Factual Summary: To assure that assets remained in the jurisdiction pending an action for $7,500,000 against respondent bank for failure to honor guarantees of promissory notes, a pre judgment attachment order was issued at the request of the payee.

Subsequently, a paying bank under a letter of credit requested its issuer to effect reimbursement to a countertrade account it held with the respondent bank. On 23 and 27 September, however, the paying bank revised its instructions and requested that the reimbursement be credited to its countertrade account with a Jordanian bank. The issuer's wire transfer department did not receive the revised instructions; and, on 27 September, sent the reimbursement through respondent's at a New York bank which had been served with the above attachment order.

When informed of this routing, the paying bank objected and the issuer instructed the respondent bank to forward the payment to the Jordanian bank. The respondent bank replied that it could not forward the reimbursement because it was in liquidation proceedings and no longer engaged in banking operations. As such, the respondent bank suggested that the issuer "delete" the pay order and transfer the funds directly to the Jordanian bank. The issuer then contacted the New York bank that held the funds, informed it that the payment was incorrect, and directed it to forward the funds to the Jordanian bank. The New York bank answered that it was unable to do so because such a transfer had not been authorized by the respondent bank. The issuer then contacted the respondent bank and requested that it communicate its authorization of the transfer to the New York bank. The respondent bank replied by sending the issuer copies of a telex to the New York bank which authorized the transfer.

The issuer, once again, contacted the New York bank, informed it of the respondent bank's authorization, and again requested that the transfer be effected. In reply, the New York bank informed the issuer that it could not effect the transfer because of the attachment order.

Subsequently, the issuer reimbursed the paying bank directly; and on 29 March, the New York bank turned over the funds subject to the attachment order (which included the reimbursement payment) to the sheriff. The issuer subsequently petitioned the court and sought a determination of its rights to the reimbursement funds and an order to return those funds.

Four years later, the payee and respondent bank settled their dispute, but the court directed the clerk to retain sufficient amounts to satisfy the issuer's claim to the reimbursement funds. The payee objected.

Legal Analysis:

1. Attachment of Funds: N.Y. C.P.L.R. - 6221 provides a mechanism for those who claim an interest in property subject to attachment to bring a special proceeding to have their rights determined. The payee argued that - 6221 is limited to traceable property and that deposited funds do not constitute a specific res. The court rejected the argument, noting that deposited funds could be attached under the statutory scheme, and, therefore, could be returned to their rightful owner under - 6221.

2. Mistake of Fact: The issuer argued that the transfer to the respondent bank was a mistake of fact and that to allow the payee to keep the money would constitute unjust enrichment. The "mistake of fact" doctrine provides that "a party who pays money, under a mistake of fact, to one who is not entitled to it should, in equity and good conscience, be permitted to recover it back even if the mistake is due to the negligence of the payor."

3. Mistake of Fact: Discharge for Value: The payee argued that the issuer, like itself, was a creditor of the respondent bank and should pursue a claim directly against the respondent bank. In so arguing, the payee argued that the "discharge for value" rule applied to the case. That rule provides that,

"[a] creditor of another or one having a lien on another's property who has received from a third person any benefit in discharge of the debt or lien, is under no duty to make restitution therefor, although the discharge was given by mistake of the transferor as to his interest or duties, if the transferee made no representation and did not have notice of the transferor's mistake."

The court ruled that the mistake of fact doctrine applied to the case because an attachment is not a "lien", and, therefor, does not fall under the discharge for value rule. The court explained that the attachment only gave the payee first "dibs" on the funds in the account should it win its lawsuit on the merits. The attachment only ripens into a lien once the plaintiff has successfully proven the merits of its case. At the time of the mistaken transfer, the attachment had not yet ripened into a lien. Additionally the court noted that the funds in dispute remained in the possession of the Marshal. As such, the transfer did not benefit the payee or discharge any lien or debt as required by the discharge for value rule. And finally the court ruled that the payee was on notice of the mistake because it had not yet received the funds, but was certainly aware of the issuer's claim.

4. Mistake of Fact: Detrimental Reliance: The payee next argued that even should the court apply the mistake in fact rule the issuer was not entitled to the funds because the New York bank had detrimentally changed its position in reliance on the mistaken payment. The court, however rejected this argument by noting that the New York bank had given the funds, not to an innocent third party, but to the court. As such, the New York bank had not detrimentally changed its position and equity required that the funds be returned to the issuer. Accordingly, the court awarded $389,615.67 to the issuer, but declined to award any interest for the over six year period the issuer had to wait to recover its funds because the issuer's own mistake had caused the litigation.



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.