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Indyk v. Habib Bank Limited

November 29, 1982


Appeal and cross-appeal from a judgment of the United States District Court for the Southern District of New York (Griesa, J ) granting Plaintiffs-Appellees-Appellants damages of $771,852.40 resulting from Habib Bank Limited's (Defendant-Appellant-Appellee) refusal to honor a cashier's check. Affirmed in part, reversed in part.

Author: Cardamone



Circuit Judges.

CARDAMONE, Circuit Judge:

There are two issues involved in this appeal; both are governed by New York law. The first is whether a party to whom a bank's postdated cashier's check is delivered takes the check as a holder in due course; we hold that under New York law it may. The second is whether the bank which issued the cashier's check may properly assert a set-off to the amount it owes based upon a theory of unjust enrichment; we hold that under New York law applied to the facts in this case, it may not.

On February 4, 1980 plaintiffs Evelyn and Leo Indyk contracted to sell to Dome Investment Company (Dome) 100 percent of the shares of Monroe Contract Corporation (Monroe), a Pennsylvania coal mining firm, for one million dollars. The closing occurred on February 6, 1980 in the offices of Equibank in White Oak, Pennsylvania. Prior to that date Dome had made a down payment to the Indyks of $157,765. At the closing plaintiffs received, as payment on the balance of the purchase price, a cashier's check in the amount of $842,243.83 drawn on defendant Habib Bank Limited (Habib or Bank). The cashier's check was postdated June 4, 1980 and signed by Habib Assistant Vice President S. Hassan Ahmed. When plaintiffs presented the cashier's check on June 4, 1980 at Habib's New York City office, the Bank refused to pay claiming that the check was issued without either authority or consideration.

After Habib's dishonor of the check, plaintiffs entered into a second agreement with the purchasers (Dome and its principals David James and Leslie Ray Smith) who agreed to pay the Indyks the unpaid balance of the purchase price plus interest. In exchange for this promise the Indyks permitted Dome to continue operating Monroe and agreed to transfer the Monroe stock to Dome upon completion of the monthly payments. Under this second agreement the Indyks had received payments from Dome which by September 1980 amounted to $171,067. At that point Dome defaulted and Monroe went bankrupt. The Indyks subsequently brought a diversity action in the United States District Court for the Southern District of New York against Habib on the dishonored cashier's check.

Following a bench trial before Judge Thomas P. Griesa, the court below held that Ahmed's signature on the check was authorized since he was an agent with apparent authority, and that the Indyks were "holders in due course" of the Habib check and took it free of Habib's asserted defense of lack of consideration. Judgment was entered in favor of the Indyks against Habib in the amount of $671,176 plus prejudgment interest and costs. The $671,176 represented the difference between the amount of the check, $842,243, and the installment payments of $171,067 received by the Indyks from Dome which the trial court credited to the Bank as an offset against the amount it owed.

Both parties appeal. Habib claims that the trial court erred in holding that the Indyks were holders in due course who took the postdated check free of Habib's defense of lack of consideration. The Indyks cross-appeal from that portion of the trial court's judgment which allowed Habib to offset the $171,067 received by the Indyks from Dome after Habib's dishonor of the check.


We turn first to the issue involving the postdated cashier's check. The Uniform Commercial Code, N.Y.U.C.C. § 3-302(1) (McKinney 1964), provides that "[a] holder in due course is a holder who takes the instrument (a) for value; and (b) in good faith; and (c) without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person." The effect of achieving holder in due course status is of course that the holder takes the instrument free from certain defenses, including the defense asserted here -- lack of consideration. See N.Y.U.C.C. § 3-305(2) (McKinney 1964).

Conceding that the Indyks ttok the cashier's check for value and in good faith, Habib asserts that the Indyks were not holders in due course because they took the postdated cashier's check with notice that defenses against the check existed. Specifically, Habib claims that the Indyks had notice because: they were aware that the cashier's check was postdated; their representative at Equibank, Mrs. Zell, expressed concern over the postdating and telephoned Mr. Ahmed at Habib to verify that the check was proper; banks normally do not use postdated cashier's checks; and the Indyks knew that Dome could not raise the necessary cash for the purchase of Dome's stock until June 4, 1980 and, therefore, at least impliedly knew that Dome did not give any consideration for the cashier's check. We find Habib's contention that the Indyks took the check with notice unpersuasive.

Under New York law notice of defenses means actual, subjective knowledge of defenses. See United States v. Novsam Realty Corp., 125 F.2d 456, 457 (2d Cir. 1942); Chemical Bank v. Haskell, 51 N.Y.2d 85, 92-93, 432 N.Y.S.2d 478, 411 N.E.2d 1339 (1980). Notice is not shown merely by the existence of suspicious circumstances. Chemical Bank, 51 N.Y.2d at 93. There is no evidence in the record before us that the Indyks had actual, subjective knowledge that the Habib check was issued without consideration or subject to any defenses. The Indyks testified that they had never dealt with or even heard of Habib prior to the closing on February 6, 1980. The check, on its face, was conceded to be a regular Habib Bank cashier's check properly made out and signed by the Assistant Vice President in charge of the bank department that issued cashier's checks. The post-dating of the check did cause the Indyks' banker some concern, which prompted her to telephone Mr. Ahmed at the Habib bank. Mrs. Zell was advised that the check had been properly issued and authorized. She reported this information to the plaintiffs. Moreover, the postdating of the check alone was not legally sufficient to give the Indyks notice of a defense.See N.Y.U.C.C. § 3-304(4) (a) (McKinney 1964). While postdated cashier's checks are not normally used by banks, the Indyks did not know and had no ...

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