Article

Factual Summary: Issuer maintained an account with Reimbursing Bank's New York branch. On the application of Solo Industries, Issuer opened a letter of credit in favor of English Beneficiary, in the amount of US$1,887,100 payable 180 days after negotiation, to be confirmed by Confirmer's London branch. Confirmer was authorized by Issuer to claim reimbursement from Issuer's US account with Reimbursing Bank.

Several days later, Confirmer accepted documents presented to it by Beneficiary, immediately discounted payment to Beneficiary in the amount of US$1,821,215.31, and forwarded the documents to Issuer. On receiving the documents, Issuer informed Confirmer that they were in order, and authorized Confirmer to claim reimbursement at maturity from Reimbursing Bank. Issuer also informed Reimbursing Bank that it was authorized to reimburse Confirmer on maturity.

A month later, however, and before maturity, Issuer cancelled its reimbursement authorization and sought and received acknowledgment from Reimbursing Bank that the authorization was cancelled. Issuer informed Confirmer that the LC was under investigation and requested Confirmer to stop payment until further notice. However, maintaining that it was entitled to claim reimbursement since it had discounted the LC, Confirmer sought repayment from Reimbursing Bank. Due to a procedural error, Reimbursing Bank paid Confirmer the requested sum despite the cancellation of the reimbursing authority, and debited Issuer's account in that amount. When Issuer discovered the error and protested, Reimbursing Bank recredited Issuer's account and sought a refund of the sum from Confirmer. Confirmer refused.

Mediation between the parties was unsuccessful, and Reimbursing Bank brought an action against Issuer and Confirmer to recover the amount paid. On motion for summary judgment, the trial court granted summary judgment in favor of Issuer, but denied summary judgment to Reimbursing Bank.

On appeal, the court set aside the orders granting summary judgment to Issuer and affirmed the denial of summary judgment as to the dispute between Reimbursing Bank and Confirmer.

Legal Analysis:

1. Mistake of Fact; Reimbursement: Reimbursing Bank claimed that due to its mistaken payment to Confirmer it was entitled to recover the payment to Confirmer as a mistake of fact. Alternatively Reimbursing Bank claimed it was entitled to recover from Issuer if it was not entitled to recover from Confirmer or if the payment to Confirmer discharged any liability of Issuer under the LC.

Confirmer argued that it had accepted the payment from Reimbursing Bank in discharge of a debt by Issuer owed to it under the LC in good faith and without knowledge of Reimbursing Bank's mistake or Issuer's revocation of Reimbursing Bank's authority to make payment. It argued that it was therefore not obligated to return the mistaken payment.

Issuer argued that it was not liable to Reimbursing Bank because the payment was made without its authority and Reimbursing Bank recredited its account with the amount of the payment after Issuer protested that the initial debit on its account was unauthorized.

2. Discharge for Value Defense: Confirmer argued that the question of whether or not it should have to reimburse Reimbursing Bank was governed by New York law. Under New York law the "discharge for value defense" would provide that:

if the recipient of a mistaken payment (here [Confirmer]) accepts it in discharge of a debt owed to it (here by [Issuer]) in good faith and without notice of the mistake, then the mistaken payer (here [Reimbursing Bank]) is not entitled to claim repayment.

Reimbursing Bank and Issuer argued that a valid discharge under the law of England required a discharge of the debt owed by Confirmer to Issuer. Therefore the payment by Reimbursing Bank to Confirmer, without Issuer's authority or ratification, does not discharge the liability of Issuer to Reimbursing Bank. The defense of discharge for value would fail and Reimbursing Bank could recover from Confirmer.

Confirmer, however, argued that under New York law such a discharge is not necessary. If such is the case then Reimbursing Bank may be entitled to recover from Issuer on the basis of the New York law of subrogation.

The appellate court summarized the trial court's decision, explaining:

The judge held that the existence of the discharge for value defence gave rise to issues of fact: in particular (a) whether it is necessary for the defence to be made out that the receipt of the mistaken payment by [Confirmer] should in fact discharge the indebtedness owed to the recipient and (b) whether or not [Confimer] knew or had noticed that the payment was made by mistake.

The appellate court found that this issue was one for trial and not appropriate for summary disposition, affirming the denial of summary judgment as between Reimbursing Bank and Confirmer.

3. Choice of Law; Unjust Enrichment: Reimbursing Bank initially relied on English law in its motions for summary judgment against Confirmer and alternatively against Issuer. When Confirmer asserted in its defense that any liability it might have to Reimbursing Bank was governed by New York law and that under New York law a discharge for value defense was available to it, Reimbursing Bank countered that if Confirmer is protected by the discharge for value defense then Issuer is liable to make repayment to Reimbursing Bank, placing its claim under English law and New York law in the alternative.

The trial court accepted Confirmer's argument that under English conflicts of laws principles New York law should be applied to determine how to treat Reimbursing Bank's accidental payment to Confirmer as the place where the claimed enrichment occurred. However, it maintained that English law governed the claims of Reimbursing Bank against Issuer. The Appellate Court, however, found that:

it is at least arguable that if, contrary to the case for both [Reimbursing Bank] and [Issuer], [Confirmer]'s alternative formulation of the defence succeeds, there will be evidence of New York law available to [Reimbursing Bank] based on ... subrogation ... to the effect that [Reimbursing Bank] is entitled to recover from [Issuer] by exercising a right of subrogation . ...

In my opinion, [Reimbursing Bank] should be entitled to explore the position under New York law at the trial both as between itself and [Confirmer] and between itself and [Issuer].

The Appellate Court, in remanding the case for trial, reversed the summary judgment granted in favor of Issuer against Reimbursing Bank and concluded that:

I do not think that [Reimbursing Bank]'s claim against [Issuer] can fairly be regarded as fanciful or as Lord Woolf put it in Swain v Hillman [2001] 1 All ER 91 "not fit for trial at all". I do not regard [Reimbursing Bank]'s case that, if English law applies, it is entitled to recover from [Issuer] on the grounds of unjust enrichment as fanciful. The same is true of its submission that [Reimbursing Bank]'s right to recover, if any, is governed by New York law and that under New York law it is subrogated to [Confirmer]'s claim against [Issuer].

For these reasons, I would allow the appeal and permit [Reimbursing Bank] to proceed to trial to enable it to advance a claim against [Issuer] should its claim against [Confirmer] fail. ...

[LHD]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.