821 F.2d 897 (2nd Cir. 1987), 680, Middle East Banking Co. v. State Street Bank Intern.

Docket Nº:680, 708, Dockets 86-7804, 86-7894.
Citation:821 F.2d 897
Party Name:MIDDLE EAST BANKING COMPANY, Plaintiff-Appellee, Cross-Appellant, v. STATE STREET BANK INTERNATIONAL, Defendant and Third-Party Plaintiff-Appellant, Cross-Appellee, v. CITIBANK, N.A. and Saudi American Bank, Al-Khobar, Third-Party Defendants- Appellees.
Case Date:June 04, 1987
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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Page 897

821 F.2d 897 (2nd Cir. 1987)

MIDDLE EAST BANKING COMPANY, Plaintiff-Appellee, Cross-Appellant,

v.

STATE STREET BANK INTERNATIONAL, Defendant and Third-Party

Plaintiff-Appellant, Cross-Appellee,

v.

CITIBANK, N.A. and Saudi American Bank, Al-Khobar,

Third-Party Defendants- Appellees.

Nos. 680, 708, Dockets 86-7804, 86-7894.

United States Court of Appeals, Second Circuit

June 4, 1987

Argued Jan. 12, 1987.

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D. Richard Funk, Pittsburgh, Pa. (W. Gregg Kerr, Robert C. Zimmer, Eckert, Seamans, Cherin & Mellott, Pittsburgh, Pa., of counsel), for plaintiff-appellee, cross-appellant Middle East Banking Co.

Ira M. Millstein, New York City (Irwin H. Warren, Richard B. Friedman, Weil, Gotshal & Manges, New York City, of counsel), for defendant and third party plaintiff-appellant, cross-appellee State Street Bank Intern.

Henry Harfield, New York City (Donald L. Cuneo, Joseph F. Haggerty, Shearman & Sterling, New York City, of counsel), for

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third party defendant-appellee Citibank, N.A.

Richard F. Lawler, New York City (Michael S. Zetlin, Whitman & Ransom, New York City, of counsel) for third party defendant-appellee Saudi American Bank, Al-Khobar.

John L. Warden, Melanie L. Cyganowski, Gail M. Inaba, Edward F. Duffy, New York City, of counsel, for amici curiae New York Clearing House Ass'n and Council on Intern. Banking, Inc.

Before PRATT, MINER and MAHONEY, Circuit Judges.

MINER, Circuit Judge:

State Street Bank International, defendant and third party plaintiff-appellant, appeals from a judgment entered in the United States District Court for the Southern District of New York (Owen, J.) in favor of plaintiff-appellee Middle East Banking Company ("MEBCO"). MEBCO claimed in the district court that State Street breached its contract of deposit with MEBCO. MEBCO sought recovery of one million dollars transferred by Citibank to MEBCO's account at State Street, which State Street subsequently, and without authorization, returned to Citibank. The district judge awarded MEBCO $536,601.83--an amount representing the total withdrawals MEBCO had honored against the transferred funds, and $144,133.83 in prejudgment interest. MEBCO cross-appeals from the judgment, seeking to recover the full one million dollars it originally claimed.

State Street also appeals from dismissal of its complaint against third party defendants Citibank and Saudi American Bank, Al-Khobar ("SAMBA"). State Street asserted claims for indemnification or contribution, contending that the third party defendants improperly had induced the return of the funds in question through use of interbank electronic funds transfer rules. State Street also asserted claims of tortious conversion against both Citibank and SAMBA, and brought actions for breach of contract, misrepresentation, and money had and received against Citibank. Concluding that no wrongful inducement had occurred, Judge Owen dismissed all third party claims against Citibank and SAMBA.

We affirm as to the finding of State Street's liability to MEBCO and as to the dismissal of the third party complaint. We vacate and remand for recalculation of damages awarded to MEBCO.

I. BACKGROUND

MEBCO is a commercial banking corporation whose principal place of business is Beirut, Lebanon. MEBCO maintains an account at the New York City branch of State Street Bank. At the time this dispute arose, one of MEBCO's clients was Abdullah Saleh Al-Rajhi ("Al-Rajhi"), a Saudi Arabian currency exchange house. Al-Rajhi purchased and sold foreign currency in Lebanon and Saudi Arabia, and it maintained two checking accounts at MEBCO's main office in West Beirut--one in United States dollars, the other in Lebanese pounds. Because MEBCO did not extend overdraft privileges to Al-Rajhi, it required that Al-Rajhi's withdrawals be offset by a corresponding deposit in U.S. dollars. In early June 1982, Al-Rajhi agreed to transfer one million U.S. dollars to MEBCO's New York City account at State Street Bank, ostensibly to have funds available in Beirut to meet local payroll needs in Lebanese currency. In return, MEBCO agreed to credit the equivalent amount in Lebanese pounds to Al-Rajhi's Beirut account.

Pursuant to this agreement, on June 7 Al-Rajhi instructed SAMBA, with whom it maintained an account, to transfer one million dollars to MEBCO's account at State Street. Later that day, SAMBA debited Al-Rajhi's account and cabled instructions to Citibank--SAMBA's correspondent bank in New York City--to forward one million dollars to State Street for MEBCO's account. SAMBA then sent a telex to MEBCO informing it of the transfer orders cabled to Citibank. The following day, June 8, MEBCO sent a telex to SAMBA seeking confirmation of the transfer, to which SAMBA immediately responded affirmatively. MEBCO then sent a telex to State Street asking if it had received the transferred

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funds. State Street responded by cable later that day that no funds had been received. MEBCO, however, did not receive State Street's cable until July 29.

The lengthy delay in MEBCO's receipt of State Street's cable apparently is attributable to the Israeli army's invasion of Lebanon. The ensuing hostilities and street fighting in Beirut resulted in severe disruptions in electrical service, which prevented MEBCO from operating its automatic telex receiving equipment. It appears from the record that MEBCO received no cable traffic relevant to this action until July 29. Notwithstanding the absence of confirmation from State Street, and in contravention of its own policies, on June 9 MEBCO credited Al-Rajhi's account with one million dollars in Lebanese pounds and began to honor withdrawals.

On June 8, however, a short time after SAMBA had confirmed the transfer to MEBCO for a second time, SAMBA received a telex from Al-Rajhi instructing SAMBA either to stop payment of the one million dollars or to retrieve the funds. Pursuant to Al-Rajhi's order, SAMBA telephoned and sent a telex to Citibank's Middle East Department in New York on the morning of June 9, requesting that the payment be stopped. In spite of its assurances to MEBCO the previous day that the transfer had occurred, SAMBA did not notify MEBCO of Al-Rajhi's stop payment order at any time. Although the transfer order had been entered into Citibank's computer, the message had not yet been sent to State Street nor had it been released by Citibank into the Clearing House Interbank Payment System ("CHIPS"); 1 in fact, the payment was not released into CHIPS until mid-afternoon. Therefore, although SAMBA's stop payment order could have been honored at the time it was received, the Citibank employee to whom it was referred mistakenly believed that the transfer to State Street already had occurred. As a result, no attempt was made to prevent the transfer and the payment was released through the CHIPS system later in the afternoon of June 9. Upon receipt of the payment, State Street credited MEBCO's account.

On June 10, the following day, Citibank attempted to retrieve the funds it erroneously transferred over SAMBA's stop payment order by sending a telex to State Street. Citibank informed State Street that the funds had been sent "in error" and extended an offer to indemnify State Street and to "assume all liabilities and responsibilities in accordance with the CIB [Council on International Banking] approved guarantee format." 2 State Street received the telex that afternoon and immediately sent a cable to MEBCO informing it of Citibank's request and seeking authorization to return the funds. Receiving no response, State Street again cabled MEBCO the following day--Friday, June 11. A similar cable was sent to MEBCO on Monday, June 14. MEBCO received none of these messages until July 29.

On June 16, although State Street had received no response to any of its cables to MEBCO, State Street's General Manager, Frank Sebestyen, instructed Ms. Napier of his staff to return the funds to Citibank and to retain the indemnification offered by Citibank in its June 10 telex. Accordingly, Napier debited MEBCO's account by one million dollars and retransferred the funds to Citibank through the CHIPS system. She also sent a cable informing MEBCO of

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the debit, which again was not received until July 29. Citibank received notice that the funds had been returned on June 16 at about 3:45 p.m., and almost immediately sent a telex to SAMBA advising it that SAMBA's account had been recredited. Later that day, however, State Street's Napier made a critical error. In contravention of Sebestyen's instructions, she sent a telex to Citibank that, in addition to confirming the retransfer, released Citibank from its indemnity. By the time Citibank received the release the following morning, Al-Rajhi already had withdrawn the one million dollars from SAMBA. Shortly thereafter, Al-Rajhi became insolvent.

In Beirut, MEBCO had been honoring Al-Rajhi's withdrawals of funds in Lebanese pounds since June 9, and by July 29--the date MEBCO finally received notification of State Street's return of the funds--Al-Rajhi had withdrawn $303,320. Upon notice of State Street's actions, MEBCO immediately protested the unauthorized debit, and demanded restoration of the one million dollars. It nonetheless continued to honor Al-Rajhi's withdrawals until September 4, which by that time had amounted to an additional $89,148. In response to MEBCO's demands, State Street contacted Citibank, and in turn Citibank tried to contact SAMBA and Al-Rajhi. All attempts to secure return of the funds from Al-Rajhi were unsuccessful; Al-Rajhi was by this time mired in bankruptcy proceedings in Saudi Arabia, and its remaining assets were being liquidated under the auspices of the Saudi government.

On November 4, 1982...

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