jurisdiction over Smith by its registration to do business, Fidelity, in June of 1977 brought the present action stating the same claim for conversion alleged in the earlier suit.

Upon a motion by Smith pursuant to CPLR 3211 (subd [a]), Special Term dismissed the complaint on the ground that the cause of action in conversion was barred by the applicable Statute of Limitations (CPLR 214). The Appellate Division unanimously affirmed, and we granted leave to appeal.

The issue, broadly framed, is whether this action is barred by the Statute of Limitations. Since an action for conversion must be commenced within three years (CPLR 214) this suit would be barred unless the running of the statutory time period has been tolled. Fidelity maintains that the Statute of Limitations was tolled at least until November 18, 1974, the earliest date that Smith could be deemed to have come into New York by complying with the requirements of article 23-A of the General Business Law, and that this action was therefore timely commenced.

As is here relevant, CPLR 207 provides: "If, when a cause of action accrues against a person, he is without the state, the time within which the action must be commenced shall be computed from the time he comes into or returns to the state.” Long before the words "he comes into or” were included as a part of section 19 of the Civil Practice Act (L 1943, ch 263), the predecessor statute to CPLR 207, it had been judicially established that section 19 of the Civil Practice Act and its tolling provisions were applicable to a situation in which a foreign defendant was not in New York either prior to or during the occurrence upon which the cause of action was predicated (see Meyers v Credit Lyonnais; 259 NY 399; National Sur. Co. v Ruffin, 242 NY 413, and cases cited therein). The amendment of section 19 of the Civil Practice Act so as to include those words was specifically intended to codify this well-established rule (1943 Report of NY Law Rev Comm, 127, 135, 166-167), and the wording of the present statute clearly indicates that rule’s continued vitality. Accordingly, CPLR 207 is applicable and renders the present action timely.

It is urged, however, that if CPLR 207 is applicable, it must be read in conjunction with CPLR 202. Smith notes that the cause of action accrued "without the state” (in Pennsylvania), and that the plaintiff, Fidelity, is a Maryland corporation rather than "a resident of [this] state”. Smith argues, therefore, that as between the New York and Pennsylvania Statutes of Limitations, the shorter net period is applicable (see Siegel, New York Practice, § 57, p 58), and that inasmuch as the six-year Pennsylvania statutory period (see Pa Stat Ann, tit 12, § 31) has expired, this action is time-barred.

This argument is premised on the assertion that Fidelity as a foreign corporation, cannot take advantage of the exception in CPLR 202 favoring New York residents, but must be relegated to the shorter of the two applicable limitations periods. Inasmuch as this premise is incorrect, Smith’s argument must be rejected.

It is the very essence of subrogation that a subrogee stands in the shoes of the subrogor and is entitled to all of the latter’s rights, benefits and remedies (see, generally, 57 NY Jur, Subrogation, § 26). Fidelity, as the subrogee of Hutton (a New York partnership), is therefore entitled, as Hutton would have been, to invoke the exception in CPLR 202, and it is therefore the tolled New York Statute of Limitations that is applicable.

Moreover, aside from general principles of subrogation, the very language of CPLR 202 mandates a determination that it is Hutton’s residency, rather than Fidelity’s, which is crucial to the application of the statutory exception favoring "residents” of this State. CPLR 202 provides for the application of the shorter of the two limitations periods in question "except * * * where the cause of action accrued in favor of a resident of the state” (emphasis added), in which case the New York period is applicable. The critical factor is, therefore, the residency of the person in whose favor the cause of action accrued (cf. Cellura v Cellura, 24 AD2d 59; Korn v Merrill, 403 F Supp 377). This becomes even more apparent by noting the language used in section 13 of the Civil Practice Act, the predecessor statute to CPLR 202. That statute provided for the "borrowing” of a shorter foreign Statute of Limitations "except that where the cause of action originally accrued in favor of a resident of this state” (emphasis added). No substaptive change was intended by the omission of the word "originally” in the current statute (NY Advisory Commission on Practice and Procedure, 2d Preliminary Report 46 [1958]).

Therefore, inasmuch as the cause of action in this case did accrue in favor of a New York resident (Hutton), the New York Statute of Limitations, as tolled, is applicable, and the action was therefore timely commenced.

Finally, Smith argues that inasmuch as this action was not commenced within six months after the termination of Fidelity’s prior action, it is barred by the provisions of CPLR 205 (subd [a]). This contention is without merit. CPLR 205 (subd [a]) was designed to effect a grace period so as to extend, if applicable, the time within which an action can be commenced. It serves the salutary purpose of preventing a Statute of Limitations from barring recovery where the action, at first timely commenced, had been dismissed due to a technical defect which can be remedied in a new action (see Graziano v Pennell, 371 F2d 761). Where, as here, the statutory time limit has not expired, due to a toll or otherwise, this section cannot be applied in such a way as to shorten the period otherwise available to the plaintiff (McLaughlin, Practice Commentaries, McKinney’s Cons Laws of NY, Book 7B, CPLR 205:5, p 198).

Accordingly, the order appealed from should be reversed, and the motion to dismiss the complaint denied.

Chief Judge Cooke and Judges Jasen, Gabrielli, Jones and Fuchsberg concur with Judge Wachtler.

Order reversed, with costs, and defendant’s motion to dismiss the complaint denied.

      . We do not decide whether compliance with that article affords a basis for in personam jurisdiction, that issue not having been properly raised or preserved' for our review.

      . "§ 202. Cause of action accruing without the state.
      "An action based upon a cause of action accruing without the state cannot be commenced after the expiration of the time limited by the laws of either the state or the place without the state where the cause of action accrued, except that where the cause of action accrued in favor of a resident of the state the time limited by the laws of the state shall apply.”

      . "§ 205. Termination of action, (a) New action by plaintiff. If an action is timely commenced and is terminated in any other manner than by a voluntary discontinuance, a dismissal of the complaint for neglect to prosecute the action, or a final judgment upon the merits, the plaintiff, or, if he dies, and the cause of action survives, his executor or administrator, may commence a new action upon the same cause of action within six months after the termination.”