author: Hancock, Jr., J.

text:
    Seymour Gillman, as Assignee for the Benefit of Creditors of Jamaica Tobacco & Sales Corp., Appellant, v Chase Manhattan Bank, N. A., Respondent.
    Argued November 22, 1988;
    decided December 22, 1988

      POINTS OF COUNSEL

      Harold S. Berzow and Kevin Nash for appellant.
    I. The segregation constituted a preferential transfer under the Debtor and Creditor Law. (Sundail Constr. Co. v Liberty Bank, 277 NY 137; Solicitor for Affairs of His Majesty’s Treasury v Bankers Trust Co., 304 NY 282; Brigham v McCabe, 20 NY2d 525; Matter of New York State Assn. of Life Underwriters v Superintendent of Ins., 37 AD2d 304, 30 NY2d 746; Jordan v National Shoe & Leather Bank, 74 NY 467; Liberty Sav. Assn. v Sun Bank, 572 F2d 591; Edwards v Sterling Natl. Bank & Trust Co., 5 F Supp 925; Clark v Manufacturers Trust Co., 169 F2d 932; Lowden v Iowa-Des Moines Natl. Bank & Trust Co., 10 F Supp 430, 84 F2d 856, 299 US 584; Miller v Wells Fargo Bank Intl. Corp., 540 F2d 548.) II. The manner in which the segregation was effectuated violated principles of commercial good faith. (Filner v Shapiro, 633 F2d 139; Kirke La Shelle Co. v Armstrong Co., 263 NY 79; Gelder Med. Group v Webber, 41 NY2d 680; Reid v Key Bank, 821 F2d 9; K.M.C. Co. v Irving Trust Co., 757 F2d 752; Skeels v Universal C. I. T. Credit Corp., 335 F2d 846; Katz v First Natl. Bank, 568 F2d 964; Goldstein v Franklin Sq. Natl. Bank, 107 F2d 393; Cusick v Second Natl. Bank, 115 F2d 150; Jensen v State Bank, 518 F2d 1.) III. Chase had no right to segregate funds in advance of effectuating a setoff and this action nullifies the validity of the subsequent setoff. (67 Wall St. Co. v Franklin Natl. Bank, 37 NY2d 245; Gray v American Express Co., 743 F2d 10; Menkes Feuer, Inc. v Peoples Bank, 268 App Div 809; Marine Midland

      Bank v Graybar Elec. Co., 41 NY2d 703; Gerseta Corp. v Equitable Trust Co., 241 NY 418.) IV. The purported security agreement is unenforceable under the doctrine of unconscionability. (Matter of State of New York v Avco Fin. Serv., 50 NY2d 383; State of New York v Wolowitz, 96 AD2d 47; Barco Auto Leasing Corp. v PSI Cosmetics, 125 Misc 2d 68; Rowe v Great Atl. & Pac. Tea Co., 46 NY2d 62; Leasing Serv. Corp. v Broetje, 545 F Supp 362; Computerized Radiological Servs. v Syntex Corp., 595 F Supp 1495; Egan v Kollsman Instrument Corp., 21 NY2d 160, cert denied sub nom. American Airlines v Egan, 390 US 1039; Matter of Allstate Ins. Co. [La Perta— Hertz Corp.], 42 AD2d 104; Leaseway-Empire, Inc. v Byrnes Coal & Lbr. Co., 43 AD2d 1010; Tri-City Renta-Car & Leasing Corp. v Vaillancourt, 33 AD2d 613.)

      Andrew J. Connick, Eugene F. Farabaugh, Anne M. Ronan, Richard White and Rolf Woolner for respondent.
    I. The security agreement gave Chase a security interest in Jamaica Tobacco’s bank accounts. (Haight v Brown, 159 Misc 652; Updike v Manufacturers Trust Co., 243 App Div 15, 267 NY 528, 296 US 648; Clark v Manufacturers Trust Co., 169 F2d 932, vacated sub nom. McGrath v Manufacturers Trust Co., 338 US 241; Lowden v Iowa-Des Moines Natl. Bank & Trust Co., 10 F Supp 430, 84 F2d 856, 299 US 584; Edwards v Sterling Natl. Bank & Trust Co., 5 F Supp 925; Peoples Natl. Bank v United States, 111 F2d 459; Miller v Wells Fargo Bank Intl. Corp., 540 F2d 548; Trust Co. v United States, 735 F2d 447; Berler v Barclays Bank, 82 AD2d 437, 55 NY2d 645.) II. Chase did not receive an avoidable preference. (Matter of Resnicks, Binghamton, Inc., 69 Misc 2d 454.) III. Chase did not act in bad faith or engage in any other tortious conduct, and is not liable for any damages. (Reid v Key Bank, 821 F2d 9; Skeels v Universal C. I. T. Credit Corp., 335 F2d 846; Kenford Co. v County of Erie, 67 NY2d 257; Linden v National City Bank, 12 AD2d 69; Lloyd v Wheatfield, 67 NY2d 809; Ting-Wan Liang v Malawista, 70 AD2d 415; Kaplan v Burroughs Corp., 426 F Supp 1328, 611 F2d 286; Matter of Farrell Publ. Corp., 165 F Supp 40; Walker v Sheldon, 10 NY2d 401.) IV. The security agreement is not unconscionable. (Matter of State of New York v Avco Fin. Serv., 50 NY2d 383; State of New York v Wolowitz, 96 AD2d 47; Matter of Friedman, 64 AD2d 70; Lister Elec. v Incorporated Vil. of Cedarhurst, 108 AD2d 731; Cayuga Harvester v Allis-Chalmers Corp., 95 AD2d 5; Equitable Lbr. Corp. v IPA Land Dev. Corp., 38 NY2d 516;
      Blake v Biscardi, 62 AD2d 975; Leasing Serv. Corp. v Graham, 646 F Supp 1410; Royal Indem. Co. v Westinghouse Elec. Corp., 385 F Supp 520; County Asphalt v Lewis Welding & Eng’g Corp., 323 F Supp 1300, 444 F2d 372, 404 US 939.)

      John L. Warden, H. Rodgin Cohen, Lauretta E. Murdock and Deborah Y. Yeoh, for The New York Clearing House Association, amicus curiae.

    I. The terms of the security agreement are not unconscionable. (Collister v Hayman, 183 NY 250; Johnson v City of New York, 191 App Div 205, 231 NY 564; Mandel v Liebman, 303 NY 88; Wasserbauer v Marine Midland Bank, 92 Misc 2d 388; Lister Elec. v Incorporated Vil. of Cedarhurst, 108 AD2d 731; Cayuga Harvester v Allis-Chalmers Corp., 95 AD2d 5; County Asphalt v Lewis Welding & Eng’g Corp., 323 F Supp 1300, 444 F2d 372, 404 US 939; Fleischmann Distilling Corp. v Distillers Co., 395 F Supp 221; Royal Indem. Co. v Westinghouse Elec. Corp., 385 F Supp 520; Matter of State of New York v Avco Fin. Serv., 50 NY2d 383.) II. Chase acted properly when it segregated the account balance to preserve its security interest. (Haight v Brown, 159 Misc 652; Federal Deposit Ins. Corp. v First Mtge. Investors, 485 F Supp 445; Reid v Key Bank, 821 F2d 9; K.M.C. Co. v Irving Trust Co., 757 F2d 752.) III. Chase did not receive a voluntary preference under New York law. (Matter of Peter Puppet Playthings [Levin — Adams], 10 AD2d 866; Matter of Sheldon, 173 NY 287; Matter of Resnicks, Binghamton, Inc., 69 Misc 2d 454; Matter of Kleefeld, 55 NY2d 253.)
   OPINION OF THE COURT

Hancock, Jr., J.

This appeal presents questions concerning actions taken by Chase Manhattan Bank, N. A. (Chase) with respect to the commercial bank account of a customer, Jamaica Tobacco and Sales Corp. (Jamaica Tobacco) which Chase contends were authorized by the terms of a security agreement executed by the customer in applying for a letter of credit. Chase issued a $400,000 irrevocable letter of credit to Jamaica Tobacco as account party for the benefit of Aetna Casualty and Surety Company (Aetna). Aetna required the letter of credit for its issuance of a surety bond to enable Jamaica Tobacco to purchase cigarette stamps on credit from State and local governmental agencies. The security agreement, Chase contends, gave it a security interest in all bank deposits maintained in Chase by Jamaica Tobacco.

This lawsuit brought by the assignee for the benefit of creditors of Jamaica Tobacco stems from actions taken by Chase without notice to Jamaica Tobacco in segregating a $372,920.57 bank deposit by transferring it from a checking account to an account over which Jamaica Tobacco had no control and on which it could not draw. These actions were authorized under the agreement, Chase contends, because of Jamaica Tobacco’s precarious financial condition. Chase claims further that they were commercially reasonable steps necessary to secure it from potential loss because of the absolute obligation it had assumed under the letter of credit.

After a nonjury trial, Supreme Court concluded that the security agreement was unconscionable and, therefore, unenforceable. Accordingly, it held that Chase acted illegally in transferring the funds from the checking account to the other account and thereby putting the funds beyond the reach of Jamaica Tobacco. The court awarded compensatory, consequential and punitive damages to the assignee, finding that Chase had acted in bad faith and that it had caused or contributed to Jamaica Tobacco’s subsequent business collapse by failing to notify it of the transfer of the account, dishonoring checks payable to the company’s creditors, and preventing Jamaica Tobacco from using the funds in its business.

The Appellate Division reversed on the law and the facts and dismissed the complaint, holding that the security agreement was neither substantively nor procedurally unconscionable. It reversed Supreme Court’s finding that Chase had acted in bad faith and held that "there is no support for the finding that it had converted funds or wrongfully dishonored Jamaica Tobacco’s checks” (135 AD2d 488, 492). Finally, the Appellate Division rejected the assignee’s arguments that segregation of the account constituted a preferential transfer in violation of Debtor and Creditor Law § 15 (6-a) (id., at 492-493).

In his appeal by leave of this court, the assignee contends that the Appellate Division erred in rejecting his arguments concerning the unconscionability of the security agreement and Chase’s alleged bad faith in segregating the account without notice and dishonoring the checks. He also argues that, even assuming the validity of the security agreement and insufficient proof of bad faith, the segregation of the deposit should, nonetheless, be set aside as a preferential transfer in violation of the Debtor and Creditor Law. For reasons which follow, we reject these arguments and conclude that there should be an affirmance.

I

Jamaica Tobacco, for many years prior to this proceeding, was engaged in the wholesale distribution of tobacco products in the New York City metropolitan area. It was a closely held, family run business. From 1964 on, the company had been managed primarily by Steven Frohlich, its president and majority stockholder.

As part of its regular business of distributing tobacco products, Jamaica Tobacco purchased tax stamps from the city and State. Before they would issue tax stamps on credit, the taxing authorities insisted on a security bond of a surety company. The surety company (here, Aetna) required, as a condition for its assumption of liability under the bond, that Jamaica Tobacco provide it with a bank letter of credit to secure Jamaica Tobacco’s promise to reimburse it for any payments that it might be required to make under the bond.

Prior to August of 1981, Jamaica Tobacco had obtained a $300,000 letter of credit from Marine Midland. When it requested an increase to $400,000, Marine Midland declined and Jamaica Tobacco applied to Chase. In late July 1981, Chase sent an application for a letter of credit to Stephen Frohlich who signed it on behalf of Jamaica Tobacco. Directly above Frohlich’s signature on the application was a printed legend in bold-faced type stating: "The Security Agreement on the reverse hereof is hereby accepted and made applicable to this Application and the Credit.”

The security agreement, in paragraph 7, provided, in part, that "[a]s security for the payment or performance of any and all * * * obligations and/or liabilities” of Jamaica Tobacco under the letter of credit, whether "absolute or contingent, due or to become due”, Jamaica Tobacco "pledges to the Bank and/or gives the Bank a general lien upon and/or right of set-off against, all right, title and interest of the Applicant in and to the balance of every deposit account, now or at any time hereafter existing, of the Applicant with the Bank, and any other claims of the Applicant against the Bank, and in and to all property, claims and demands and rights and interests therein of the Applicant * * * which * * * shall * * * come into the Bank’s possession, custody or control * * * for any purpose, whether or not for the express purpose of being used by the Bank as collateral security or for * * * any other or different purpose”.

Paragraph 8 of the security agreement stated, in part, that if Chase "shall in good faith deem itself insecure at any time * * * any and all obligations and liabilities of the Applicant to the Bank * * * shall become and be due and payable forthwith without notice or demand; and the Applicant * * * expressly authorizes the Bank * * * to apply * * * any balance of deposits and any sums credited by or due from the Bank to the Applicant in general account or otherwise, to the payment of any and all of such obligations and/or liabilities” (emphasis added).

On August 10, 1981, Chase issued an irrevocable letter of credit in favor of Aetna for Jamaica Tobacco as account party. Its one-year term was renewable automatically unless Chase elected not to renew and gave Aetna the required notice prior to the renewal date. Under the letter of credit, Chase assumed a binding obligation to pay up to $400,000 to Aetna upon presentation by Aetna of proper documentation. As the account party, Jamaica Tobacco undertook to reimburse Chase for any payments made on its behalf to Aetna.

As security for the letter of credit — in addition to the pledge of and general lien upon its bank accounts — Jamaica Tobacco provided Chase with the following: a "Negative Pledge” agreement confirming that it would not allow anyone else to file against the company under the Uniform Commercial Code while Jamaica Tobacco was indebted to Chase, a "Loan Restriction” agreement confirming that Jamaica Tobacco would not incur any loan debts while indebted to Chase, personal guarantees of amounts then or thereafter owed from Jamaica Tobacco to Chase signed by the principal officers of Jamaica Tobacco and their wives, and a "Subordination Agreement” stating that Jamaica Tobacco was indebted to Frohlich in the amount of $450,000 and that that debt was subordinated to Jamaica Tobacco’s obligations to Chase.

After the letter of credit had been renewed in August 1982 for an additional year, Chase learned that Jamaica Tobacco was experiencing serious financial and managerial difficulties. In October 1982, Chase received information indicating that Jamaica Tobacco had repaid part of its debt to Frohlich in violation of the "Subordination Agreement”, had borrowed $110,000 from Frohlich’s parents in violation of the "Loan Restriction”, and had permitted a UCC filing in favor of Frohlich’s parents in contravention of the "Negative Pledge” agreement.

On the basis of such information, Chase deemed itself to be insecure with respect to Jamaica Tobacco’s financial condition and its ability to meet its commitments under the letter of credit. Acting under the security agreement, Chase, on October 25, 1982, transferred the funds on deposit in Jamaica Tobacco’s checking account to an account entitled "Other Demand Deposits”. Jamaica Tobacco had no access to the transferred funds. Because no funds remained in the checking account, checks drawn on it were subsequently dishonored. Some months later, in June 1983, Aetna presented its sight draft and was paid by Chase in accordance with the letter of credit. After these transactions, Jamaica Tobacco remained in debt to Chase in the approximate sum of $27,000.

Jamaica Tobacco executed a deed of assignment for the benefit of creditors on November 5, 1982 and the assignee commenced this action in May of 1984 to nullify the segregation of the bank account as a "preferential transfer” and for damages and other relief.

II

We address first the basic determination of the trial court on which its grant of relief is premised: that the security agreement was unconscionable when entered into and, therefore, unenforceable (see, UCC 2-302). An unconscionable contract has been defined as one which "is so grossly unreasonable or unconscionable in the light of the mores and business practices of the time and place as to be unenforcible according to its literal terms. (See 1 Corbin on Contracts, § 128, p. 400.)” (Mandel v Liebman, 303 NY 88, 94.) The doctrine, which is rooted in equitable principles, is a flexible one and the concept of unconscionability is "intended to be sensitive to the realities and nuances of the bargaining process” (Matter of State of New York v Avco Fin. Serv., 50 NY2d 383, 389-390). A determination of unconscionability generally requires a showing that the contract was both procedurally and substantively unconscionable when made — i.e., "some showing of an 'absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party’ (Williams v Walker-Thomas Furniture Co., 350 F2d 445, 449).” (Matter of State of New York v Avco Fin. Serv., supra, at 389; see also, Jones v Star Credit Corp., 59 Misc 2d 189,192.)

The procedural element of unconscionability requires an examination of the contract formation process and the alleged lack of meaningful choice. The focus is on such matters as the size and commercial setting of the transaction (see, UCC 2-302 [2]), whether deceptive or high-pressured tactics were employed, the use of fine print in the contract, the experience and education of the party claiming unconscionability, and whether there was disparity in bargaining power (see, Matter of State of New York v Avco Fin. Serv., supra, at 390; State of New York v Wolowitz, 96 AD2d 47, 67; White and Summers, Uniform Commercial Code § 4-3, at 150 [2d ed]).

Here, the claim of procedural unconscionability is based solely on Frohlich’s testimony that he was unaware of the terms in the security agreement, that the security agreement was never called to his attention, that he never read it, that no one read it to him, and that, indeed, he did not know of its existence. There is no allegation of deception or that Frohlich lacked experience or expertise. Nor is there any suggestion that the application was signed as a result of high-pressured tactics. On the contrary, Frohlich signed the instrument in his own office where he had time to study it and, if necessary, to discuss it with a lawyer. The contract concerned a type of commercial transaction routinely entered into in the course of Jamaica Tobacco’s business and one with which Frohlich was necessarily familiar from his several years of running the business.

Frohlich signed the application form immediately below the bold-face legend stating: "The Security Agreement on the reverse hereof is hereby accepted and made applicable to this Application and the Credit.” He states that he did not read the front of the form or the legend but gives no explanation for his failure to do so. Under the general rule, Jamaica Tobacco would be conclusively bound by the security agreement irrespective of Frohlich’s testimony that he did not read it and was unaware of its terms (see, Metzger v Aetna Ins. Co., 227 NY 411, 416; 9 Wigmore, Evidence § 2415 [Chadbourn rev 1981]). Indeed, it has been held that the failure of a signer to read an instrument in circumstances analogous to those here amounts to gross negligence (see, Pimpinello v Swift & Co., 253 NY 159, 162-163; Wallach Agency v Bank of N. Y., 75 AD2d 878, 879). Given the commercial setting of this transaction, Frohlich’s claim that he was unaware of the security agreement provisions — even if the claim were to be fully credited — does not support a determination of procedural unconscionability (see, Equitable Lbr. Corp. v IPA Land Dev. Corp., 38 NY2d 516, 518, n 2, 523; Cayuga Harvester v Allis- Chalmers Corp., 95 AD2d 5, 21; Leasing Serv. Corp. v Simpkins Metal Bldgs., 638 F Supp 896, 899 [SD NY 1986]). Neither does the argument that the terms of the security agreement were inconspicuous because typed in fine print on the reverse side of the application, nor the contention that Frohlich was not alerted to its existence. While the location and the size of print may, in a proper case, be factors bearing on procedural unconscionability, they have no bearing where, as here, the existence of the security agreement was clearly noted in boldface print directly above the signature line (see, Equitable Lbr. Corp. v IPA Land Dev. Corp., 38 NY2d 516, 518, n 2, supra)

Nor are we persuaded by the assignee’s argument that the security agreement was substantively unconscionable. This question entails an analysis of the substance of the bargain to determine whether the terms were unreasonably favorable to the party against whom unconscionability is urged (see, Matter of State of New York v Avco Fin. Serv., supra, at 389). While determinations of unconscionability are ordinarily based on the court’s conclusion that both the procedural and substantive components are present (see, Matter of State of New York v Avco Fin. Serv., supra, at 389), there have been exceptional cases where a provision of the contract is so outrageous as to warrant holding it unenforceable on the ground of substantive unconscionability alone (see, State of New York v Wolowitz, 96 AD2d 47, 68, supra; White and Summers, Uniform Commercial Code § 4-7, at 164, 165 [2d ed]). The contract terms in question here would clearly not fall within this exceptional category. Moreover, considering their commercial context, their purpose, and their effect, we conclude, that by any reasonable standard, those terms were not so overbalanced in favor of Chase as to be found substantively unconscionable.

A determination of the commercial reasonableness of the terms in the security agreement authorizing Chase to segregate the checking account without notice requires an examination of Chase’s obligations under the letter of credit. Under a letter of credit, the issuer must honor a draft or demand for payment from the beneficiary so long as the documents presented conform to the terms of the letter of credit. The issuer’s obligation to honor a properly presented draft is independent of any underlying contractual arrangement between the account party (i.e., its customer) and the beneficiary. Thus, the issuer must honor the draft irrespective of whether the underlying contract has been properly performed (see, Matter of Supreme Mdse. Co. v Chemical Bank, 70 NY2d 344, 350-352; First Commercial Bank v Gotham Originals, 64 NY2d 287, 294, 295; UCC 5-114; Harfield, Practice Commentary, McKinney’s Cons Laws of NY, Book 62½, UCC 5-114, at 686; Official Comment, McKinney’s Cons Laws of NY, Book 62½, UCC 5-114, at 688). Upon issuing the $400,000 letter of credit on behalf of Jamaica Tobacco, Chase became unconditionally obligated to honor a draft upon presentation of conforming documentation, including a showing that the draft was necessary to cover Aetna’s liability under its surety bond with Jamaica Tobacco.

Banks, when issuing letters of credit like the one granted to Jamaica Tobacco here, typically require terms that create security interests in bank deposits of the account party (see, e.g., the clause, identical to para 7 of the security agreement here, used in Dolan, Letters of Credit, at A-82 — A-83; see also, Practising Law Institute, Letters of Credit and Bankers’ Acceptances, at 103-112 [1986]). The purpose of such a security agreement is, of course, to provide the issuing bank with the means of protecting itself from potential loss due to the financial inability of the account party to make the promised reimbursement for any payment the issuing bank is required to make to the beneficiary. Paragraphs 7 and 8 of the security agreement here provided this protection by giving Chase, the issuing bank, a security interest in the deposits of Jamaica Tobacco, the account party, under which Chase had a right, if, in good faith, it deemed itself to be insecure, to segregate Jamaica Tobacco’s bank deposits without notice.

It is this contractual right of the issuing bank to take action with respect to the bank deposits without first notifying Jamaica Tobacco which the assignee attacks as unreasonably advantageous to the issuing bank. But it is precisely this aspect of the arrangement — i.e., that the issuing bank was authorized to take such action without notice to the account party — which gave paragraphs 7 and 8 their effectiveness as a protective measure; for if advance notice had been required, the account party could have defeated the purpose of the security interest by the simple expedient of withdrawing its funds.

The aim of the Uniform Commercial Code unconscionability provision (UCC 2-302), it has been said, is to prevent oppression and unfair surprise, not to readjust the agreed allocation of the risks in the light of some perceived imbalance in the parties’ bargaining power (see, Matter of State of New York v Avco Fin. Serv., supra, at 389; Official Comment, McKinney’s Cons Laws of NY, Book 62½, UCC 2-302, at 193, 194). Here, when the two commercial parties to the contract entered into the arrangement, they were aware that Jamaica Tobacco would customarily be carrying a debt for credit purchases of tax stamps at a level close to the limit in the letter of credit. To be able to make such credit purchases to the limit of $400,000, Jamaica Tobacco required the backing of Chase’s credit and it asked Chase to assume the obligations and attendant risks in issuing a letter of credit. In return, Jamaica Tobacco gave Chase a security interest in its checking account. In doing so, it necessarily assumed the risk that the bank might find it necessary to take action without prior notice with respect to that account. In contending that we should hold this arrangement to be unconscionable as being unreasonably favorable to the bank, the assignee necessarily asks us to disturb the allocation of risks to which the parties have agreed. We decline to do so.

Ill

The assignee argues that, even if the security agreement was not unconscionable, Chase’s conduct in segregating Jamaica Tobacco’s checking account and dishonoring checks drawn thereon without first notifying Jamaica Tobacco was impermissible and justified the relief granted by the trial court. It must be noted that on this appeal Jamaica Tobacco does not challenge the conclusion that when Chase acted under paragraphs 7 and 8, it could, in good faith, have deemed itself to be insecure because of the information received concerning Jamaica Tobacco’s financial condition and the indicated violations by Jamaica Tobacco of the "Negative Pledge”, "Loan Restriction”, and "Subordination Agreement”. Instead, the assignee advances two other arguments: (1) that paragraphs 7 and 8 of the security agreement did not give Chase a security interest in Jamaica Tobacco’s checking account and (2) that even if Chase had such a security interest, it acted with commercial bad faith in its conduct with respect to the Jamaica Tobacco bank account so as to warrant the imposition of compensatory, consequential and punitive damages.

The argument that Chase did not acquire a security interest in the checking account requires little discussion, because by the express terms of paragraph 7 such an interest was unmistakably granted. The operative provisions in paragraph 7 plainly stated that Jamaica Tobacco, as security for its obligations, absolute or contingent, due or to become due, "pledgefd] to the Bank and/or g[ave] to the Bank a general lien upon” (emphasis added) all of its intérests in the balances of every account then or at any time thereafter existing with the bank. It is true, as the assignee points out, that the question whether paragraph 7 created a security interest is governed by the common law and not by the provisions of article 9 of the Uniform Commercial Code. But, under the common law, there is nothing to prevent the parties from creating a security interest in bank deposits by appropriate terms in an agreement making specific reference thereto (see, e.g., Updike v Manufacturers Trust Co., 243 App Div 15, 19; Haight v Brown, 159 Misc 652, 655; 9 NY Jur 2d, Banks and Financial Institutions, § 303, at 541 [1980]; cf., People’s Natl. Bank v Hewitt, 226 App Div 412, 415). The language in paragraph 7 is sufficiently specific to create a security interest in Jamaica Tobacco’s checking account.

The assignee contends, nevertheless, that even if Chase had a valid security interest, the standards of commercial reasonableness required that it notify Jamaica Tobacco before segregating the checking account. In particular, he argues that Chase violated the implied standard of good faith inherent in every contract (see, UCC 1-203; see also, UCC 1-201 [19]) both by failing to warn of the impending segregation and by showing continued confidence in Jamaica Tobacco when it renewed the letter of credit shortly before segregating the checking account. The assignee asserts, in effect, that, assuming Chase held a valid security interest in the account, it nevertheless had an implied good-faith duty to do the very thing — i.e., give advance notice of its intention of segregating the account — which could well have resulted in the depletion of the account and the destruction of its security interest. We know of no authority supporting such a proposition. The assignee’s reliance on K.M.C. Co. v Irving Trust Co. (757 F2d 752 [6th Cir 1985]) is misplaced. That case did not involve the bank’s actions with respect to a security interest specifically granted in a bank deposit. The question in K.M.C. was whether a bank acted in good faith in refusing to continue to advance funds within the maximum limits of an agreed line of credit.

Moreover, we agree with the Appellate Division that there was no basis for Supreme Court’s finding of bad faith in the bank’s subsequent dishonor of Jamaica Tobacco’s checks. If, as we hold, there was no commercial bad faith in Chase’s actions in segregating the account without notice — and putting it beyond the reach of Jamaica Tobacco — there could be no basis for a finding of bad faith when checks drawn on the segregated account were subsequently returned unpaid.

Nor, contrary to the assignee’s arguments, does it matter that, at the time of the segregation of the account, Aetna had not yet presented a draft to Chase for payment and that, therefore, nothing was then due from Jamaica Tobacco to Chase under paragraph 1 of the security agreement. Paragraph 7, when the security agreement was executed, contemporaneously vested Chase with a security interest in Jamaica Tobacco’s checking account. The express purpose of granting the security interest was to secure Chase for the promised performance of the future as well as present obligations being assumed by Jamaica Tobacco. There is no question that when it acted to effectuate its security interest by segregating the account, Chase had good reason to believe that Jamaica Tobacco was insolvent. It knew that Jamaica Tobacco’s indebtedness for tax stamps purchased on credit was running close to the limit of $400,000. Chase could well have assumed that Aetna would almost certainly be called upon to pay this sum under its bond and that it, in turn, as issuer of the letter of credit, would eventually be required to reimburse Aetna. Under these circumstances, Chase cannot be held to have acted in bad faith when it took steps to safeguard the fund in which it had an existing security interest and which would, in all likelihood, constitute the only available asset for its reimbursement.

IV

Finally, the assignee argues that the bank’s action in segregating the checking account constituted a preferential transfer in contravention of Debtor and Creditor Law § 15 (6-a). Thus, he says, he is entitled to recover the sum of $372,920.57, the amount of the transferred account, with interest from October 25, 1982. The assignee maintains, in effect, that even if the security agreement was effective to create a security interest in Jamaica Tobacco’s checking account, as we hold it was, the security agreement should not result in putting the bank in a priority position with respect to the other creditors because the bank elected not to take actual control of the account until October 25, 1982, the date of the segregation. Because the assignment for the benefit of creditors took place on November 5, 1982 — within four months of the October 25, 1982 segregation — and because both Jamaica Tobacco and the bank were aware of Jamaica Tobacco’s insolvency, the assignee contends that the transfer should be set aside. The assignee’s argument must fail because subdivision (6-a) applies only to transfers which are voluntary.

By express terms of the statute, a preferential transfer must be "a voluntary transfer from the assignor [the insolvent debtor] of money or property for or on account of an antecedent debt” (Debtor and Creditor Law § 15 [6-a] [emphasis added]). Subdivision (6-a) was added (L 1950, ch 758, § 5) as one of the recommendations made by the New York State Law Revision Commission intended to bring the New York statute pertaining to assignments for the benefit of creditors (Debtor and Creditor Law art 2) into general conformity with the Bankruptcy Act (see, 1950 Report of NY Law Rev Commn, 1950 NY Legis Doc No. 65 [L], at 15-25). The purpose of the amendment was to enact the equitable rule recognized in other States that a transfer may be set aside as a constructive fraud on creditors if it is made or permitted to be made by the debtor when the creditor receiving the transfer has reasonable cause to believe that the debtor is insolvent (id., at 15-16, 50-52, 69-70).

As with the section permitting the assignee to set aside a transfer made by the debtor in fraud of his creditors (Debtor and Creditor Law § 15 [6]; see also, Real Property Law § 268; EDPL 13-3.6), the assignee’s right to set aside a transfer under subdivision 6-a presupposes some action undertaken by the debtor which unfairly disadvantages one or more of his creditors (see, e.g., Reynolds v Ellis, 103 NY 116; Truesdell v Bourke, 29 App Div 95, affd 161 NY 634; 23 Carmody-Wait 2d, NY Prac § 142:46; 30 NY Jur 2d, Creditors’ Rights and Remedies, § 474). The equitable theory underlying the assignee’s right to set aside such a transfer would, therefore, be incompatible with any transfer which is not the result of some voluntary act by the debtor. Indeed, the Law Revision Commission stated specifically, in its report, that its recommendations did "not extend to involuntary transfers suffered by the debtor” (id., at 15). Thus, it has been held that the lien of a properly obtained judgment — even if the judgment creditor was aware of the debtor’s insolvency — does not constitute a "voluntary transfer” within the meaning of Debtor and Creditor Law § 15 (6-a) (see, Matter of Resnicks, Binghamton, Inc., 69 Misc 2d 454, 456; see also, Truesdell v Bourke, 29 App Div 95, 97, affd 161 NY 634, supra).

Here, if the transfer sought to be set aside as preferential is Chase’s action on October 25, 1982 in segregating Jamaica Tobacco’s checking account, the requirement of subdivision (6-a) cannot be met. That transfer could not have been one voluntarily made by Jamaica Tobacco. On the contrary, Jamaica Tobacco strenuously urges that the October 25, 1982 segregation was made by Chase without its knowledge and against its will. Nor can the assignee obviate the "voluntary transfer” requirement in subdivision (6-a) by looking to the August 1981 security agreement for the purpose of adopting its voluntary aspect. Obviously, the security agreement cannot serve the purpose since it does not comply with the statute’s four-month time limitation.

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

Chief Judge Wachtler and Judges Simons, Kaye, Alexander and Titone concur; Judge Bellacosa taking no part.

Order affirmed, with costs.

      . Contrary to the Appellate Division decision (135 AD2d 488, 492-493), article 9 of the UCC is inapplicable to the transfer of an interest in a bank deposit (UCC 9-104 [l]).

      . The assignee made no claim of "commercial bad faith” in his complaint or amended complaint; to the extent that the assignee conformed the pleadings to the proof adduced at trial, he alleged bad faith only with respect to Chase’s "failing to provide notice or demand prior to the [segregation]” of the $372,920.57 on October 25, 1982 (trial court opn, record, at 19).

      . Debtor and Creditor Law § 15 (6-a) states, in pertinent part: “The court shall have power * * * To authorize an assignee to bring an action, which he is hereby empowered to maintain, against any person, who with reasonable cause to believe the assignor was insolvent as defined in section thirteen of this act, has within four months of the assignment received a voluntary transfer from the assignor of money or property for or on account of an antecedent debt, the eifect of which transfer is to enable the creditor to obtain a greater percentage of his debt than some other creditor of the same class, and the assignee may recover the property so transferred or its value. For the purpose of this section a transfer shall be deemed to have been made when it is so far perfected that no creditor having a judgment on a simple contract without special priority (whether or not such a creditor exists) could have obtained an interest superior to that of the transferee therein. A transfer not so perfected prior to the assignment shall be deemed to have been made immediately before the assignment.”


source: Caselaw Access Project

author: Kaye, J.

license: Public Domain

text:
    The People of the State of New York, Appellant, v Curtis English, Respondent.
    Argued January 10, 1989;
    decided February 14, 1989

      POINTS OF COUNSEL

      Howard R. Relin, District Attorney (Elizabeth Clifford of counsel), for appellant.
    The lower court erred in suppressing defendant’s statements made to a police officer. (People ex rel. Maiello v New York State Bd. of Parole, 65 NY2d 145; People v Ronald W., 24 NY2d 732; People v Parker, 82 AD2d 661, 57 NY2d 815; Miranda v Arizona, 384 US 436; Schneckloth v Bustamone, 412 US 218; United States v Washington, 431 US 181; Harris v New York, 401 US 222; People v Maerling, 64 NY2d 134; People v Ames, 126 AD2d 731.)

      Edward J. Nowak, Public Defender (Peter J. Pullano and Yolanda Villa of counsel), for respondent.
    I. The sole question raised by appellant is a mixed question of law and fact, which is outside the scope of review of this court. The decision of the lower court must thus be affirmed. (People v Harrison, 57 NY2d 470; People v Wharton, 46 NY2d 924; People v Conyers, 68 NY2d 982; People v Mayorga, 64 NY2d 864; People v King, 61 NY2d 969; People v Parker, 82 AD2d 661, 57 NY2d 815; People v Chappie, 38 NY2d 112; People v Bethea, 67 NY2d 364.) II. The suppression order was correct and should be affirmed. (Miranda v Arizona, 384 US 436; People v Bethea, 67 NY2d 364; People v Chappie, 38 NY2d 112; People ex rel. Maiello v New York State Bd. of Parole, 65 NY2d 145; Minnesota v Murphy, 465 US 420; People v Ferguson, 90 Misc 2d 467; People v Ray, 65 NY2d 282; People v Jones, 47 NY2d 528; Estelle v Smith, 451 US 454; People v Newson, 68 AD2d 377.)
   OPINION OF THE COURT

Kaye, J.

A parolee’s statements to his parole officer, made while the parolee is in custody and in response to the parole officer’s questions about the parolee’s suspected involvement in a crime, are considered compelled unless preceded by Miranda warnings. Consequently, the parolee’s later statements to a police officer, made after Miranda warnings but as part of a continuous interrogation, must be suppressed at trial.

While defendant was on parole for an earlier, unrelated crime, the police began to suspect that he was involved in a recent burglary. A police investigator telephoned defendant’s parole officer, told him there was evidence linking defendant to the burglary, and asked to be notified the next time defendant reported so that he could talk to defendant. About a week later, defendant voluntarily reported to his parole officer —one day after his scheduled appointment. Defendant explained that the lateness was due to fear that his parole might be violated because he had a fight with someone at work. In answer to the parole officer’s general questions, defendant admitted that he had been buying and using marihuana. Telling defendant that he was "on the edge of being violated,” the parole officer had defendant empty his pockets, and when he discovered that defendant was carrying a knife, the officer announced that he was "violating” defendant’s parole and placed him in handcuffs. A search of defendant’s house, to which he consented, resulted in the discovery of drug paraphernalia and defendant’s additional admissions to the use of cocaine as well as marihuana.

The parole officer then began specifically to question defendant — still in handcuffs — about the burglary the investigator had brought to his attention. Defendant admitted his involvement in the burglary, at which point the parole officer telephoned the police. The parole officer asked defendant no more questions but encouraged him to cooperate with the police, adding that the Parole Board would be notified if he did. Upon his arrival shortly thereafter, a police sergeant advised defendant of his Miranda rights and had the handcuffs removed; this was the first time since defendant arrived at the parole officer’s office that he was given Miranda warnings. Defendant waived his right to remain silent and to the assistance of counsel, and again confessed to the burglary — this time in detail — both orally and in writing.

After a Huntley hearing, the court held, first, that defendant’s statement to his parole officer was inadmissible at trial by virtue of his failure to advise defendant of his Miranda rights. Second, the court suppressed defendant’s statements to the police officer on the basis that those later statements— although made after Miranda warnings — were the product of a course of continuous questioning without any break in the interrogation sufficient to attenuate them from the earlier questioning. The Appellate Division affirmed.

The People challenge only the second ruling. They contend that the relationship of parole officer and parolee is fundamentally different from that of police officer and suspect; that a parole officer’s focus is rehabilitative, and inherently nonadversarial and noncoercive; and that parole officers therefore need not give Miranda warnings in interviews with their parolees (see, 1 LaFave & Israel, Criminal Procedure § 6.10, at 542). There having been no impropriety or illegality in the parole officer’s questioning, the People reason, there was no basis for the conclusion that defendant’s statement to his parole officer tainted his later statements to the police. Defendant, by contrast, argues that answers given by parolees during interviews with their parole officers are invariably compelled in a constitutional sense due to the inherently coercive effect of the parolee’s legal obligation to answer truthfully, that the unwarned statement was therefore illegally obtained, and that the later statements were necessarily tainted.

In that a parole officer may function both as counselor and as law enforcement agent in questioning a parolee about possible criminal activity, there is some merit in the position of each party, militating against the imposition of a single rule covering all types of parole officer-parolee encounters. As we recognized in People v Ronald W. (24 NY2d 732), a distinction can be drawn between "the sort of incommunicado, police-dominated atmosphere of custodial interrogation and overbearing of the subject’s will at which the Miranda rule was aimed”, and questioning by a probation officer directed at helping probationers rehabilitate themselves. (Id., at 734.) There, the defendant had freely come into the Probation Department seeking help for a friend and was not alone and incommunicado during questioning about needle marks on his arm. We concluded that the officer was not acting asa" Taw enforcement’ officer within the spirit or meaning of Miranda v. Arizona” (People v Ronald W., supra, at 735), and Miranda warnings were not required as a prerequisite to admission of defendant’s statements at a revocation hearing. Similarly, in People ex rel. Maiello v New York State Bd. of Parole (65 NY2d 145) we refused to prohibit the use of \m-Mirandized statements made to relator’s parole officer at his parole revocation hearing.

On the other hand, as we recognized in People v Parker (57 NY2d 815, affg for reasons stated in 82 AD2d 661), a parole officer also may assume the role of a law enforcement agent. In Parker, we affirmed an order barring the use of defendant’s unwarned statements to his parole officer at his criminal trial. There, defendant’s parole officer was aware when he first questioned defendant that criminal charges were already pending and that defendant was represented by an attorney.

While we are urged to demarcate categories when Miranda warnings are and are not required, the facts of this case do not call upon us to decide whether the nature of the parole officer-parolee relationship is such that even routine, noncustodial questioning must be preceded by Miranda warnings if it is concerned with possible criminal activity. Here it is plain that the parole officer was no longer acting in his role as defendant’s counselor when he questioned defendant about the burglary. Rather, he had long since decided to violate defendant’s parole. The officer had already taken defendant into custody, had kept him handcuffed while obtaining his consent and then performing a search of his apartment that revealed additional incriminating evidence, and had gotten further statements about defendant’s drug use. It was only then, well after the parole officer had ample information on which to determine that defendant had not complied with the conditions of his parole, and had in fact informed defendant that the decision was already made, that he began to question defendant — still in handcuffs — about the burglary in which the police had expressed interest.

At that point, the parole officer’s actions were the functional equivalent of those of a police officer. At the least, once defendant was physically taken into custody and handcuffed, the potential for coercion was as great as that which inheres in custodial interrogation by a police officer, and in accordance with our previous decisions under State law, administration of the Miranda warnings was required to dispel that potential coercion in order for defendant’s statement to be admissible in a criminal trial (see, People ex rel. Maiello v New York State Bd. of Parole, 65 NY2d, at 146-147, supra).

In these circumstances, then, we cannot accept the People’s contention that the failure to advise defendant of his Miranda rights was proper, and that no presumption of compulsion should be drawn from it. Having rejected that claim, we are bound by the undisturbed finding of the trial court that defendant’s subsequent Mirandized statements were not sufficiently attenuated from the first, unwarned statement to dispel the coercive effect of the earlier questioning (see, People v Chappie, 38 NY2d 112). Indeed, before us the People do not even dispute the fact that the questioning of defendant was virtually uninterrupted.

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

Chief Judge Wachtler and Judges Simons, Alexander, Titone, Hancock, Jr., and Bellacosa concur.

Order affirmed.


author: Hancock, Jr., J. Titone, J.

text:
    In the Matter of Prisoners’ Legal Services of New York, Appellant, v New York State Department of Correctional Services, Respondent.
    Argued October 20, 1988;
    decided December 1, 1988

      POINTS OF COUNSEL

      Dan Getman, Robert Selcov, John A. Gresham and David C. Leven for appellant.
    I. The privacy exception does not apply to this request. (Matter of Westchester Rockland Newspapers v Kimball, 50 NY2d 575; Matter of Capital Newspapers v Burns, 67 NY2d 562; Matter of Konigsberg v Coughlin, 68 NY2d 245; Matter of Farbman & Sons v New York City Health & Hosps. Corp., 62 NY2d 75; Matter of Miracle Mile Assocs. v Yudelson, 68 AD2d 176, 48 NY2d 706; Matter of Sheehan v City of Binghamton, 59 AD2d 808; DiLucia v Mandelker, 100 AD2d 260, 68 NY2d 844; Matter of Howard v Wyman, 28 NY2d 434; Matter of John P. v Whalen, 54 NY2d 89; Matter of Gannett Co. v County of Monroe, 45 NY2d 954.) II. Civil Rights Law § 50-a does not apply to the prisoner grievance records sought. (Matter of Capital Newspapers v Burns, 67 NY2d 562; Matter

      of Woodin v Lane, 119 AD2d 969; Matter of Baker v Regan, 114 AD2d 187, 68 NY2d 335; American Sugar Ref Co. v Waterfront Commn., 55 NY2d 11, appeal dismissed sub nom. New York Shipping Assn. v Waterfront Commn., 458 US 1101; Matter of Johnson v Ward, 64 AD2d 186; Matter of Patterson v Smith, 53 NY2d 98; Murray, Hollander, Sullivan & Bass v HEM Research, 111 AD2d 63; Heine v Papp, 97 AD2d 929; Abdul Wali v Coughlin, 754 F2d 1015.) III. Summary judgment should be entered granting petitioner the documents it seeks. (Matter of Gannett Co. v County of Monroe, 45 NY2d 954; Reed v Shoratlantic Dev. Co., 121 AD2d 525; Four Seasons Hotels v Vinnik, 127 AD2d 310; Monteferrante v New York City Fire Dept., 63 AD2d 576, 47 NY2d 737.)

      Robert Abrams, Attorney-General (Harvey M. Berman and O. Peter Sherwood of counsel), for respondent.
    I. The requested documents are exempt from disclosure under section 50-a of the Civil Rights Law. (Matter of Gannett Co. v James, 86 AD2d 744; Matter of Capital Newspapers v Burns, 109 AD2d 92, 67 NY2d 562; Matter of Albano v Kirby, 36 NY2d 526.) II. This court should not consider petitioner’s argument, raised for the first time in this proceeding, that section 50-a does not apply to State correction officers. (County of Nassau v Cuomo, 69 NY2d 737; Matter of Gregory v Board of Appeals, 57 NY2d 865; Abood v Hospital Ambulance Serv., 30 NY2d 295; People v Floyd J., 61 NY2d 895; Sega v State of New York, 60 NY2d 183; Sanders v Winship, 57 NY2d 391; Zappone v Home Ins. Co., 55 NY2d 131; Matter of Chatlos v McGoldrick, 302 NY 380; Matter of Knight-Ridder Broadcasting v Greenberg, 70 NY2d 151; Consumer Prod. Safety Commn. v GTE Sylvania, 447 US 102.) III. The disclosure of the requested documents would result in an unwarranted invasion of personal privacy. (Matter of Capital Newspapers v Burns, 67 NY2d 562; Matter of Scaccia v New York State Div. of State Police, 138 AD2d 50; Matter of Nicholas, 117 Misc 2d 630.)

      Richard R. Rowley and Mark T. Walsh for New York State Inspection, Security and Law Enforcement Employees, District Council 82, American Federation of State, County and Municipal Employees, AFL-CIO, amicus curiae.

    I. Section 50-a of the Civil Rights Law applies to correction officers employed by the New York State Department of Correctional Services. (Martin v Home Bank, 160 NY 190; County of Nassau v Cuomo, 69 NY2d 737; Matter of Gregory v Board, of Appeals, 57 NY2d 865; Finger Lakes Racing Assn. v New York State Racing &

      Wagering Bd., 45 NY2d 471; Abood v Hospital Ambulance Serv., 30 NY2d 295; Matter of Allstate Ins. Co. v Libow, 106 AD2d 110, 65 NY2d 807; Riegert Apts. Corp. v Planning Bd., 57 NY2d 206; People v Florus, 67 Misc 2d 809; Roth v Michelson, 55 NY2d 278; People v Floyd J., 61 NY2d 895.) II. The records sought are personnel records used to evaluate performance toward continued employment, are within the coverage of Civil Rights Law § 50-a and as such are exempt from disclosure under Public Officers Law § 87 (b) (2) (a). (Matter of Gannett Co. v James, 86 AD2d 744; Matter of Capital Newspapers v Burns, 109 AD2d 92, 67 NY2d 562; Matter of Fournier v Fish, 83 AD2d 979; Matter of Thomas v New York City Tr. Police Dept., 91 AD2d 898; Matter of John P. v Whalen, 54 NY2d 89.) III. Release of the records of official disciplinary action would constitute an unwarranted invasion of personal privacy. (Matter of Frick v Bahou, 56 NY2d 777; Matter of Petrocelli v McGoldrick, 288 NY2d 25.)
   OPINION OF THE COURT

Hancock, Jr., J.

Do inmate grievances against State correction officers and the administrative decisions relating thereto constitute "personnel records, used to evaluate performance toward continued employment or promotion” (Civil Rights Law § 50-a [1]) which are exempt from disclosure under the Freedom of Information Law (FOIL) (see, Public Officers Law § 87 [2] [a])? This is the central question presented in the article 78 proceeding brought by petitioner, Prisoners’ Legal Services, for an order permitting it to inspect or copy the grievance records involving a correction officer at the Fishkill Correctional Facility. The courts below, distinguishing Matter of Capital Newspapers v Burns (67 NY2d 562), held that the records sought are exempt from disclosure under Civil Rights Law § 50-a and dismissed the proceeding. We granted leave to appeal and now affirm.

In its petition, Prisoners’ Legal Services states that it made a request for access to inmates’ grievances and agency decisions pertaining to a particular correction officer at Fishkill after receiving numerous complaints from prisoners about her conduct. When the acting superintendent of Fishkill denied the request, petitioner filed an administrative appeal to respondent Department of Correctional Services which upheld the denial. Respondent held that, because the grievance information and agency determinations "would be utilized in evaluating work performance of [the officer]”, they were exempt from disclosure under Civil Rights Law § 50-a. In affirming Supreme Court’s dismissal of the petition, the Appellate Division found that the records sought are "considered to be part of an employee’s personnel record and are clearly relied upon in evaluating the employee’s performance” (138 AD2d 712, 713-714). It rejected petitioner’s contention that, because no lawsuit had been commenced, the Civil Rights Law § 50-a exemption should not apply. The court reasoned that the legislative purpose of protecting police and correction officers from harassment and reprisals would be served by granting the statutory protection before as well as after commencement of an action (138 AD2d, at 714). We agree with these conclusions.

In addressing respondent’s contention that inmate grievance documents may be withheld as confidential personnel records, we are mindful that FOIL is to be liberally construed and its exemptions narrowly interpreted (see, Public Officers Law § 84; Matter of Capital Newspapers v Whalen, 69 NY2d 246, 252; Matter of Fink v Lefkowitz, 47 NY2d 567, 571). The exemption in question states that an agency may deny access to records which are "specifically exempted from disclosure” by a State statute (Public Officers Law §87 [2] [a]). Here, the applicable State statute provides that "personnel records, used to evaluate performance toward continued employment or promotion * * * shall be considered confidential and not subject to inspection or review [except on written consent or by court order]” (Civil Rights Law § 50-a [1]). The precise statutory question presented does not involve an interpretation of FOIL, but the meaning of "personal records” under Civil Rights Law § 50-a (l) — i.e., whether they encompass the particular grievanee records demanded here (see, Matter of Newsday, Inc. v Sise, 71 NY2d 146, 150-151). If so, those records are, by express terms of the statute, to be "considered confidential” and not subject to review and, thus, access may be properly withheld under Public Officers Law § 87 (2) (a) (see, Matter of Newsday, Inc. v Sise, supra).

Section 50-a provides no definition or other language explaining or qualifying what is covered by the term "personnel records” except that such records must be under the control of the particular agency or department and be used to evaluate performance toward continued employment or promotion. Under these limited criteria, however, records pertaining to inmate grievances would fall within the statute. They are documents containing personal, employment-related information about a public employee, namely, complaints made by inmates about the on-the-job conduct of certain correction officers; these documents are received, processed and maintained as part of a correctional facility’s operations (see, Correction Law § 139; Inmate Grievance Program 7 NYCRR part 701; DOCS Policy Directive No. 4040); and, as found by the Appellate Division, they "are clearly relied upon in evaluating the employee’s performance” (138 AD2d 712, 713, supra). (Accord, Matter of Gannett Co. v James, 86 AD2d 744, 745, lv denied 56 NY2d 502 [complaints against police officers held to be personnel records used to evaluate performance].)

Documents pertaining to misconduct or rules violations by correction officers — which could well be used in various ways against the officers — are the very sort of record which, the legislative history reveals, was intended to be kept confidential. The legislative purpose underlying section 50-a when originally enacted to apply to police officers (see, Carpenter v City of Plattsburgh, 105 AD2d 295, 298, affd for reasons stated below 66 NY2d 791) and later amended to cover correction officers (see, Matter of Capital Newspapers v Burns, 67 NY2d 562, 568, supra) was the same: to protect the officers from the use of records — including unsubstantiated and irrelevant complaints of misconduct — as a means for harassment and reprisals and for purposes of cross-examination by plaintiffs counsel during litigation (see, e.g., Mem of Senator Padavan and Assemblyman DeSalvio, and Mem of Division of Criminal Justice Services, Governor’s Bill Jacket, L 1976, ch 413; Mem of Senator Marino in support of L 1981, ch 778, 1981 NY Legis Ann, at 419; various memoranda in support of L 1981, ch 778 filed by Assemblyman Kremer, the State Commission of Correction, the American Federation of State, County, and Municipal Employees, and the State Division of Budget).

Petitioner argues, nonetheless, that the "personnel records” exemption should not apply because records of prisoners’ complaints of misconduct or rules violations against a correction officer — although held to be of significance to a superior in considering continued employment or promotion (138 AD2d, at 713) — are not actually maintained as part of officers’ employment records or in their personnel files; they are kept by the Inmate Grievance Resolution Committee (see, 7 NYCRR 701.14 [b]; DOCS Policy Directive No. 4040 [IV] [B] [3]). But whether a document qualifies as a personnel record under Civil Rights Law § 50-a (1) depends upon its nature and its use in evaluating an officer’s performance — not its physical location or its particular custodian. Indeed, it has been held that applicability of the statute "cannot be determined simply on the basis of where the information is stored” (Matter of Capital Newspapers v Burns, 109 AD2d 92, 95, affd 67 NY2d 562, supra; see also, Matter of Gannett Co. v James, supra). The construction petitioner urges seems inimical to the very statutory purpose of preventing the use of personnel records as a device for harassing or embarrassing police and correction officers. The records of prisoners’ complaints requested here, regardless of where they are kept, could certainly be employed for these purposes. Such an interpretation — which would frustrate the aim of the statute — should be rejected (see, Matter of Newsday, Inc. v Sise, supra, at 152).

Similarly, we reject the argument that, section 50-a was intended to afford protection only after a particular grievance has become the subject of litigation. Again, the argument finds no support in the statutory language and authority on the point is to the contrary (see, Matter of Thomas v New York City Tr. Police Dept., 91 AD2d 898, 899).

Contrary to the dissent, the conclusion that records may be protected from disclosure under section 50-a, even though not sought for actual litigation, is entirely consistent with the statutory scheme. The statute bars disclosure of personnel records "considered confidential” under section 50-a (1), absent consent of the officer involved, except as mandated by a "lawful court order”; it further provides, under section 50-a (3), that such a court order may not be issued unless, after a hearing and in camera inspection, it appears to the reviewing Judge that "the records are relevant and material in the action before him”. There can be no question that the statute thus permits court-ordered disclosure of personnel records within its protection — i.e., those that have potential use in harassing and embarrassing officers in litigation — only in the context of an ongoing litigation. But this does not suggest, as the dissent argues, that personnel records must first be related to pending litigation before receiving the statute’s protection. If such a narrow view of section 50-a were adopted, the statute could be circumvented by the simple expedient of making FOIL requests for the records first and bringing the lawsuit later. The Legislature could not have intended to enact a statute that could so easily be rendered ineffectual (see, McKinney’s Cons Laws of NY, Book 1, Statutes § 144, at 291).

Moreover, Matter of Capital Newspapers v Burns (supra)— permitting a newspaper reporter FOIL access to police records —does not support petitioner’s request in this case. Unlike the grievance records demanded here by Prisoners’ Legal Services, the police officers’ attendance and sick leave records at issue in Capital Newspapers were sought for a purpose and in a context that could have had no relation to potential litigation. In concluding that the materials requested in Capital Newspapers did not constitute the kind of personnel records protected under section 50-a, we by no means suggested that the application of that statute was limited to an ongoing litigation. Rather, we simply recognized that the legislative intent in enacting the 1981 amendment to section 50-a was to prevent release of sensitive personnel records that could be used in litigation for the purpose of harassing or embarrassing correction officers (see, 67 NY2d, at 568-569, supra); records having remote or no such potential use, like those sought in Capital Newspapers, fall outside the scope of the statute.

Finally, petitioner argues that the amendment of Civil Rights Law § 50-a (L 1981, ch 778) was intended to protect local but not State correction officers. We perceive no merit in this claim. The statute draws no such distinction and there is nothing in its underlying purpose or legislative intent which would support limiting its application to correction officers at local facilities. The need to protect correction officers from unrestricted examination of their personnel records is equally compelling for State and local employees.

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

Titone, J.

(dissenting):

I am very troubled by the majority’s expansive reading of the term "personnel records” as that term is used in Civil Rights Law § 50-a (1). I am even more troubled by the majority’s conclusion that this statutory exception to the general rule of disclosure is operative even where there is no pending litigation. The combination of the majority’s holdings on these two points will lead to a broad and amorphous exemption from disclosure well beyond what the Legislature apparently intended. For that reason, I dissent.

It is by now familiar that our State has made a strong commitment to open government and public accountability, a commitment that has been expressed through the various provisions of the Freedom of Information Law (see, Matter of Capital Newspapers v Whalen, 69 NY2d 246, 252; Matter of Capital Newspapers v Burns, 67 NY2d 562, 565; Matter of Farbman & Sons v New York City Health & Hosps. Corp., 62 NY2d 75, 79). Consistent with this commitment and our belief that a democratic system of government functions most effectively when its citizens are well informed, our court has repeatedly stressed that under FOIL all records of public agencies are presumptively open to public inspection unless specifically exempted and that exemptions should be narrowly construed to provide maximum public access (Matter of Capital Newspapers v Burns, supra, at 566; Matter of Farbman & Sons v New York City Health & Hosps. Corp., supra, at 79-80; Matter of Washington Post Co. v New York State Ins. Dept., 61 NY2d 557; Matter of Fink v Lefkowitz, 47 NY2d 567, 571; see, Public Officers Law § 87 [2]; but cf., Matter of Newsday Inc. v Sise, 71 NY2d 146). Viewed against that backdrop, the majority’s conclusion that the inmate grievance documents sought here are "personnel records” within the "narrowly specific” exemption created by Civil Rights Law § 50-a (1) can only be regarded as a major retreat from these principles.

The administrative procedure that generates these grievance documents is mandated by Correction Law § 139, which was adopted after the tragic uprising at Attica prison (see, Matter of Johnson v Ward, 64 AD2d 186). Its purpose is to provide a nonviolent, nonadversarial method of resolving internal problems within the prisons (Matter of Patterson v Smith, 53 NY2d 98, 101; see, 7 NYCRR 701.1). As one of the attorneys representing respondent in this proceeding noted, "the grievance system was instituted * * * as a formal mechanism to air grievances and as a safety valve to allow an inmate to vent his feelings and frustrations in writing”.

As is evident from this brief summary of the purposes underlying the grievance procedure, the documents that petitioner seeks, inmate grievances filed in connection with a particular correction officer, were not generated pursuant to any personnel policy or procedure of the Department. Indeed, the conclusion that the grievance system is entirely separate from the Department’s system of personnel evaluation is underscored by the regulation requiring an employee’s written consent before a grievance document may be made part of his or her personnel file (7 NYCRR 701.14 [b]).

Nonetheless, the majority concludes that these grievance documents are "personnel records” within the meaning of Civil Rights Law § 50-a (1). The majority begins with the premise that the term "personnel records,” which is otherwise undefined, is synonymous with the specific criteria listed immediately after the term is used in the statute. Thus, in the majority’s view, "personnel records” are, quite simply, those documents that are "used to evaluate performance toward continued employment or promotion, [and are] under the control of any [of the listed agencies]” (see, Civil Rights Law § 50-a [1]). The grievance records sought here are then deemed exempt under that definition because they are "received, processed and maintained as part of a correctional facility’s operations” and " 'are clearly relied upon in evaluating the employee’s performance’ ” (majority opn, at 31). I would dispute this conclusion both as a matter of simple statutory construction and as a matter of sound public policy.

With respect to the question of statutory construction, it seems clear that the criteria on which the majority relies were intended to create an additional limitation upon, rather than a complementary definition of, the term "personnel records.” As is apparent from the wording of the statute, the Civil Rights Law § 50-a (l)’s exemption from disclosure was intended to apply only when the documents in question both qualify as "personnel records” and are (1) used to evaluate performance and (2) under the agency’s control. Indeed, if, as the majority holds, the Legislature intended the latter two elements to be the only criteria for triggering the statutory exemption, it would have omitted the term "personnel records” entirely and simply stated that "all records used to evaluate performance * * *, under the [law enforcement agency’s] control” are exempt from disclosure. Given the statute’s language, the Legislature must have intended for the courts to give independent effect to the term "personnel records.”

With regard to the policy considerations, I note that the majority’s decision to equate "personnel records” with documents used to evaluate employees’ performance opens the Civil Rights Law § 50-a (1) exemption to almost unlimited use. As anyone with administrative or supervisory experience can attest, virtually any document created by or about an employee may be used as a basis for performance evaluation. Thus, under the majority’s construction, Civil Rights Law § 50-a (1) creates a broad shield that will insulate a wide range of documents maintained by the listed law enforcement agencies from public view. I cannot agree that such a result is consistent either with the Legislature’s intentions or with the sound public policies that underlie FOIL.

Having concluded that the term "personnel records” cannot and should not be read expansively to include all agency documents that could conceivably be used to evaluate employee performance, I would hold that the exemption prescribed in Civil Rights Law § 50-a (1) is limited to documents that are used for evaluation, are within the agency’s control and are created in connection with the delineated agencies’ personnel procedures and policies. Under that view, the grievance documents petitioner seeks would not be exempt, since they were generated in connection with the statutorily mandated inmate grievance procedure, an administrative mechanism that exists for the benefit of prisoners and is completely unrelated to the Department of Correctional Services’ personnel practices (cf., Matter of Capital Newspapers v Burns, supra [concerning disclosure of employee "Lost Time Reports”]).

Moreover, even if I were to agree that these grievance documents are "personnel records” within the meaning of Civil Rights Law § 50-a (1), I could not cast my vote for an affirmance because, in my view, another critical component of the right to an exemption is missing here. In Matter of Capital Newspapers v Burns (supra, at 568-569), we held that the statute could not be invoked as a bar to disclosure of certain personnel records because the request for disclosure had been made in a "nonlitigation context.” We based this holding on the legislative history of the statute and on the observation that "the legislative intent underlying the enactment of Civil Rights Law § 50-a was narrowly specific, 'to prevent time-consuming and perhaps vexatious investigation into irrelevant collateral matters in the context of a civil or criminal action (67 NY2d, at 569, supra). In other words, the statute was designed to prevent the use of discovery tools to conduct aimless fishing expeditions in litigated matters when the only result would be unnecessary harassment or embarrassment.

In order to reach its conclusion that Civil Rights Law § 50-a (1) may be invoked here, the majority has had to reinterpret and give a narrower cast to the court’s holding in Capital Newspapers. Thus, while the Capital Newspapers court concluded, without qualifications, that the statute was intended to operate only " 'in the context of a civil or criminal action’ ” (67 NY2d, at 569, supra), the majority in this case states that requested personnel records need not be "related to pending litigation before receiving the statute’s protection”, suggesting that the statute governs even when the request merely "could have [a] relation to potential litigation” (majority opn, at 33). Once again, the majority has strained to reach a result that renders the Civil Rights Law § 50-a (1) exemption far broader than its drafters intended. In the process, it has created an anomalous and unworkable rule.

First, the majority has provided no guidance as to how the lower courts may distinguish between disclosure requests with no relation to litigation of any kind and those which are potentially related to some future, yet-to-be identified litigation. Apart from sheer speculation and assumptions based upon the applicant’s identity, no solution to this problem is readily apparent. Indeed, the majority in this case has not explained its basis for distinguishing between the information request in this case and that made in Capital Newspapers, and the only distinction that suggests itself is that urged by respondents: i.e., that the request in Capital Newspapers was made by a news media applicant, while the request in this case was made by a legal advocacy organization specializing in prisoners’ rights.

The second problem with the majority’s analysis is that it transforms the qualified exemption created by the statute into a mixed exemption, with some records receiving absolute protection while others are subject to court-ordered disclosure. However, Civil Rights Law § 50-a (1) makes all law enforcement personnel records presumptively exempt from disclosure and permits disclosure of any such record if release is "mandated by lawful court order” (Civil Rights Law § 50-a [1]). The reference to court-ordered disclosure in subdivision (1) is unqualified and clearly was intended to apply to all requests for information covered by that subdivision. Thus, there is simply no basis in the statutory language or design for the distinction the majority now draws between records sought in the context of pending litigation, which are subject to court-ordered disclosure, and records sought for other purposes, which are not even eligible for judicial consideration.

Since the provision for court-ordered disclosure is unqualified and the determination as to whether disclosure should be ordered under the statute depends upon whether the records are "relevant and material in the action before [the court]” (Civil Rights Law § 50-a [3] [emphasis supplied]), it seems clear beyond doubt that the statute was intended to apply, as we held in Capital Newspapers (supra), only when a request for disclosure is made in the context of pending litigation. Indeed, the existence of pending litigation is essential to the operation of the statute, since without it there is no basis for the court to apply the statutory criteria of relevance and materiality or to determine whether documents presumptively exempt under the statute should be released.

In the final analysis, the conclusion that court-ordered disclosure is available only in the context of ongoing litigation cannot be reconciled either with the statutory language or with our recent holding in Capital Newspapers (supra), in which disclosure was ordered precisely because there was no pending litigation. I can perceive only two ways in which the holdings in Capital Newspapers and this case can be reconciled. Either Capital Newspapers has been overruled sub silentio or a new, tripartite disclosure system for law enforcement personnel records has been created. If, in fact, Capital Newspapers is still the law, then requests for information having remote or no potential use in litigation are still subject to disclosure without qualification. In contrast, records that are sought within the context of pending litigation are subject to the Civil Rights Law § 50-a privilege, but may be released upon a judicial finding that they are relevant and material in the litigation. Finally, under the majority’s new and broadened view of Civil Rights Law § 50-a’s coverage, records which a court somehow discerns may be useful in potential, yet-to-be determined litigation are absolutely privileged, since they fall within the statute’s provision for exemption from disclosure but are not within the statutory provisions for relief through judicial intervention (see, Civil Rights Law § 50-a [2]-[3]). I can see no rational relationship between these distinctions and the purposes underlying the statute. Accordingly, I cannot accept that this anomalous result is what the Legislature had in mind.

In closing, I would stress that while I am sensitive to the potential discomfort and legitimate concern that many law enforcement officers have in relation to this type of disclosure, such considerations do not alone furnish a sound basis for shielding all records relating to their official conduct from public view. The Legislature struck an appropriate balance between these concerns and the competing concern of promoting accountability of public servants by creating a "narrowly specific” exemption from disclosure for certain records, subject to judicial oversight (see, Matter of Capital Newspapers v Burns, supra, at 569). By construing this exemption broadly and holding that it is applicable in a wide variety of situations involving "potential litigation,” the majority has tipped the balance in favor of the law enforcement officers’ desire for privacy and, in the process, has impaired the legislative values of openness and accountability that are implicit in the statutory scheme. Because that result is inconsistent with both our prior decisions and the clearly declared legislative intent, I cannot join my colleagues’ decision to affirm the Appellate Division’s decision in this case.

Chief Judge Wachtler and Judges Simons, Kaye, Alexander and Bellacosa concur with Judge Hancock, Jr.; Judge Titone dissents and votes to reverse in a separate opinion.

Order affirmed, with costs.

      . Because we decide the appeal under Civil Rights Law § 50-a, we do not reach respondent’s contention that the records should also be exempt because disclosure would involve an unwarranted invasion of personal privacy (see, Public Officers Law § 87 [2] [b]; § 89 [2] [b] [iv]).

      . Section 50-a (1) (personnel records of police officers, firefighters and correction officers) provides: "All personnel records, used to evaluate performance toward continued employment or promotion, under the control of any police agency or department of the state or any political subdivision thereof including authorities or agencies maintaining police forces of individuals defined as police officers in section 1.20 of the criminal procedure law and such personnel records under the control of a sheriffs department or a department of correction of individuals employed as correction officers and such personnel records under the control of a paid fire department or force of individuals employed as firefighters or firefighter/paramedics shall be considered confidential and not subject to inspection or review without the express written consent of such police officer, firefighters, firefighter/ paramedic or correction officer except as may be mandated by lawful court order.”