Worms v. BankAmerica International
570 N.E.2d 189, 77 N.Y.2d 362, 568 N.Y.S.2d 541 (1991)
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Rule of Law:
New York law applies the 'discharge for value' rule to mistaken electronic wire transfers, allowing a creditor-beneficiary to retain funds mistakenly received in discharge of a debt, even without demonstrating detrimental reliance, if the beneficiary made no misrepresentation and had no notice of the transferor's mistake.
Facts:
- On April 10, 1989, Spedley Securities, an Australian corporation, instructed Security Pacific International Bank (Security Pacific) to electronically transfer $1,974,267.97 to Banque Worms, a French Bank, to pay a debt under a revolving credit agreement.
- A few hours later, Spedley, by a second telex, directed Security Pacific to stop payment to Banque Worms and instead transfer the same amount to National Westminster Bank USA (Natwest USA).
- Despite having received Spedley's second telex canceling the payment to Banque Worms, Security Pacific mistakenly transferred $1,974,267.97 into Banque Worms’ account at BankAmerica International.
- That same afternoon, Security Pacific also executed Spedley’s second payment order, transferring $1,974,267.97 to Natwest USA, which resulted in Spedley's account at Security Pacific being debited twice and becoming overdrawn.
- Security Pacific requested BankAmerica to return the funds mistakenly transferred to Banque Worms, and BankAmerica agreed after Security Pacific provided an indemnity.
- BankAmerica returned the funds to Security Pacific, but Banque Worms refused BankAmerica’s request to debit its account to reflect the return of the funds.
- BankAmerica then called upon Security Pacific to perform under the indemnity, requiring Security Pacific to return the funds to BankAmerica.
- Security Pacific's attempt to recover funds from Spedley to cover this indemnity was unsuccessful because Spedley had entered into involuntary liquidation.
Procedural Posture:
- Banque Worms brought suit against BankAmerica in the United States District Court for the Southern District of New York.
- BankAmerica instituted a third-party action against Security Pacific for return of the funds.
- Security Pacific counterclaimed against Banque Worms seeking a declaration that neither Banque Worms nor BankAmerica were entitled to the funds.
- Eventually, Security Pacific returned the funds to BankAmerica, BankAmerica recredited Banque Worms’ account, and BankAmerica was voluntarily dismissed from the case, leaving Banque Worms and Security Pacific as the sole contestants.
- 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.
- The Second Circuit certified a question to the New York Court of Appeals, inquiring which rule (discharge for value or mistake of fact/detrimental reliance) New York would apply to this mistaken wire transfer.
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Issue:
Does New York law apply the 'discharge for value' rule or the 'mistake of fact' rule to a concededly mistaken electronic wire transfer made by a transferor to a creditor-beneficiary of the originator?
Opinions:
Majority - Alexander, J.
Yes, New York law applies the 'discharge for value' rule to the circumstances of this case, thus entitling Banque Worms to retain the funds mistakenly transferred without the necessity of demonstrating detrimental reliance. The court recognized New York's historical application of the 'mistake of fact' doctrine, which generally allowed recovery of mistaken payments unless the recipient detrimentally relied. However, it noted that existing rules inadequately addressed the unique problems of electronic fund transfers, leading to the development of UCC Article 4A. While Article 4A was not retroactive, its legislative history and policy considerations, particularly the paramount goal of finality in business transactions, strongly informed the court's decision. The 'discharge for value' rule (Restatement of Restitution § 14) is consistent with this policy, holding that a creditor who receives funds in discharge of a debt from a third party by mistake is not obligated to make restitution if they made no misrepresentation and had no notice of the transferor's mistake. The court found that Banque Worms, as a creditor of Spedley, was entitled to the funds and was unaware of Security Pacific's error. Applying this rule ensures certainty for beneficiaries in high-volume, low-cost wire transactions and aligns with Article 4A's expectation that risks are mitigated through commercially reasonable security procedures by the transferor bank.
Analysis:
This case is highly significant as it firmly establishes the 'discharge for value' rule as the operative legal principle for mistaken electronic funds transfers in New York, distinguishing it from the traditional 'mistake of fact' rule. The ruling underscores the unique legal treatment necessitated by the speed and volume of modern wire transactions, prioritizing finality and certainty in commercial dealings, consistent with the policy goals of UCC Article 4A. This decision provides predictability for financial institutions and beneficiaries, effectively placing the risk of internal processing errors onto the transferring bank, absent recipient misrepresentation or notice of the mistake, and highlights the shift in legal analysis for digital payment systems.
