Banque Worms v. BankAmerica Intern.

• Decision Date: 12 February 1991
• Citation: 77 N.Y.2d 362,570 N.E.2d 189,568 N.Y.S.2d 541
• Parties: , 570 N.E.2d 189, 59 USLW 2515, 13 UCC Rep.Serv.2d 657 BANQUE WORMS, Plaintiff, v. BANKAMERICA INTERNATIONAL, Defendant and Third-Party Plaintiff. Security Pacific International Bank, Third-Party Defendant.
• Court: New York Court of Appeals Court of Appeals

Page 541

568 N.Y.S.2d 541

77 N.Y.2d 362, 570 N.E.2d 189, 59 USLW 2515,

13 UCC Rep.Serv.2d 657

BANQUE WORMS, Plaintiff, v. BANKAMERICA INTERNATIONAL, Defendant and Third-Party Plaintiff Security Pacific International Bank, Third-Party Defendant.

Court of Appeals of New York.

Feb. 12, 1991.

J. Portis Hicks, Gregg J. Borri and E. Allan Farnsworth, New York City, for plaintiff.

Sarah L. Reid and Alan R. Kusinitz, New York City, for third-party defendant.

OPINION OF THE COURT

ALEXANDER, Judge.

On April 10, 1989, Security Pacific International Bank (Security Pacific), a Federally chartered banking corporation with offices in New York City, mistakenly wired $1,974,267.97 on behalf of Spedley Securities (Spedley), an Australian corporation, into the account of Banque Worms, a French Bank, maintained with BankAmerica International (BankAmerica), another Federally chartered bank with New York offices. Initially intending to make payment on its debt to Banque Worms under a revolving credit agreement, Spedley instructed Security Pacific, which routinely effected wire transfers for Spedley, to electronically transfer funds from Security Pacific to Banque Worms' account at BankAmerica.

A few hours after directing this wire transfer, Spedley, by a second telex, directed Security Pacific to stop payment to Banque Worms and to make payment instead to National Westminster Bank USA (Natwest USA) for the same amount. At the time Security Pacific received the telexes, Spedley had a credit balance of only $84,500 in its account at Security Pacific, but later that morning, Security Pacific received additional funds sufficient to cover the transaction and then began to execute the transaction. However, in mistaken disregard of Spedley's second telex canceling the wire transfer to Banque Worms, Security Pacific transferred the funds into Banque Worms' account at BankAmerica. The funds were credited to the account after Banque Worms was notified through the Clearing House Interbank Payment System (CHIPS) that the funds had been received. That afternoon, Security Pacific executed Spedley's second payment order and transferred $1,974,267.97 to Natwest USA. Spedley's account at Security Pacific was debited twice to record both wire transfers thus producing an overdraft.

Meanwhile, at Security Pacific's request made prior to the transfer to Natwest USA, BankAmerica agreed to return the funds mistakenly transferred, provided Security Pacific furnished a United States Council on International Banking, Inc. (CIB) indemnity. The indemnity was furnished and the funds returned to Security Pacific on the following day. Banque Worms, however, refused BankAmerica's request that it consent to its account being debited to reflect the return of the funds. Consequently BankAmerica called upon Security Pacific to perform pursuant to the CIB indemnity and return the funds. Security Pacific's attempt to obtain funds from Spedley to cover this indemnity was unavailing because by that time, Spedley had entered into involuntary liquidation.

Banque Worms brought suit against BankAmerica in the United States District Court for the Southern District of New York seeking to compel BankAmerica to recredit $1,974,267.97 to Banque Worms' account. BankAmerica instituted a third-party action against Security Pacific for return of the funds, and Security Pacific counterclaimed against Banque Worms seeking a declaration that neither Banque Worms nor BankAmerica were entitled to the $1,974,267.97. Eventually, for reasons not here pertinent, Security Pacific returned the funds to BankAmerica, BankAmerica recredited Banque Worms' account and was voluntarily dismissed from the case leaving only Banque Worms and Security Pacific as the sole contestants seeking entitlement to the $1,974,267.97.

On their respective motion and cross motion for summary judgment, the District Court, applying the "discharge for value" rule, granted judgment for Banque Worms. Security Pacific appealed to the United States Court of Appeals for the Second Circuit, arguing that New York neither recognized nor applied the "discharge for value" rule in situations such as this; that the controlling rule under New York law was the "mistake of fact" rule pursuant to which, in order to be entitled to retain the mistakenly transferred funds, Banque Worms was required to demonstrate detrimental reliance. The case is before us upon a certified question from the Second Circuit (see, section 500.17 of the Court of Appeals Rules of Practice [22 NYCRR] inquiring "[w]hether in this case, where a concededly mistaken wire transfer by [Security Pacific] was made to [Banque Worms], a creditor of Spedley, New York would apply the 'Discharge for Value' rule as set forth at section 14 of the Restatement of Restitution or, in the alternative, whether in this case New York would apply the rule that holds that money paid under a mistake may be recovered, unless the payment has caused such a change in the position of the receiving party that it would be unjust to require the party to refund."

For the reasons that follow, we conclude that, under the circumstances of this case, the "discharge for value" rule should be applied, thus entitling Banque Worms to retain the funds mistakenly transferred without the necessity of demonstrating detrimental reliance.

I

A

In the area of restitution, New York has long recognized the rule that "if A pays money to B upon the erroneous assumption of the former that he is indebted to the latter, an action may be maintained for its recovery. The reason for the rule is obvious. Since A was mistaken in the assumption that he was indebted to B, the latter is not entitled to retain the money acquired by the mistake of the former, even though the mistake is the result of negligence." (Ball v. Shepard, 202 N.Y. 247, 253, 95 N.E. 719.) This rule has been applied where the cause of action has been denominated as one for money had and received (Parsa v. State of New York, 64 N.Y.2d 143, 148, 485 N.Y.S.2d 27, 474 N.E.2d 235), for unjust enrichment or restitution (Paramount Film Distrib. Corp. v. State of New York, 30 N.Y.2d 415, 421, 334 N.Y.S.2d 388, 285 N.E.2d 695), or upon a theory of quasi contract (Miller v. Schloss, 218 N.Y. 400, 113 N.E. 337). Where, however, the receiving party has changed its position to its detriment in reliance upon the mistake so that requiring that it refund the money paid would be "unfair," recovery has been denied (Paramount Film Distrib. Corp. v. State of New York, supra, 30 N.Y.2d at 422, 334 N.Y.S.2d 388, 285 N.E.2d 695; Ball v. Shepard, supra, 202 N.Y. at 254, 95 N.E. 719).

This rule has evolved into the "mistake of fact" doctrine, in which detrimental reliance is a requisite factor, and which provides that "money paid under a mistake of fact may be recovered back, however negligent the party paying may have been in making the mistake, unless the payment has caused such a change in the position of the other party that it would be unjust to require him to refund." (National Bank v. National Mechanics' Banking Assn., 55 N.Y. 211, 213; see also, Hathaway v. County of Delaware, 185 N.Y. 368, 78 N.E. 153; Mayer v. Mayor of City of N.Y., 63 N.Y. 455, 457 ["general rule that money paid under a mistake of material fact may be recovered back * * * is subject to the qualification that the payment cannot be recalled when the position of the party receiving it has been changed in consequence of the payment, and it would be inequitable to allow a recovery."].)

The Restatement of Restitution, on the other hand, has established the "discharge for value" rule which 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 interests or duties, if the transferee made no misrepresentation and did not have notice of the transferor's mistake" (Restatement of Restitution § 14[1].

The question as to which of these divergent rules New York will apply to electronic fund transfers divides the parties and prompts the certified question from the Second Circuit. Security Pacific argues that New York has rejected the "discharge for value" rule and has required that detrimental reliance under the "mistake of fact" rule be demonstrated in all cases other than where the mistake was induced by fraud. Banque Worms, on the other hand, invokes the "discharge for value" rule, arguing that because it is a creditor of Spedley and had no knowledge that the wire transfer was erroneous, it is entitled to keep the funds. It points out, as indicated by the official comment to section 14(1) of the Restatement of Restitution, that the "discharge for value" rule is simply a "specific application of the underlying principle of bona fide purchase" set forth in section 13 of the Restatement (Restatement of Restitution § 14, comment a ).

Banque Worms cites to various decisions of New York courts in support of its contention that New York has adopted and applied the "discharge for value" rule (see, e.g., Ball v. Shepard, 202 N.Y. 247, 95 N.E. 719, supra; Consolidated Natl. Bank v. First Natl. Bank, 199 N.Y. 516, 92 N.E. 1081, affg. 129 App.Div. 538, 114 N.Y.S. 308; Oddie v. National City Bank, 45 N.Y. 735). Indeed, both parties rely to a significant degree upon Ball v. Shepard in support of their respective positions. Security Pacific relies upon the Court's observation in the first of two classes of cases discussed, that "the mistake of fact is usually one which arises inter partes, and in order to justify recovery in any such case it must appear that the defendant was not, in the first instance, entitled to receive the money; and that his circumstances have not been so changed through its receipt as to render it unjust to compel him to refund." (202 N.Y. at 256, ...