author: Chief Judge Cooke. Meyer, J.

text:
    Robert R. Cooper, Respondent, v Ateliers de la Motobecane, S. A., Appellant.
    Argued October 13, 1982
    decided November 18, 1982

      POINTS OF COUNSEL

      Richard Kent Bernstein and Pierre Cournot for appellant.
    I. The complaint should be dismissed. (Incontrade, Inc. v Oilborn Int., S.A., 407 F Supp 1359; Siderius, Inc. v Compania de Acero del Pacifico, S.A., 453 F Supp 22.) II. The attachment should be vacated. (Metropolitan World Tanker Corp. v P.N. Pertambangan Minjakdangas Bumi Nasional, 427 F Supp 2; Andros Cia Maritima, S.A. v Andre & Cie, S.A., 430 F Supp 88; Atlas Chartering Servs. v World Trade Group, 453 F Supp 861.)

      Steven L. Cohen for respondent.
    I. The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards does not divest this court of continuing jurisdiction nor prohibit prearbitration attachments. (Boys Markets v Clerk’s Union, 398 US 235; Carolina Power & Light Co. v Uranex, 451 F Supp 1044; McCreary Tire & Rubber Co. v CEAT, 501 F2d 1032; Companie de Navegacion y Financiera Bosnia, S.A. v National Unity Mar. Salvage Corp., 457 F Supp 1013; Andros Cia Maritima, S.A. v Andre & Cie, S.A., 430 F Supp 88; Atlas Chartering Servs. v World Trade Group, 453 F Supp 861; Paramount Carriers Corp. v Cook Inds., 465 F Supp 599.) II. New York law permits a prearbitration attachment to secure an eventual award. (American Reserve Ins. Co. v China Ins. Co., 297 NY 322; Matter of Loutex Gas & Oil Corp. [Star Pipe Line Co.], 22 Misc 2d 709; Compania Panamena Maritima San Gerassimo, S.A. v International Union Lines, 17 Misc 2d 497.)
   OPINION OF THE COURT

Chief Judge Cooke.

The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (UN Convention) was drafted to minimize the uncertainty of enforcing arbitration agreements and to avoid the vagaries of foreign law for international traders. This policy would be defeated by allowing a party, contrary to contract, to bring multiple suits and to obtain an order of attachment before arbitration. Therefore, the order of the Appellate Division should be reversed.

I

Plaintiff and others not here involved entered into a contract with defendant, a French corporation, to establish a New York corporation to distribute defendant’s products. The agreement provided that plaintiff and others could each tender his or her shares for repurchase to defendant or the New York corporation, the two being jointly and severally obligated to buy such shares according to a price-setting formula. Disputes over valuation were to be resolved by arbitration in Switzerland.

In April, 1978, plaintiff tendered his shares for repurchase. Negotiations ensued until defendant finally demanded arbitration. In September, 1978, plaintiff sought a permanent stay of arbitration in Supreme Court (Action I). Special Term denied the petition, but the Appellate Division reversed and issued a stay. The Court of Appeals, relying on Matter of United Nations Dev. Corp. v Norkin Plumbing Co. (45 NY2d 358), reversed and denied the stay in a one-sentence decision (49 NY2d 819).

During the pendency of Action I, in January, 1979, plaintiff commenced this action for a money judgment (Action II) and obtained an ex parte attachment of a debt owed by the New York corporation to defendant. Plaintiff sought to confirm the attachment and was opposed by defendant, who moved to dismiss the complaint and vacate the attachment. Supreme Court confirmed the attachment after the Appellate Division had granted a stay of arbitration in Action I. Defendant renewed its motion to dismiss and vacate after the Court of Appeals reversed in Action I. Special Term granted the motion, relying on Federal cases that interpret the UN Convention as stripping a court of jurisdiction to entertain an attachment action. The Appellate Division reversed in a 4-1 decision, rejecting the loss-of-jurisdiction argument and holding that there could be prearbitration attachment. The dissenting Justice relied on Special Term’s decision.

II

Arbitration is preferred over litigation by the business world as “a process [that] combines finality of decision with speed, low expense, and flexibility in the selection of principles and mercantile customs to be used in solving a problem” (Quigley, Accession by the United States to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 70 Yale LJ 1049; see Aksen, American Arbitration Accession Arrives in the Age of Aquarius: United States Implements United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 3 Sw U L Rev 1, 2-3). It has long been the policy in New York to encourage the use of arbitration “as an easy, expeditious and inexpensive method of settling disputes, and as tending to prevent litigation.” (Fudickar v Guardian Mut. Life Ins. Co., 62 NY 392, 399.) This support has not diminished over the last century (see Matter of Maye [Bluestein], 40 NY2d 113,117-118; 5 NY Jur 2d, Arbitration and Award, § 5, p 99).

The desirability of arbitration is enhanced in the context of international trade, where the complexity of litigation is often compounded by lack of familiarity with foreign procedures and law (see Burstein, Arbitration of International Commercial Disputes, 6 B C Ind & Comm L Rev 569, 569-572; Quigley, op. cit., at p 1051; see, also, Contini, International Commercial Arbitration, 8 Am J Comp L 283, 283-284; Domke, American Arbitral Awards: Enforcement in Foreign Countries, 1965 U of 111 L Forum 399). Thus, resolving disputes through arbitration allows all parties to avoid unknown risks inherent in resorting to a foreign justice system.

The prevalent problem in international contracts containing arbitration clauses has been in enforcing the agreement to arbitrate. The old antagonism to arbitration (cf. Fudickar v Guardian Mut. Life Ins. Co., supra) is shared by many countries, so that there is often uncertainty whether a contracting party may be compelled to arbitrate or whether an arbitrator’s award may be enforced (see Burstein, op. cit., at pp 569-570; Contini, op. cit., at pp 287-288; Domke, op. cit.; McMahon, Implementation of the UN Convention on Foreign Arbitral Awards in the US, 26 Arb J 65, 65-66; Quigley, op. cit., at p 1057). Before 1958, international efforts to resolve these conflicts were made through bilateral and multilateral treaties (see Contini, op. cit., at pp 286-287). Of the latter, the most significant documents were the Geneva Protocol on Arbitration Clauses of 1923 and the Geneva Convention on the Execution of Foreign Arbitral Awards of 1927. Although helpful, the Geneva Treaties were not satisfactory as their language was ambiguous as to the scope of application, some awards were excluded from their scope, and the party seeking to enforce the award had the burden of proving the validity and finality of the award (see Contini, op. cit., at pp 288-289).

It was against this background that the UN Convention was drafted in New York in 1958. Generally, the UN Convention eased the difficulty in enforcing international arbitration agreements by minimizing uncertainties and shifting the burden of proof to the party opposing enforcement. The question whether an arbitral award is “foreign”, a matter unclear in some civil law countries (see Contini, op. cit., at pp 292-293), is answered by adopting a territorial definition of domesticity (see USCS Administrative Rules, Foreign Arbitral Awards Conv, art I, § 1; Contini, op. cit., at p 293). When an action is brought in court and a party asserts the arbitration agreement, the court “shall * * * refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.” (USCS Administrative Rules, Foreign Arbitral Awards Conv, art II, § 3; see Contini, op. cit., at p 296). Moreover, foreign arbitration awards are to be enforced on the same terms as domestic awards (see USCS Administrative Rules, Foreign Arbitral Awards Conv, art III; Contini, op. cit., at p 297).

Of particular relevance to the present controversy are the UN Convention’s provisions for objecting to the award and requiring security. Unlike the earlier Geneva Treaties, the UN Convention requires the party opposing enforcement to prove the award’s invalidity, and it limits the grounds for objection (see USCS Administrative Rules, Foreign Arbitral Awards Conv, art V; Contini, op. cit., at p 299; see, also, Aksen, op. cit., at pp 11-12; Czyzak & Sullivan, American Arbitration Law and the UN Convention, 13 Arb J 197, 198-199; Domke, op. cit., at p 401; Quigley, op. cit., at p 1066). Moreover, if enforcement is opposed, the proponent of the award may request that the other party be ordered to give suitable security (see USCS Administrative Rules, Foreign Arbitral Awards Conv, art VI; Quigley, op. cit., at p 1060). This gives the courts a tool to discourage attempts to avoid arbitration awards which attempts are made merely as obstructionist tactics (see Contini, op. cit., at p 304).

Ill

The provisional remedy of attachment is, in part, a device to secure the payment of a money judgment (see McLaughlin, Practice Commentaries, McKinney’s Cons Law of NY, Book 7B, CPLR 6201:1, p 11). It is available only in an action for damages (see CPLR 6201; McLaughlin, op. cit.). Under the appropriate circumstances, it can be obtained in a matter that is subject to arbitration: an order of attachment will remain valid if it was obtained with notice or has been confirmed in a contract action before a defendant obtains a stay of proceedings because the underlying controversy is subject to arbitration (see American Reserve Ins. Co. v China Ins. Co., 297 NY 322, 326-327). It should be noted, however, that attachment would not be available in a proceeding to compel arbitration (see CPLR 7503, subd [a]), as that is not an action seeking a money judgment.

It is open to dispute whether attachment is even necessary in the arbitration context. Arbitration, as part of the contracting process, is subject to the same implicit assumptions of good faith and honesty that permeate the entire relationship. Voluntary compliance with arbitral awards may be as high as 85% (see Contini, op. cit., at p 309, n 84). Moreover, parties are free to include security clauses (e.g., performance bonds or creating escrow accounts) in their agreements to arbitrate. The UN Convention apparently considered the problem and saw no need to provide for prearbitration security (cf. USCS Administrative Rules, Foreign Arbitral Awards Conv, Art VI [security available when party opposes enforcement of award]). Moreover, the list of signatory countries provides assurance to a contracting party that it will be able to enforce an arbitral award almost anywhere in the world (see id., at Appendix: List of Participants, Declarations and Reservations).

IV

More important here, however, is the injection of uncertainty — the antithesis of the UN Convention’s purpose — that would occur by permitting attachments and judicial proceedings. Once again, the foreign business entity would be subject to foreign laws with which it is unfamiliar.

The UN Convention was implemented in the United States in 1970 (Public L 91-368, codified at US Code, tit 9, § 201 et seq.). This act amended the Federal Arbitration Act by re-enacting the earlier sections and denominating them “Chapter 1”, and adding “Chapter 2” to provide a vehicle for enforcing the UN Convention (see Aksen, op. cit., at p 16). In McCreary Tire & Rubber Co. v CEAT (501 F2d 1032) the Third Circuit ruled that the language “refer the parties to arbitration” (USCS Administrative Rules, Foreign Arbitral Awards Conv, art II, § 3) precludes the courts from acting in any capacity except to order arbitration, and therefore an order of attachment could not be issued. To hold .otherwise would defeat the purpose of the UN Convention (see id.; accord I.T.A.D. Assoc. v Podar Bros., 636 F2d 75 [4th Cir]; Metropolitan World Tanker Corp. v P.N. Pertambangan Minjakdangas Bumi Nasional, 427 F Supp 2 [SDNY]; see, also, Siderius, Inc. v Compania de Acero del Pacifico, S.A., 453 F Supp 22 [SDNY]).

Plaintiff relies on a number of cases to the contrary (see Paramount Carriers Corp. v Cook Inds., 465 F Supp 599 [SDNY]; Compania de Navegacion y Financiera Bosnia, S.A. v National Unity Mar. Salvage Corp., 457 F Supp 1013 [SDNY]; Atlas Chartering Servs. v World Trade Group, 453 F Supp 861 [SDNY]; Carolina Power & Light Co. v Uranex, 451 F Supp 1044 [ND Cal]). Most of these cases are distinguishable, however. The implementing statute provides that normal Federal arbitration law applies to the extent it is not inconsistent with the UN Convention (see US Code, tit 9, § 208). That law specifically permits attachment to be used in admiralty cases (see US Code, tit 9, § 8). In all of the cases relied on by plaintiff, except for National Unity Mar. and Carolina Power, the courts relied on section 8 in approving attachment in a case arising out of a maritime contract. In National Unity Mar., the court discussed neither section 8 nor the UN Convention in approving attachment in a maritime contract case. Only in Carolina Power did the court allow attachment in a case not involving a maritime contract falling under the UN Convention. That court rejected McCreary’s reasoning that it must divest itself of jurisdiction. Instead, concerned that the plaintiff would be unable to enforce an eventual arbitral award, the District Court approved the security attachment, a rationale that, as discussed above, is not compelling.

The controversy now before this court demonstrates the soundness of the decisions reached by the Third and Fourth Circuits. Defendant agreed to arbitrate disputes, but instead has become embroiled in two lawsuits. Action II, the instant case, is nothing more than plaintiff’s attempt to circumvent Special Term’s ruling in Action I denying the stay of arbitration. Indeed, the chronology of events indicates that the order of attachment should never have issued at all, as the underlying dispute is subject to arbitration.

V

Whenever a matter of foreign relations is involved, one must consider the mirror image of a particular situation. Is it desirable to subject American property overseas to whatever rules of attachment and other judicial process may apply in some foreign country when our citizen has agreed to arbitrate a dispute? It can be assumed that American business entities engaging in international trade would not encourage such a result. Permitting this type of attachment to stand would expose American business to that, risk in other countries.

The essence of arbitration is resolving disputes without the interference of the judicial process and its strictures. When international trade is involved, this essence is enhanced by the desire to avoid unfamiliar foreign law. The UN Convention has considered the problems and created a solution, one that does not contemplate significant judicial intervention until after an arbitral award is made. The purpose and policy of the UN Convention will be best carried out by restricting prearbitration judicial action to determining whether arbitration should be compelled.

Accordingly, the order of the Appellate Division should be reversed, with costs, and the order of Supreme Court, New York County, reinstated.

Meyer, J.

(dissenting). Respectfully I dissent and vote to affirm the order of the Appellate Division essentially for the reasons stated in the memorandum of that court.

In response to the majority I add that: (1) nothing in the UN Convention or in the history of its negotiation or its implementation by Congress suggests that the word “refer” as used in section 3 of article II of the UN Convention was intended to foreclose the use of attachment where permitted by the law of the jurisdiction in which the attachment is obtained; (2) in light of the majority’s concessions that foreign arbitration awards are enforced on the same terms as domestic awards (p 413), that there are circumstances under which a domestic award may be enforced under our law through use of a preaward attachment (p 413) and that the UN Convention speaks only in terms of postaward security (p 414), and of the fact that the UN Convention does not specifically address the subject of preaward attachment, the UN Convention cannot properly be said to have proscribed such an attachment by implication; and (3) the use of attachment in maritime contract cases arbitrated under the Federal statute cannot properly be distinguished from arbitration-related attachment permitted under State statutory and decisional law, for the UN Convention makes no distinction; it either permits or proscribes both. In my view, absent more specific language of proscription in the UN Convention, it permits both.

Judges Jones, Wachtler and Fuchsberg concur with Chief Judge Cooke; Judge Meyer dissents and votes to affirm in a separate opinion in which Judges Jasen and Gabrielli concur.

Order reversed, with costs, and the order of Supreme Court, New York County, reinstated. Question certified answered in the negative.


source: Caselaw Access Project

author: Jasen, J.

license: Public Domain

text:
    Ida W. Spaulding, Appellant, v Frank J. Benenati, Respondent.
    Argued October 4, 1982
    decided November 18, 1982

      POINTS OF COUNSEL

      Robert Dembia and Peter J. Ng for appellant.
    I. “Good will” is not a narrow concept in the context of a professional business; it includes more than just skill. (Morgan v Schuyler, 79 NY 490; Matter of Brown, 242 NY 1; Matter of Caldwell, 107 Misc 316,195 App Div 890.) II. The good will sold in this case was saleable and valuable. (Matter of Brown, 242 NY 1.) III. This case involves a valid contract; it should be enforced.

      Charles S. Vaccaro for respondent.
    I. The court below correctly enunciated the law that the saleability of “good will” does not apply to the business of a deceased practitioner. (Matter of Martin, 178 Misc 43; Matter of Leserman, 145 Misc 387.) II. The business of a professional man has no good will transferable after his death and, therefore, not subject to any estate tax. III. Since a sale of a nonexisting asset was contemplated by the parties there is an absence or failure of consideration to support the claim of plaintiff-appellant for $4,000, a portion of the total purchase price. (Haas v Wertheim, 266 App Div 672, 293 NY 723; Graham v Denton, 253 App Div 910; Converse v Schmidlapp, 264 App Div 381, 290 NY 834.) IV. The lower court erred on the facts and the law applicable to the attempted sale of “good will” in the instant case.
   OPINION OF THE COURT

Jasen, J.

The issue presented on this appeal is whether the sale of good will, insofar as it relates to the practice of a profession, may encompass something other than the personal skill, judgment and reputation of a deceased professional.

On January 30, 1972, Dr. Ralph L. Spaulding, a dentist who had practiced in Monticello for many years, died, leaving his entire estate, including his dental practice, to his wife, plaintiff Ida W. Spaulding. On July 14, 1972, plaintiff entered into a written agreement to sell her deceased husband’s dental practice for $11,000 to defendant Frank J. Benenati. The contract provided for the sale of “[a] 11 of the equipment, fixtures, instruments, furniture, and files, and including the good will, and any and all things constituting the dental practice of the late Dr. Ralph L. Spaulding at 236 Broadway in the Village of Monticello”. The consideration to be paid was apportioned among the various assets of the practice. The dental supplies were valued at $1,000 and the equipment, fixtures, instruments, furniture and other tangible assets were valued at $6,000. Four thousand dollars was assigned as the value of the good will. The contract also provided that defendant would have the right, for six years, to lease the office premises of the late Dr. Spaulding at a rate of $150 per month for the first three years and $200 per month for three additional years. Except for a $1,500 down payment, the payments in consideration for the practice were to be made in monthly installments.

When defendant defaulted in making certain monthly installment payments, plaintiff commenced this action for breach of contract. Defendant asserted as his third defense that the good will of a deceased professional is not a saleable asset. In response to plaintiff’s motion to dismiss that defense, defendant cross-moved for partial summary judgment dismissing so much of the complaint that sought recovery for $4,000 owed with respect to the sale of good will on the ground that the good will of a professional is not a saleable asset and, therefore, his promise to pay $4,000 is unenforceable for lack of consideration. Special Term granted plaintiff’s motion to dismiss defendant’s third defense and denied defendant’s cross motion.

On appeal, the Appellate Division modified Special Term’s order by reinstating defendant’s third defense and granting defendant’s cross motion for partial summary judgment, holding that saleable good will cannot arise in a professional business which depends upon the personal skill of and confidence in a particular person.

We have no disagreement with the Appellate Division as to the general rule that the personal skill, judgment and reputation of a professional person, whether deceased or living, is not a saleable item. (25 NY Jur, Good Will, § 7, p 218.) This rule is based on the sound reasoning that the name, skill, judgment, and reputation of a professional person is inseparable from that person and follows its possessor wherever he goes. “In the case of a professional man, his skill cannot survive his death and hence any value inhering to it or to the concomitant reputation entirely disappears.” (Matter of Martin, 178 Misc 43, 45.)

Additional support for this rule is found in the public policy of this State. With respect to that element of good will which is comprised of the name of the professional whose practice is purchased, “it would be a fraud on the public to attempt to conserve the good will of an individual or former partner, which is personal to him, by attempting to create [a false] appearance of continuity.” (Weiner v Weiner, 88 Misc 2d 920, 924, citing Bailly v Betti, 241 NY 22.) It is axiomatic that one who purchases the professional practice of another can never acquire the right to deceive the public. (Laube, Good Will in Professional Partnerships, 12 Cornell LQ 303, 322.) The courts that have adopted this rule have recognized the reality that personal attributes of a professional person expire at his death. (Matter of Martin, supra; Matter of Leserman, 145 Misc 387; Matter of Caldwell, 107 Misc 316.) These courts have thus provided for the protection of the public from fraud and deception by refusing to enforce contracts which purport to transfer the name, skill, judgment or reputation of a deceased professional as an element of good will. Consequently, individuals are prevented from practicing a profession under the pretense of having somehow acquired by purchase or inheritance the personal attributes of another professional.

However, this rule, which has our unqualified support, applies only to the sale of the good will of a professional practice which is comprised solely of the personal skill, judgment or reputation of the professional whose practice is being sold. A brief review of past decisions of this court makes it clear that the rule should not be applied to the situation where the sale of good will is intended to include something other than the personal attributes of a professional, such as the right to establish a practice on the same premises used by the former practitioner.

An early decision of this court involved a dispute over the value of the benefit, if any, a partner in a dental practice derived by remaining at the professional partnership’s place of practice. It was found that the remaining partner “acquired an advantage over the [departing partner], for he had the exclusive right to occupy the rooms of the late firm, and as incident thereto, the benefit of that good will, which Lord Eldon defines, in Crutwell v Lye (17 Vesey, 335), ‘as the probability that the old customers will resort to the old place’.” (Morgan v Schuyler, 79 NY 490, 493.) The court went on to distinguish this element of good will from that which attaches to a professional practice as the result of confidence in the professional’s skill and ability.

In a case involving the sale of a brokerage business, this court once again adopted a broad definition of good will, stating that “[m]en will pay for any privilege that gives a reasonable expectancy of preference in the race of competition * * * Such expectancy may come from succession in place or name or otherwise to a business that has won the favor of its customers.” (Matter of Brown, 242 NY 1, 6.) Elaborating on the elements which comprise good will, Judge Cardozo opined “[t]he chief elements of value upon any sale of a good will are, first, continuity of place, and, second, continuity of name”. (Matter of Brown, supra, at p 7 [emphasis in original]; see, also, People ex rel. Johnson Co. v Roberts, 159 NY 70, 83.) Expressing doubt that continuity of place would be of great value, he commented further that even if the individuals who sell a business inform their customers that they will be doing business elsewhere, “[n]one the less, some customers might wander into the old place from forgetfulness or habit.” (Matter of Brown, supra, at p 11.) While we agree with Judge Cardozo that there is doubt whether a privilege so uncertain would be worth a great deal, we do not believe that the court should interfere in the voluntary agreement reached by sophisticated parties to a contract. If an individual chooses to pay for the expectancy that customers will return to the seller’s former location, believing the right to locate there is a valuable asset, and agrees on a price therefor, so be it. Absent a claim of fraud or unconscionability, the adequacy of consideration is not a proper subject for judicial scrutiny. (Mencher v Weiss, 306 NY 1; Mandel v Liebman, 303 NY 88; 21 NY Jur 2d, Contracts, § 74, pp 493-494.)

While it is arguable that the expectation that former patients will return to a particular professional’s place of business is greater where one of the partners of the former association remains at that place of business, as was the case in Morgan v Schuyler (supra), we believe that there is still a significant probability that people living in the surrounding neighborhood who have regularly patronized a professional practice will continue to frequent that professional office even though the practice is being conducted by a different person. The extent of this probability depends upon force of habit, convenience of location, attractiveness of the premises, availability of convenient alternatives and numerous other factors. It cannot be seriously contended that such an expectancy is without value and insufficient as consideration to bind one to honor a promise to pay the value assigned to it.

There is no valid reason advanced why the term good will, not otherwise defined or restricted in this agreement, should not be construed broadly. It can include, but is not limited to, such things as continuity of location of a professional office, name, skill, judgment and reputation. While the good will of a professional practice which depends solely on the name, skill, judgment or reputation of a professional is not a saleable asset (25 NY Jur, Good Will, § 7, p 218; Matter of Martin, 178 Misc 43, supra), professional good will which is comprised of an element other than personal attributes of a professional person, such as continuity of location of a professional office, is a saleable asset which is attached to the place, not the person, and survives the death of that person.

In our view, the trial court’s interpretation — that the defendant agreed to pay $4,000 “for the right to open a dental practice in the same premises” as formerly occupied by the deceased dentist “and remain there for six years” — is both reasonable and in conformity with the intention of the parties. Indeed, a different interpretation would operate to leave that provision of the contract which provided for the sale of good will without force and effect — a result which should be avoided by the courts when interpreting a contract. (Laba v Carey, 29 NY2d 302, 308; Corhill Corp. v S. D. Plants, Inc., 9 NY2d 595, 599; Muzak Corp. v Hotel Taft Corp., 1 NY2d 42, 46.)

Nowhere in defendant’s version of the facts does he claim that the plaintiff attempted to sell him the deceased dentist’s skill and judgment. On the contrary, the defendant merely states in bald conclusory form that his “attorney . has now informed [him] that Mrs. Spaulding did not have any vested interested [sic] in any ‘good will’ of her late husband’s dental practice, therefore she could not have sold anything that she did not possess.” (Emphasis supplied.) It was essential for the defendant, in claiming absence of consideration, to state his version of the facts in evidentiary form. Bald conclusory assertions are insufficient to defeat summary judgment. (Ehrlich v American Moninger Greenhouse Mfg. Corp., 26 NY2d 255.)

Since no evidence has been presented which would establish a contrary intent, we conclude, as a matter of law, that the saleable item of good will which defendant agreed to buy was the benefit to be derived by locating his dental practice on the premises formerly occupied by the late Dr. Spaulding. Having agreed to pay $4,000 for that benefit and been allowed to lease the premises for six years, defendant will not be heard to question whether it was, in fact, worth that sum.

Accordingly, the order of the Appellate Division should be reversed, with costs, plaintiff’s motion to dismiss defendant’s third affirmative defense granted, defendant’s cross motion for partial summary judgment denied and the certified question answered in the affirmative.

Judges Gabrielli, Jones, Wachtler, Fuchsberg and Meyer concur; Chief Judge Cooke taking no part.

Order reversed, etc.

      . As the Appellate Division correctly found, a contract involving multiple promises, each of which is exchanged for a specifically identified portion of the entire consideration, is enforceable in part even though one of the bargained for promises is unenforceable for lack of consideration. (1 Williston, Contracts [3d ed], § 134, p 566; § 137A, p 594; Restatement, Contracts 2d, § 80, pp 204-205.)

      . While it is true that contracts purporting to transfer the good will of a business may be analyzed differently depending on whether a professional or commercial business is involved, the distinction is irrelevant for purposes of defining good will and isolating the individual elements which may be included in the term. For this reason, cases dealing with commercial and professional good will will be discussed in deciding what intangible assets the term may include within its definition.

      . Further support for a broad definition of good will is found in Justice Story’s treatise on the law of partnership in which good will is described as “the advantage or benefit, which is acquired by an establishment, beyond the mere value of the capital, stock, funds, or property employed therein, in consequence of the general public patronage and encouragement, which it receives from constant or habitual customers, on account of its local position, or common celebrity, or reputation for skill or affluence, or punctuality, or from other accidental circumstances or necessities, or even from ancient partialities or prejudices.” (Story, Partnership, § 99, p 170.) In addition, Black’s Law Dictionary defines good will as, inter alia, “every advantage, every positive advantage, that has been acquired by a proprietor in carrying on his business, whether connected with the premises in which the business is conducted, or with the name under which it is managed, or with any other matter carrying with it the benefit of the business.” (Black’s Law Dictionary [5th ed], p 625.)

      . It should be noted that we do not agree with trial court’s finding that part of the $4,000 figure was paid in exchange for Dr. Spaulding’s files. The contract clearly shows that good will and the files were two separate and distinct assets.


author: Chief Judge Cooke.

text:
    In the Matter of Vicki B., Appellant, v David H., Respondent.
    Argued October 14, 1982
    decided November 18, 1982

      POINTS OF COUNSEL

      Frederick A. O. Schwarz, Jr., Corporation Counsel {Joan E. Handler and Francis F. Caputo of counsel), for appellant.
    In enacting subdivision (a) of section 517 of the Family Court Act, the Legislature has provided that a petitioner’s successful evidentiary demonstration that the father has voluntarily acknowledged his paternity of a child is sufficient circumstance to completely remove a proceeding to judicially establish his paternity of that child from the constraints of the two-year Statute of Limitations which would otherwise govern such proceeding. (Matter of Lorraine M. v Linwood M. S., 108 Misc 2d 366; Matter of Dolores D. v Mario N. D., 69 Misc 2d 689; Horn v Horton, 90 Misc 2d 159; Matter of Ethel B. v Charles W., 66 Misc 2d 337; Matter of Antoinette K. v Kenneth L., 103 Misc 2d 1011; Matter of Lydia L. v Vidal L., 95 Misc 2d 507; Matter of Shirley D. v Richardo B., 54 AD2d 564; Matter of Howard v Robinson, 32 AD2d 837; Matter of Wong v Beckford, 28 AD2d 137; Schuerf v Fowler, 2 AD2d 541.)

      Richard R. Reigi for respondent.
    I. If the bar of the Statute of Limitations is permanently removed in this case as contended by petitioner-appellant, there would be a violation of due process and the statute would be rendered unconstitutional. (Matter of Dolores D. v Mario N. D., 68 Misc 2d 689; Matter of Ethel B. v Charles W., 66 Misc 2d 337.) II. The Statute of Limitations should be extended for two years after payments of child support cease. (Brooklyn Bank v Barnaby, 197 NY 210; Matter of Fitch, 270 App Div 227; Matter of Antoinette K. v Kenneth L., 103 Misc 2d 1011; Connell v Hayden, 83 AD2d 30.)
   OPINION OF THE COURT

Chief Judge Cooke.

When a putative father has acknowledged paternity either in writing or through the furnishing of support payments, the time within which a paternity proceeding must be brought is not restricted by any statutory limitation.

Petitioner commenced this paternity proceeding in July, 1978, six and one-half years after her child was born. The Family Court denied respondent’s motion to dismiss the matter as untimely. The Appellate Division reversed and granted the motion, holding that the proceeding was barred because it was not commenced within two years of the last of 39 separate support payments respondent made between February, 1974 and October, 1975.

Subdivision (a) of section 517 of the Family Court Act sets forth the time limits for bringing such proceedings. It provides: “Proceedings to establish the paternity of the child may be instituted during the pregnancy of the mother or after the birth of the child, but shall not be brought after the lapse of more than two years from the birth of the child, unless paternity has been acknowledged by the father in writing or by furnishing support, or unless the mother is under the age of eighteen years, in which case the time limitation is extended until two years after the mother reaches the age of eighteen years.”

Respondent urges, and the court below held, that, although the statute permits the bringing of paternity proceedings based on acknowledgment of paternity by the putative father more than two years after the birth of the child, such acknowledgment serves only to start the two-year statutory period running anew. Inasmuch as petitioner failed to bring the proceeding within two years of respondent’s last act of acknowledgment, the court reasoned that it was untimely.

On its face, the plain language of the statute lends no support to the conclusion that a putative father’s acknowledgment merely renews the Statute of Limitations. The statute, after establishing a general two-year limitations period for bringing a paternity petition, expressly excepts situations when paternity has been acknowledged by the father or when the mother is under 18 years of age. Only in the latter of these two exceptions is another time limit imposed; no new limit is stated when the extension is founded on the father’s acts of acknowledgment.

Respondent analogizes acknowledgment of paternity by a father to part payment of a debt, which at common law starts the Statute of Limitations running anew on contract actions (see Restatement, Contracts, § 86). This analogy is inapposite. The part payment of a debt renews the Statute of Limitations because it constitutes a new implied promise to pay (see Roth v Michelson, 55 NY2d 278, 281; Morris Demolition Co. v Board of Educ., 40 NY2d 516, 520-522; see, generally, Calamari & Perillo, Contracts [2d ed], § 5-7, at p 186). The policy that imputes a new promise as between two private contractual parties is analogous to a putative father’s act of acknowledgment only insofar as both acts revive the opportunity to prosecute a claim that would otherwise be time-barred. In the absence of a legislative directive limiting the time within which the revived paternity proceeding must be brought, however, and in light of the strong public policy that obligates a parent to support his or her child (see Family Ct Act, § 513; Schaschlo v Taishoff 2 NY2d 408, 411), there exists no basis to hold that acknowledgment serves only to renew the Statute of Limitations.

Finally, respondent’s concern that failure to require a specific time at which such paternity claims must be extinguished would prejudice a putative father by exposing him to stale claims against which he would be unable to marshal a defense is misplaced. To avoid the Statute of Limitations, a mother must establish by clear and convincing evidence that paternity has been acknowledged (see Matter of Dorn “HH” v Lawrence “II”, 31 NY2d 154, 158, n 4). Thus, the putative father may still seek the protection of the statute by controverting the basis for his payments. Moreover, recent advances in blood typing provide strong defenses (see Family Ct Act, § 532; Joint AMA-ABA Guidelines: Present Status of Serologic Testing in Problems of Disputed Parentage, 10 Family LQ 247, 256). Finally, the father’s affirmative acts of acknowledgment themselves argue against claims of surprise or prejudice.

Accordingly, the order of the Appellate Division should be reversed and the order of the Family Court, Richmond County, reinstated.

Judges Jasen, Gabrielli, Jones, Wachtler, Fuchsberg and Meyer concur.

Order reversed, etc.


text:
    In the Matter of Carmelo E., Appellant.
    Argued October 4, 1982
    decided November 16, 1982

      POINTS OF COUNSEL

      John F. McGlynn and Lenore Gittis for appellant.
    I. The fact-finding determination must be reversed and the petition dismissed because of the absence of any evidence, apart from appellant’s statements, which would tend to connect him with the acts charged. (People v Murray, 40 NY2d 327; People v Reade, 13 NY2d 42; Matter of Earl R., 34 AD2d 1094; Matter of Gault, 387 US 1.) II. The fact-finding determination violated appellant’s due process rights because appellant’s guilt was not proved beyond a reasonable doubt when the People failed to offer any proof of his guilt aside from his demonstrably unreliable confession which was inconsistent with the facts of the crime and was contradicted by police testimony and by the inculpatory statements of the adults who had been indicted for the crime. (Jackson v Virginia, 443 US 307; Matter of Winship, 397 US 358; People v Oyola, 6 NY2d 259; People v Ledwon, 153 NY 10; Smith v United States, 348 US 147; Matter of Gault, 387 US 1; Matter of Gregory W., 19 NY2d 55.) III. The Family Court’s refusal to accept in evidence a newspaper account of the crime, published several days before the statements, deprived appellant of a fair trial. (People v Yazum, 13 NY2d 302; People v Miller, 39 NY2d 543; Ando v Woodberry, 8 NY2d 165; Goldberg v Kelly, 397 US 254; People v Crimmins, 36 NY2d 230.)

      Elizabeth Holtzman, District Attorney (Lois M. Raf and Barbara D. Underwood of counsel), for respondent.
    I. Appellant’s guilt was established beyond a reasonable doubt. (People v Thomas, 53 NY2d 983; People v Gruttola, 43 NY2d 116; People v De Tore, 34 NY2d 199; People v Montanez, 41 NY2d 53; People v Benzinger, 36 NY2d 29.) II. Subdivision (b) of section 744 of the Family Court Act and CPL 60.50 set the same standard for the corroboration of a confession, and that standard was satisfied here. (People v Murray, 40 NY2d 327, 430 US 948; People v Lewis, 260 NY 171; Matter of Gregory W., 19 NY2d 55; Matter of Samuel W., 24 NY2d 196, revd sub nom. Matter of Winship, 397 US 358; Matter of Gault, 387 US 1; Matter of D. [Daniel], 27 NY2d 90; People v Daniels, 37 NY2d 624; People v Fuller, 50 NY2d 628; People v Nisoff, 36 NY2d 560.) III. In the absence of any evidence that appellant was aware of a newspaper article which reported some of the facts of the crime, the article had no probative value in determining whether appellant’s confession was reliable. Therefore, the Trial Judge properly exercised her discretion in excluding the article from evidence. (People v Miller, 39 NY2d 543; People v Johnson, 47 NY2d 785; People v Mandel, 48 NY2d 952; People v Lamar McC., 47 NY2d 731; People v Culhane, 45 NY2d 757.)
   OPINION OF THE COURT

Chief Judge Cooke.

An out-of-court confession that is corroborated by evidence that the crime occurred is sufficient to sustain a determination that a youth is a juvenile delinquent, notwithstanding the absence of independent evidence directly linking the youth to the criminal act.

On September 30, 1977, Rosa Valdez was killed in her South Brooklyn home by robbers who ransacked the house and shot Mrs. Valdez four times. The next day, a car containing items taken from the Valdez house was found burned in Bensonhurst. Police eventually arrested two adult suspects, Luis Vera and Alan Fuentes, and interrogated two youths, who were released because of their minimal participation in the incident.

Vera and Fuentes each confessed. Vera attributed the actual shooting to an unnamed “black dude”. Fuentes stated that Vera was the shooter. While incarcerated at Rikers Island, Vera committed suicide. Subsequently, authorities discovered in Vera’s cell a letter to Fuentes that indicated that Vera and possibly Fuentes were fabricating their stories' to avoid a murder conviction.

The day after Vera’s suicide, appellant voluntarily came to the police station, where he was later joined by his mother and a family friend. After waiving his Miranda rights, appellant twice confessed his part in the burglary-slaying and the later car-burning. None of the other four suspects had mentioned appellant’s participation, and, before his appearance, the police had no intimation that he was involved in any fashion.

A fact-finding hearing was held to determine appellant’s delinquency. The evidence consisted primarily of appellant’s two confessions and the results of the police investigation. Appellant moved to dismiss for failure by the People to make out a prima facie case, arguing that no evidence other than his confession had been presented to place appellant at the scene of the crime. The motion was denied. Appellant’s defense relied on showing that his confession was not trustworthy and that, for reasons unknown, he fabricated the account of his participation. Appellant did not testify at the hearing.

Appellant was found to have committed acts that, if he were an adult, would constitute second degree murder and second degree burglary, and was adjudicated a juvenile delinquent. The Trial Judge ordered him placed with the New York State Division for Youth. The Appellate Division unanimously affirmed, without opinion. Leave to appeal was granted by this court.

The primary issue before this court is the extent of corroboration required by subdivision (b) of section 744 of the Family Court Act. That subdivision provides: “Any determination at the conclusion of a fact-finding hearing that a respondent did an act or acts must be based on proof beyond a reasonable doubt. For this purpose, an uncorroborated confession made out of court by a respondent is not sufficient.” The People argue that, as with adults, independent proof that a criminal act occurred is the only corroboration that is necessary (see CPL 60.50). Appellant asserts, however, that there must be independent evidence of his participation as well as of the crime’s occurrence. There has been a split among the Appellate Divisions. The First and Second Departments have adopted the lesser standard (see Matter of Geraldine D., 85 AD2d 574 [1st Dept]; Matter of Carmelo E., 79 AD2d 897 [2d Dept]); the Fourth Department has indorsed the stricter standard requiring independent proof of participation (see Matter of Earl R., 34 AD2d 1094).

In considering the question, it must be kept in mind that juvenile delinquency proceedings have a dual nature. While involving criminal conduct, the process itself is a civil proceeding. This is the result of early decisions to accord greater flexibility in responding to the wayward child than is permitted by the criminal justice system and its sanctions for the adult offender (see McKinney’s Session Laws of NY, 1962, pp 3433-3434; Besharov, Practice Commentaries, McKinney’s Cons Laws of NY, Book 29A, Part 1, Family Ct Act, § 711, pp 548-549). The goal has been said to be not to punish a malefactor, but rather to supervise and guide a troubled youth (see McKinney’s Session Laws, op. cit.; Besharov, op. cit.; see, also, People v Lewis, 260 NY 171, 176-177).

One of the initial consequences of this approach was the minimization, if not the total abnegation, of constitutional and statutory rights accorded adults (see People v Lewis, supra). Thus, children could be adjudicated juvenile delinquents and removed from the community without the protection of legal counsel, using involuntary or questionable confessions, on the basis of otherwise incompetent evidence, and with guilt being established by only a preponderance of evidence. This State early began affording greater protection to children lest the criminal nature of the proceeding be overlooked because of its civil characterization. A specific act of delinquency was required to be charged and proven (see People v Pikunas, 260 NY 72), standard rules of evidence in civil trials were to be followed (see People v Lewis, 260 NY, at p 178), and, when the act charged would be criminal if committed by an adult, normal criminal procedure was to be invoked (see People v Fitzgerald, 244 NY 307, 312-316).

Notwithstanding this solicitude for children’s rights, there still remained significant deviations from the rights accorded adults, although both could be subjected to loss of liberty. Not until 1967 was it held that a child undergoing adjudication as a juvenile delinquent was generally entitled to constitutional rights of due process (see Matter of Gault, 387 US 1). Specifically, the Supreme Court ruled that, at least when the child is facing possible incarceration, he or she has the right to receive prior written notice of the charges, the right to be represented by counsel, the right to confront and cross-examine witnesses, and the right to invoke the privilege against self incrimination (id., at pp 33-34, 41, 55-57). Only in 1970 did the Supreme Court first hold that juveniles charged with violating the criminal law are constitutionally entitled to the reasonable-doubt standard, rather than the less demanding preponderance-of-the-evidence rule (see Matter of Winship, 397 US 358, 368).

It is against this backdrop that we consider the provisions of the Family Court Act, adopted in 1962 (L 1962, ch 686). Acting at a time when juveniles’ constitutional rights remained severely circumscribed, the Legislature provided certain statutory privileges instead. For example, it directed that children be advised of a right to remain silent and to be represented by counsel (see Family Ct Act, § 741, subd [a], L 1962, ch 686), a particularly innovative step at the time (see Dembitz, Juvenile Cases in the New Family Court, 48 Cornell LQ 499, 513). And the Legislature added the provision — now under scrutiny in the present case — that an extrajudicial confession must be corroborated for it to satisfy the evidentiary burden of proof (Family Ct Act, § 744, subd [b], L 1962, ch 686).

Both appellant and the People point to the section’s legislative history, particularly the public hearings and reports, to support their respective positions. Appellant urges that the more restrictive interpretation was intended inasmuch as the Legislature was acting to strengthen juvenile rights. The People counter that the act was meant only to grant the same, not greater, protections to juveniles as were held by adults.

The latter argument is more persuasive. Appellant confuses the theoretical solicitude of the Family Court with the statutory and constitutional rights held by children before 1962. Albeit charged with paternally guiding the wayward youth back to the path of righteousness and lawfulness, the courts often did this with little regard to the youth’s (later gained) rights. In other words, the child’s welfare was protected with a too-heavy hand. The Legislature, therefore, acted to provide certain procedural safeguards before the court could exercise its far-reaching substantive powers over children (see McKinney’s Session Laws of NY, 1962, pp 3436-3437). Indeed, the limit of the Legislature’s concern is evidenced by subdivision (b) of section 744 itself: as originally enacted, it still required proof of guilt by only a preponderance of the evidence (see Family Ct Act, § 744, subd [b], L 1962, ch 686), a standard not changed (see L 1976, ch 191) until after the decision in Matter of Winship (397 US 358, supra). In short, the Legislature’s purpose was to increase the procedural rights held by juveniles charged with committing acts that would be criminal if done by an adult. Requiring only general corroboration is consonant with this purpose.

This conclusion is buttressed by a consideration of other statutes. CPL 60.50 states: “A person may not be convicted of any offense solely upon evidence of a confession or admission made by him without additional proof that the offense charged has been committed.” This is derived from section 395 of the Code of Criminal Procedure, which included substantially identical language. In contrast, accomplice testimony cannot be used to convict a defendant if “unsupported by corroborative evidence tending to connect the defendant with the commission of such offense” (CPL 60.22, subd 1 [emphasis added], derived from Code of Criminal Procedure, § 399 [must have “other evidence as tends to connect the defendant with the commission of the crime”]). At the time the Legislature enacted subdivision (b) of section 744, it had two models from which it could draw in drafting a new statute imposing a corroboration requirement. The Family Court Act did not parrot the language used in section 395 of the Code of Criminal Procedure, but it also did not impose the stricter corroboration requirement of accomplice testimony.

The greater scrutiny accorded accomplice testimony is to guard against the inherent suspiciousness of such evidence (see People v Cona, 49 NY2d 26). No similar reason is present when a juvenile confesses. The confessing juvenile’s penal interest is not to incriminate himself, as opposed to the accomplice who may deliberately incriminate others in order to obtain favorable treatment for himself or herself. Given the right to counsel held by juveniles today, which ameliorates the dangers of abusive interrogation (cf. Matter of Gregory W., 19 NY2d 55), the more pressing concern is that traditionally related to confessions, the fear of convicting a person when no crime has actually occurred (see People v Murray, 40 NY2d 327, 331-332).

Had the Legislature desired to grant confessing juveniles the same protection given defendants being prosecuted with accomplice evidence, it could have included language similar to that appearing in CPL 60.22 (subd 1). Not having seen fit to do so, the Legislature should be assumed to have intended the lesser standard. Thus, the People here were under a burden of establishing the corpus delicti of murder and burglary, but were not required to show by independent proof that appellant personally was involved. This burden was met and appellant’s confession was properly used to support the final determination of delinquency.

Appellant’s other arguments are without merit.

Accordingly, the order of the Appellate Division should be affirmed, without costs.

Judges Jasen, Gabrielli, Jones, Wachtler, Fuchsberg and Meyer concur.

Order affirmed.


author: Fuchsberg, J. Chief Judge Cooke,

text:
    Merrill Lynch, Pierce, Fenner & Smith, Incorporated, Respondent, v Chemical Bank, Appellant. (And a Third-Party Action.)
    Argued October 5, 1982
    decided November 18, 1982

      POINTS OF COUNSEL

      Harold, Weisblatt, John B. Wynne and Kenneth J. Kelly for appellant.
    I. The alleged negligence of a drawee bank (that is not also the depositary bank) regarding irregularities in indorsements is irrelevant and does not preclude the drawee bank from asserting the defense of section 3-405 of the Uniform Commercial Code. (Tonelli v Chase Manhattan Bank, N.A., 41 NY2d 667; Sundial Constr. Co. v Liberty Bank of Buffalo, 277 NY 137; Pulka v Edelman, 40 NY2d 781; Palsgraf v Long Is. R. R. Corp., 248 NY 339; Underpinning & Foundation Constructors v Chase Manhattan

      Bank, N.A., 46 NY2d 459.) II. The ruling of the court below presents banks with the dilemma of incurring needless additional check processing costs or abandoning section 3-405 as a defense. (Underpinning & Foundation Constructors v Chase Manhattan, N.A., 46 NY2d 459.)

      Roger J. Hawke for respondent.
    I. The court below correctly ruled that section 3-405 of the Uniform Commercial Code is not available to a bank to avoid liability for its own negligence. (Underpinning & Foundation Constructors v Chase Manhattan Bank, N.A., 46 NY2d 459; Board of Higher Educ. v Bankers Trust Co., 86 Misc 2d 560; Titan Air Conditioning Corp. v Chase Manhattan Bank, N.A., 61 AD2d 764; Dayton Price & Co. v First Nat. City Bank, 64 AD2d 563.) II. There is an issue of fact on whether the checks were tainted in a way which should have put Chemical on notice. (Goldberg v Manufacturers Trust Co., 199 Misc 167; Advanced Alloys v Sergeant Steel Corp., 72 Misc 2d 614, 79 Misc 2d 149; Belmar Trucking Corp. v American Trust Co., 65 Misc 2d 31; Wagner Trading Co. v Battery Park Nat. Bank, 228 NY 37; Corn Exch. Bank v Nassau Bank, 91 NY 73.)
   OPINION OF THE COURT

Fuchsberg, J.

This appeal requires us to explore the extent to which, if at all, immunity from liability accorded a drawee bank by section 3-405 (subd [1], par [c]) of the Uniform Commercial Code may be limited by the drawee’s negligence in paying checks over forged indorsements.

The section at issue, commonly referred to in commercial circles as either the “fictitious payee” or “padded payroll” rule, provides: “An indorsement by any person in the name of a named payee is effective if * * * 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”.

The factual context in which the case is here is undisputed. The defendant, Chemical Bank, unaware that the indorsements of the payees’ name were forged, routinely paid 13 checks drawn by the plaintiff, Merrill Lynch, on its Chemical account in the aggregate sum of $115,180. The forgeries were occasioned by chicanery of a Merrill Lynch accounts payable employee who, by presenting his employer’s New York check issuing department with false invoices which ostensibly represented obligations due its suppliers, caused checks to be issued to the order of these supposed creditors. The malefactor or accomplices then indorsed the names of the payees and, in face of the fact that New York addresses appeared below the payees’ names, caused the checks to be deposited in California and Ohio bank accounts in names other than those to whose order they had been drawn. Seven of the checks were presented to Chemical by the Federal Reserve Bank (FRB) as collecting bank and the remainder by the depositary banks themselves. In due course, Chemical charged its Merrill Lynch account.

This suit, instituted by Merrill Lynch to recover the amount so debited, was brought on three theories. As set out in its complaint, the first was that “Chemical acted negligently and contrary to normal and accepted banking practices, breached its duty of good faith and failed to exercise ordinary care”. Particularizing, it added that Chemical should have been alerted to the irregular nature of the checks because “the purported indorsements of the corporate payees were handwritten, and in many instances illegible”, were indorsed “in blank, rather than for deposit only” and bore “second indorsements of unrelated persons or entities”. Reiterating the allegations of the first count, the second sounded in breach of contract and the third in conversion. In its answer, Chemical relied, among other affirmative defenses, on what, in the circumstances of this case, it took to be the exculpatory effect of section 3-405.

At the same time, Chemical, by way of a third-party summons and complaint, impleaded FRB essentially on the rationale that, if Merrill Lynch recovered, Chemical, in turn, should be made whole by FRB, which, as a collecting bank, would then have to be found in breach of its warranty of good title (Uniform Commercial Code, § 4-207). FRB countered with a motion for summary judgment, premised on the position that, under section 3-405, “endorsement of the checks in the name of the payee thereof was sufficient and effective to transfer title to the instrument”. On the same ground, Chemical thereupon cross-moved for partial summary judgment dismissing Merrill Lynch’s complaint, except for the issue of staleness it had raised (see supra, n 1). Special Term denied both motions.

On appeal, the Appellate Division unanimously modified Special Term’s order, on the law, by granting the motion directed to Chemical’s third-party case against FRB. In so deciding, the court agreed that, under section 3-405 of the Uniform Commercial Code, the forged indorsements were effective to transfer title to the checks. However, as to Chemical’s cross motion against Merrill Lynch, the court, by a vote of 3 to 2, found that section 3-405 was “not available to defendant to avoid liability for its own negligence” (82 AD2d 772, 773); on this view, it affirmed, thus relegating the issue of Chemical’s negligence to trial.

On the present appeal, which brings up for review Chemical’s motion against Merrill Lynch only, the appellant in the main presses the point that its alleged negligence in disregarding irregularities in the indorsements may not deprive it of the benefits of section 3-405 of the Uniform Commercial Code and, in the alternative, that, in any event, it was not negligent because it was under no obligation to inspect the indorsements, a duty which, it insists, was the responsibility of FRB and the depositary banks alone. Echoing the dissent of Presiding Justice Murphy and Justice Silverman at the Appellate Division, Chemical also advances the pragmatic argument that a contrary reading of the statute would impose what, at least for large commercial banks, would constitute an unrealistically onerous and expensive burden of inspecting an “immense volume of checks”, all the more so since these checks must be “processed and paid or alternatively, returned or dishonored by midnight of the following business day” (see David Graubart, Inc. v Bank Leumi Trust Co. of N. Y., 48 NY2d 554, 557-558). Merrill Lynch, on the other hand, choosing to interpret our decision in Underpinning & Foundation Constructors v Chase Manhattan Bank, N.A. (46 NY2d 459) as supportive of its stance, continues to contend that section 3-405 of the Uniform Commercial Code will not absolve a banking institution, be it a depositary, drawee or collecting bank, from liability for its own negligence.

For the ensuing reasons, we believe that, under the circumstances of this case, Chemical’s motion for partial summary judgment should have been granted.

Our analysis may well begin with the observation that section 3-405 (subd [1], par [c]) bespeaks an exception to the general rule governing the responsibility of a bank to its customers. For it is basic that ordinarily a drawee bank may not debit its customer’s account when it pays a check over a forged indorsement. This is because the underlying relationship between a bank and its depositor is the contractual one of debtor and creditor (Brigham v McCabe, 20 NY2d 525), implicit in which is the understanding that the bank will pay out its customer’s funds only in accordance with the latter’s instructions (Tonelli v Chase Manhattan Bank, N.A., 41 NY2d 667, 670). Thus, absent contrary instruction or legislative exception, when a drawer issues a check in the name of a particular payee, the drawee bank is to apply funds from the drawer’s account to its payment only upon receiving the payee’s authorized indorsement. In this perspective, a forged indorsement, since it is an unauthorized signature (Uniform Commercial Code, § 1-201, subd [43]), in and by itself would be “wholly inoperative” (Uniform Commercial Code, § 3-404, subd [1]).

It follows that, in the typical case in which payment is made on a check that is not properly payable (see Uniform Commercial Code, § 4-401, subd [1]), the payment is deemed to have been made solely from the funds of the drawee bank rather than from those of its depositor. But, when the conditions which section 3-405 contemplates prevail, the indorsement, though forged, is still effective, and the instrument then must be treated as “both a valuable instrument and a valid instruction to the drawee to honor the check and debit the drawer’s account accordingly” (Underpinning & Foundation Constructors v Chase Manhattan Bank, N.A., supra, at p 465).

This departure from the general rule is explained by section 3-405’s Official Comment 4, which advises, “The principle followed is that the loss should fall upon the employer as a risk of his business enterprise rather than upon the subsequent holder or drawee. The reasons are that the employer is normally in a better position to prevent such forgeries by reasonable care in the selection or supervision of his employees, or, if he is not, is at least in a better position to cover the loss by fidelity insurance; and that the cost of such insurance is properly an expense of his business rather than of the business of the holder or drawee”.

Since the assumptions instinct in this rationalization are hardly indisputable, it is no surprise that the rule it supports represents a conscious choice between the traditional one, which, as we have seen, was more protective of the bank’s customer, and the one in the code, which, as some commentators have bluntly acknowledged, was “a banker’s provision intended to narrow the liability of banks and broaden the responsibility of their customers” (White & Summers, Uniform Commercial Code, § 16-8, p 639). Thus, whatever, in the abstract, may have been the equities of the respective contentions of the competing commercial camps, there can be little doubt but that the outcome, so far as the adoption of section 3-405 of the Uniform Commercial Code is concerned, was calculated to shift the balance in favor of the bank “in situations in which the drawer’s own employee has perpetrated the fraud or committed the crime giving rise to the loss” (1 Hawkland, A Transactional Guide to the Uniform Commercial Code, pp 391-394).

That this represents contemporary legislative thinking is clear from the way in which the statutory scheme evolved. Long before section 3-405 of the Uniform Commercial Code came into being, subdivision 3 of section 28 of the former Negotiable Instruments Law already provided that a check is “payable to bearer * * * [w]hen it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable”. Carrying this language to its logical limits, one then might have thought that, because an instrument forged by an employee was to be treated as bearer paper, the fact of forgery had been rendered irrelevant to its negotiability.

Nevertheless, most courts, reluctant to read the statute this broadly, applied it only when the faithless employee made or drew the check himself, but not, as in the case before us now, when he had merely furnished the payee’s name to the employer, for then the falsity presumably would not be “known to the person making it so payable” (Hawkland, op. cit.). This narrow interpretation apparently fell short of the drafters’ intention because the reaction, first, in 1960, was to amend section 28 of the Negotiable Instruments Law to make it explicit that knowledge to the malefactor who furnished the name was sufficient (Britton, Handbook of the Law of Bills and Notes, § 149, pp 433-437). And, secondly, by the adoption of section 3-405 of the Uniform Commercial Code, the bearer fiction device was replaced by the more forthright effective indorsement concept (see Official Comment 1 to § 3-405, McKinney’s Cons Laws of NY, Book 62 V2, Uniform Commercial Code, § 3-405, NY Anns [1] [b], [c], p 258).

The special scrutiny this legislative course demanded also highlights the fact that section 3-405’s failure to delineate a standard of care, to which a bank itself must adhere if it is to advantage itself of this section, was no oversight. In contrast are sections 3-406 and 4-406 of the Uniform Commercial Code, which, along with section 3-405’s “padded payroll” provision, deal with defenses which may be available to a drawee bank in forged indorsement cases.

For instance, subdivision (2) of section 4-406, which otherwise precludes a customer from asserting a claim which might have been averted but for its neglect in. examining “the [bank] statement and items to discover his unauthorized signature or any alteration on an item” (subd [1]), makes preclusion inapropos when “the customer establishes lack of ordinary care on the part of the bank in paying the item” (subd [3]). And, similarly, section 3-406, which puts the onus for a forgery on a customer who “substantially contributes to a material alteration of the instrument or to the making of an unauthorized signature”, still requires the bank to have paid the instrument “in good faith and in accordance with the reasonable commercial standards of the drawee’s or payor’s business”.

It is fair to conclude, therefore, that, unlike cases which fall within the foregoing sections, a drawee bank’s mere failure to use ordinary care in the handling of a check whose forgery has brought it within the embrace of section 3-405 (subd [1], par [c]) will not subject it to liability (White & Summers, Uniform Commercial Code, § 16-8, p 639).

This is not to say that, if a check is “tainted in some other way which would put the drawee on notice, and which would make its payment unauthorized” (Underpinning & Foundation Constructors v Chase Manhattan Bank, N.A., 46 NY2d 459, 466, supra; emphasis supplied), a drawee bank may yet not be liable. For instance, a drawee bank surely is not immunized by section 3-405 when it acts dishonestly. In short, “a basis for liability independent of any liability which might be created by payment over a forged instrument alone” may very well survive (Underpinning & Foundation Constructors v Chase Manhattan Bank, N.A., supra, at p 469; emphasis supplied).

In contrast, without more, in the present case, it is at once clear that the irregularities on which Merrill Lynch here focuses were part and parcel of the forgeries themselves and, as the dissenters at the Appellate Division observed, “could not possibly have alerted the bank to the fact that the checks were tainted, indeed it would have been most remarkable if the drawee bank had even noticed them”. (82 AD2d 772, 774, supra.)

Finally, Merrill Lynch’s reliance on Underpinning is misplaced. The checks there, unlike the ones here, contained restrictive indorsements, e.g., “for deposit only”, by which the maker explicitly limited deposit to the restrictive indorsers’ accounts alone, failure to conform to which would create an independent cause for liability. Indeed in Underpinning, we are not called upon to resolve the liability of a drawee bank, but that of a depositary bank which, as the first to take the checks with the restrictive indorsements, could most readily have prevented the fraud (Uniform Commercial Code, § 3-206, subd [2]; see, generally, Whalley, Forged Instruments and the UCC’s “Holder”, 6 Ind L Rev 45, 50). Significantly, even there, we pointed out that the forgeries and disregard of the restrictions were distinct defects, one not justifying the other. Obviously, then, Underpinning and the present case are not akin.

Accordingly, the order of the Appellate Division, insofar as appealed from, should be reversed, with costs, and defendant Chemical’s motion for partial summary judgment granted. The certified question should be answered in the negative.

Chief Judge Cooke,

(concurring). To permit a drawee bank to avoid liability for paying a check on a forged indorsement by asserting the “fictitious payee” rule, when the bank itself may have acted negligently in paying the check, is a harsh result. Inasmuch as section 3-405 of the Uniform Commercial Code does not include any requirement that a bank act with ordinary care, however, I am constrained to concur in the majority’s result.

As a general rule, a forged indorsement is wholly inoperative and ineffective to negotiate an instrument (see Uni-, form Commercial Code, § 3-404, subd [11). Consequently, the item is not properly payable and the drawer’s account may not be charged (see Uniform Commercial Code, § 4-401, subd [11; Harbus, The Great Pretender — A Look at the Impostor Provision of the Uniform Commercial Code, 47 U Cin L Rev 385, 387).

In two instances, the general rule is limited when the drawer has acted negligently, and the drawee has not. The drawer may be charged if its negligence has substantially contributed to the making of the unauthorized signature and the drawee has paid the instrument in good faith and in accordance with reasonable commercial standards (see Uniform Commercial Code, § 3-406). Similarly, the drawee is protected if it has acted reasonably and the drawer fails to discover the wrongful payments by not examining its bank statement with reasonable care and promptness (see Uniform Commercial Code, § 4-406).

Another exception to the general rule is created by section 3-405. That statute, at issue here, provides that an indorsement by any person is effective when the check is issued to an imposter or when the named payee was not actually intended to have any interest in the item (see Uniform Commercial Code, § 3-405, subd [1]). Unlike sections 3-406 and 4-406, however, section 3-405 does not prescribe any standard to be applied to a drawee’s conduct.

Questions have been raised as to the scope of section 3-405. It is unsettled whether it validates certain signatures for all purposes or only for the limited purpose of permitting negotiability (see Harbus, op. cit., at pp 390-394; Comment, The Effect of Bank Misconduct on the Operation of the Padded Payroll Preclusion of U.C.C. § 3-405, 27 UCLA L Rev 147, 160-161). Thus, it has been suggested that the warranty provisions of section 3-417 should apply (see Harbus, op. cit., at pp 390-393) and that a transferee should be denied holder-in-due-course status when an irregularity on the item’s face gives notice of some defect in the instrument (see Comment, op. cit., at pp 165-170).

The central rationale of section 3-405 is that an employer is in the best position to institute controls to guard against employees’ fraudulently obtaining checks and so should bear the loss when this occurs (see Uniform Commercial Code, § 3-405, Official Comment 4). The soundness of the reasoning of this conceded “ ‘banker’s provision’ ” (p 445) has been questioned by this court (see Underpinning & Foundation Constructors v Chase Manhattan Bank, N.A., 46 NY2d 459, 468) and commentators (see Harbus, op. cit.; Comment, op. cit.). Its particular hardship becomes clearer when the drawee bank is itself negligent. In a padded payroll situation such as here, the drawer may well not be negligent at all, but rather is the victim of an employee’s criminal act (see Harbus, op. cit., at p 409). Yet, the negligent bank, which in other situations may be held liable notwithstanding the drawer’s negligence (see Uniform Commercial Code, §§ 3-406, 4-406), will be totally exonerated regardless of its own carelessness because the drawer was duped by an employee (see Harbus, op. cit.). “Th[e] principle [of Comment 4] exemplifies a reasonable commercial policy if all parties are innocent; it seems quite unfair if the bank has not acted in a commercially reasonable manner. It allows a negligent party to escape from the ordinary consequences of its negligence.” (Harbus, op. cit., at p 409.) The “rules of 3-405 [should be considered] to be first cousins of the rules in 3-406 and 4-406, and * * * a customer [should be allowed] to prove a drawee’s negligence and, having proved it, to assert the forged indorsement.” (White & Summers, Uniform Commercial Code [2d ed], § 16-8, p 639.)

Plaintiff here is not attempting to controvert directly the effectiveness of the forged corporate indorsements for negotiating the items. Rather, it argues that the appearance of the indorsements was such as to put defendant on notice of the checks’ irregularity. To subsume this issue within that of the effectiveness of the indorsements (see p 447) condones cashing checks with dubious indorsements (cf. Underpinning & Foundation Constructors v Chase Manhattan Bank, N.A., supra, at p 468 [“the drawer is thus precluded from recovering solely on the basis of the forgery from banks which honor the check” (emphasis added)]).

There is no sound reason why a drawee should be absolved of all duty to exercise reasonable care merely because a check was obtained by a drawer’s defrauding employee. The large volume of daily business cannot explain this, inasmuch as the,burden is placed on the drawee in other situations. Nor is consistency among the States a compelling reason. Two courts in this State have held that a drawee must exercise reasonable care before obtaining the protection of section 3-405 (see Titan Air Conditioning Corp. v Chase Manhattan Bank, N.A., 61 AD2d 764; Board of Higher Educ. v Bankers Trust Co., 86 Misc 2d 560), as have courts in at least two other States (see Wright v Bank of Cal. Nat. Assn., 276 Cal App 2d 485; Pacific Ind. Co. v Security First Nat. Bank, 248 Cal App 2d 75; Frost Nat. Bank of San Antonio v Nicholas & Barrera, 500 SW2d 906 [Tex]).

Unless displaced by the provisions of the Uniform Commercial Code, traditional principles of law and equity are expressly reserved (see Uniform Commercial Code, § 1-103). On the record before this court, it cannot be said that, as a matter of law, checks bearing handwritten, often illegible, corporate indorsements in blank with third-party indorsements of unrelated persons or entities in States far removed from the payees’ addresses are not such as would give notice of the item’s irregularity to the drawee. This is especially true of those checks that were deposited later than the 60-day limitation printed on their fronts. Certainly, this is not a question to be resolved by Judges on a motion for summary judgment, but one that should be left to the trial court.

Construing section 3-405 in the same manner as sections 3-406 and 4-406 would not shift the loss on all impostor/fietitious-payee checks to the drawee. Section 3-405 should be recognized as the exception it is, however, and applied narrowly (see White & Summers, op. cit.). When the indorsement is in a form that would not arouse suspicion, it would be effective to negotiate the check. If, however, the form of the impostor’s or fictitious payee’s indorsement is such that, under any other circumstances, it would raise a question as to the item’s validity or regularity, the drawee’s conduct would be scrutinized and, if found to be negligent, the drawee charged with the forged indorsement.

Having said all this, I must join the majority in reversing the order of the Appellate Division. The absence of a standard of care in section 3-405 must be deemed an intentional omission by the Legislature in light of its ability to include such language when it desires, as manifested by sections 3-406 and 4-406. This court should not require ordinary care by the drawee when the Legislature has declined to do so (see Matter of Carmelo E., 57 NY2d 431; Reigert Apts. Corp. v Planning Bd. of Town of Clarkstown, 57 NY2d 206; Holt v County of Tioga, 56 NY2d 414, 424-425 [Cooke, Ch. J., dissenting]). Instead, section 3-405 should be amended to preclude its invocation by a drawee or other transferee who has failed to exercise due care (see Harbus, op. cit., at p 415).

Judges Jasen, Gabrielli, Jones and Meyer concur with Judge Fuchsberg; Chief Judge Cooke concurs in a separate opinion in which Judge Wachtler concurs.

Order, insofar as appealed from, reversed, with costs, and defendant’s motion for partial summary judgment granted. Question certified answered in the negative.

      . As part of the first cause of action, it was also alleged that “the checks were each paid more than six months after their date of issuance, despite the notation on their face ‘Not to be cashed later than 60 days from the date of this check’.”

      . The appeal is here, pursuant to CPLR 5602 (subd |b|, par 1). by leave of the Appellate Division, which certified the following question: “Was the order of this Court, which modified the order of the Supreme Court, properly made?”

      . Because of the manifest advantages of uniformity in the law of bills and notes, we observe that other courts which have considered the matter have arrived at the same conclusion (see, e.g., Prudential Ins. Co. of Amer. v Marine Nat. Exch. Bank of Milwaukee, 371 F Supp 1002; Kraftsman Container Corp. v United Counties Trust Co., 169 NJ Super 488; Fair Park Nat. Bank v Southwestern Inv. Co., 541 SW2d 266 [Texl; General Ace. Fire & Life Assur. Corp. v Citizens Fid. Bank & Trust Co., 519 SW2d 817 |Ky|; Western Cas. & Sur. Co. v Citizens Bank of Las Cruces, 33 UCC Rep 1018).


text:
    The People of the State of New York, Respondent, v Ricardo Rivera, Appellant.
    Argued November 8, 1982
    decided December 8, 1982

      POINTS OF COUNSEL

      Patrick M. Wall and Oren Root, Jr., for appellant.
    Police testimony that Rivera led them to the gun was admitted in violation of appellant’s Fifth Amendment rights. (Miranda v Arizona, 384 US 436; Rhode Island v Innis, 446 US 291; People v Rodney P., 21 NY2d 1; United States v Ross, 321 F2d 61, 375 US 894; Schmerber v California, 384 US 757; United States ex rel. Gibbs v Zelker, 496 F2d 991; People v Lanquetot, 104 Misc 2d 179.)

      Robert M. Morgenthau, District Attorney (Donald J. Siewert and Robert M. Pitler of counsel), for respondent.
    I. Appellant’s guilt was established overwhelmingly. (People v Benzinger, 36 NY2d 29.) II. Admission of testimony that appellant entered Janvier’s bedroom after he spoke with the police was harmless error. (Miranda v Arizona, 384 US 436.)
   OPINION OF THE COURT

Chief Judge Cooke.

When a criminal suspect is subjected to custodial interrogation by police without being apprised of his right against self incrimination, any pertinent communication, whether made by statement or conduct, in response to the interrogation, is inadmissible at trial. Although here defendant’s communicative act should have been excluded, when viewed in light of the quantum and nature of the other, properly adduced, evidence, the error was harmless. Therefore, defendant’s conviction should stand.

On October 3,1974, police were summoned to a Manhattan apartment by neighbors who had heard a commotion and two gunshots, followed by a man’s cry for help. The victim, bleeding from a mortal chest wound, was able to admit police to his apartment. Defendant was discovered in the apartment, but no weapon was found when he was frisked. Without being advised of his Miranda rights, defendant made inculpatory oral statements in response to police interrogation. At one point, defendant was questioned about the location of the weapon. In response, defendant silently led the police to the bedroom, and began to climb over the bed towards the window. Before he could reach the window, the officers grabbed and handcuffed him. A gun was found on the windowsill, behind the drapes.

Defendant successfully moved before trial to suppress the oral admissions he made while in custody and before being informed of his constitutional rights. The motion made no reference to the events in the bedroom. At trial, however, the court declined to suppress testimony that police had generally engaged defendant in conversation and that defendant had led police to the bedroom where the weapon was found.

At the close of the trial three counts were submitted to the jury: common-law murder, felony murder with burglary as the underlying felony, and criminal possession of a weapon in the second degree. The jury deadlocked on the common-law murder count, acquitted defendant of felony murder, and convicted him of the weapons count.

Defendant argues that admitting testimony about the bedroom incident, over objection, was error warranting reversal and a new trial. It is not disputed that immediately before he led police to the bedroom, defendant was subjected to custodial interrogation in the absence of warnings prescribed by Miranda v Arizona (384 US 436), and that his conduct was in response to this interrogation. The protections afforded a criminal suspect’s right to remain silent are of no less force when the suspect has been wrongly induced to communicate through conduct than when he has made an oral statement (see Schmerber v California, 384 US 757, 761, n 5, 763-764). Inasmuch as defendant’s conduct was clearly communicative, and was instigated in violation of the strictures of Miranda, the trial court erred.

The error, nevertheless, does not require that defendant’s conviction be reversed. Constitutional error will be deemed harmless when “there is no reasonable possibility that the error might have contributed to defendant’s conviction and that it was thus harmless beyond a reasonable doubt” (People v Crimmins, 36 NY2d 230, 237; see Chapman v California, 386 US 18; People v Schaeffer, 56 NY2d 448; People v Sanders, 56 NY2d 51).

Defendant was convicted of possessing a “loaded firearm with intent to use the same unlawfully against another” (Penal Law, § 265.03). Defendant conceded that the gun itself was properly admitted, as was the fact that it was found in the bedroom. The record at trial indicates that defendant and an accomplice planned to rob the man ultimately shot. The accomplice testified that the gun found by police had been shown to him by defendant earlier on the day of the shooting and that it then had contained a clip with two bullets, one with a hollow head. This testimony was corroborated by other evidence, including the determination that the fatal bullet had a hollow head. When they first entered the apartment, the police found defendant exiting the bedroom where the gun was later found. Moreover, other than the victim, defendant was alone in the apartment, which had no means of egress other than the front door.

Admitting evidence of the bedroom incident was erroneous, but its prejudicial effect was mitigated. The court precluded any testimony that defendant’s conduct was a direct response to a police inquiry as to the location of the gun. Thus, the only improperly admitted evidence that was probative of defendant’s guilt of the weapons count was that defendant, accompanied by the police, went into the room where the weapon was found. This evidence, in light of the overwhelming evidence linking defendant to the gun, doubtless did not contribute to defendant’s conviction.

Accordingly, the order of the Appellate Division should be affirmed.

Judges Jasen, Gabrielli, Jones, Wachtler, Fuchsberg and Meyer concur.

Order affirmed.