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December 6, 1974

NATIONAL BANK OF NORTH AMERICA, Defendant and Third-Party Plaintiff, v. CENTAUR PACKING CO., INC., and Samuel Schweid, Third-Party Defendants

Edward Weinfeld, District Judge.

The opinion of the court was delivered by: WEINFELD


EDWARD WEINFELD, District Judge.

 Plaintiff Wilhelm Foods, Inc. ("Wilhelm"), a meat packer, commenced this action against National Bank of North America ("Bank") to recover $181,638.80, the total of eight drafts drawn by plaintiff's predecessor, each of which covered shipments of meat to DaFran Meat Company, Inc. ("DaFran"), a meat jobber, which had a checking account at the Bank. The drafts were forwarded to defendant Bank for collection. Plaintiff claims that the Bank failed seasonably to dishonor the drafts and seeks recovery of damages for their face amount. Its complaint alleges four different causes of action. Prior to trial the court granted summary judgment in favor of the Bank upon the first cause of action, predicated upon the theory that the defendant was a payor bank. This court held otherwise -- that the defendant was not the payor bank or the drawee of the drafts; that the drafts had been sent to the defendant for collection against the account of DaFran. Familiarity is assumed with the ruling which sets forth some of the pertinent facts which are not in dispute. *fn1"

 The case proceeded to trial upon the remaining three causes of action, which allege:

 (1) that the Bank, which was a substantial secured creditor of DaFran, intentionally mishandled all the drafts to improve its own position;

 (2) that the Bank negligently mishandled the drafts; and

 (3) that the Bank's action was willful and malicious and warrants punitive damages.

 The Bank, in addition to a denial of the essential allegations of these causes of action, pleads affirmative defenses of (1) election of remedies; (2) laches; (3) estoppel and (4) contributory negligence.

 Preliminarily, the court disposes of a matter which was adverted to upon the trial. Included among plaintiff's claims is one for $22,541.76, the invoice price of a shipment of meat to DaFran on August 2, 1971. In this instance, unlike others here in suit, no draft was ever forwarded to the Bank. Plaintiff seeks to justify this claim upon a theory of "consequential" damages. Whatever the theory, there is not the slightest basis for recovery, since the shipment was on its way before the first draft reached the Bank, and the Bank had no relationship to the shipment of any kind.

 As described in the court's opinion on the summary judgment motion, prior to the time of the shipments involved in this suit, the plaintiff had sold meat to DaFran on open account. Payment on those transactions had been due in seven to ten days following receipt of the shipment. In late July, 1971, the defendant was slow in its payments on the outstanding open account, and plaintiff decided to utilize "sight" drafts to obtain payment for each shipment thereafter sold to DaFran. On July 29 Wilhelm notified the Bank it was considering placing DaFran on a sight draft basis, and the Bank's representative stated there would be no problem with DaFran's credit worthiness. Thereupon, a day, and in some instances several days, after a shipment was on its way plaintiff drew a draft for the amount of the shipment and deposited it with one or the other of its local banks in Denver, Colorado, which in turn airmailed the draft along with a "letter of transmittal" to the defendant Bank. Each shipment continued to go forward from Denver to DaFran by truck or carrier as in the past, and an invoice was mailed to DaFran the day shipment left plaintiff's premises. Deliveries of the shipments continued to be made to DaFran in the same manner as under the open account without requiring prior payment from DaFran.

 DaFran, in addition to its deposits with the Bank, also had a substantial line of credit there which was secured by DaFran's accounts receivable, inventory and other assets. DaFran's place of business was in the Bronx, located nearby the Bank's branch in that borough; its checking account was at the Bank's 38th Street branch in the Borough of Manhattan; and the credit line was serviced at another branch in Manhattan. All drafts wherein DaFran was the drawee were received by the Bank's 38th Street branch, but under its procedure they were delivered the next day to the Bronx branch to facilitate payments by DaFran. The drafts were entered in a log maintained at the Bronx branch pending instructions by DaFran to the Bank at its credit office whether or not to pay the drafts. When payment was authorized, DaFran would deliver its check at the Bronx branch payable to the Bank, which would then issue its cashier's check to the forwarding bank.

 Between July 28 and August 12 Wilhelm made the eight shipments to DaFran for a total invoice price of $181,638.80, covered by drafts which were received by the Bank between August 3 and August 17. The shipments were received by DaFran, but it never authorized the Bank to make payments of those drafts. The Bank retained all drafts until they were returned to the forwarding Denver banks; three were received by one Denver bank on August 23 with the notation on the drafts "no authority to pay"; the five others were received by the other Denver bank on August 24. Soon after the return of the drafts DaFran ceased doing business, its creditors held a meeting and agreed upon a common law composition for thirty cents on the dollar, which plaintiff accepted on September 25, 1971, and pursuant to which it received $61,307.70. Plaintiff now seeks to recover the unpaid balance of $120,331.10 from the Bank upon a claim that its actions caused the loss.

 It appears that shortly before and during the period in question, when drafts were drawn by other meat shippers upon DaFran, they were retained by the Bank for extended periods, in one instance as long as twenty-five days, pending DaFran's authorizing payment, which it always did; and so it was customary to await such authorization instead of returning the drafts. But the Bank's practice in retaining drafts of other meat packers until DaFran authorized payment does not define the Bank's duty to plaintiff with respect to the drafts it submitted for collection. The Bank's duty to act "seasonably" is defined as follows:

"A collecting bank taking proper action before its midnight deadline following receipt of an item, notice or payment acts seasonably; taking proper action within a reasonably longer time may be seasonable but the bank has the burden of so ...

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