Banque Worms v BankAmerica International

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This case, fonldy known to restitution fans and other obstreporous rascals of the financial services industry as Banque Worms involved a revolving credit facility between one Spedley and the Banque.

Facts

In 1989, Banque Worms informed Spedley that it would not be renewing the revolver and demanded payment of the outstanding balance on April 10, 1989.

On 10 April 1989, at 12:36 am, Spedley instructed its bank, SPI, to wire the total amount due to the Banque at its BankAmerica account. By 3:37 am the same day – not three hours later – Spedley had a change of heart and instructed SPI to stop payment to Banque Worms and instead make a payment in the same amount to National Westminster Bank USA.”

You won’t believe this, but notwithstanding the second instruction SPI went ahead and wired the full amount to BankAmerica. Can you imagine it? About two hours after that SPI informed BankAmerica of the mistake and asked for the money back. Assuming that BankAmerica would send the money back, SPI then sent the exact same amount to National Westminster Bank USA as well.

Issue

Did Banque Worms have to pay the money back?

Banque Worms did not want to. It invoked the famous discharge-for-value defense: it was, it said, a creditor with a right to the payment from Spedley, so since it hadn’t misrepresented to anyone, and had no knowledge of the fact that there had been a mistake, it said it didn’t have to.

SPI argued that it was entitled to a return of the payment under restitutionary principles unless Banque Worms had relied on the payment to its detriment, and it hadn’t.

Decision

Banque Worms got to keep the money.

The New York Court of Appeals considered that section 14 of the Restatement of the Law of Restitution’s description of the discharge-for-value defense as applying in the case. That provides:

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.

Here Banque was owed the money, it got paid it, and wasn’t at fault or to be blamed for SPI’s failure to read its own email (or whatever it was banks used for messages in 1989. It was swayed by the perceived need for certainty in the then-emerging business of electronic funds transfer.

The JC says

The decision is right — Banque Worms should be able to keep the money — but for the wrong reasons, and these have had a ghastly knock-on effect for poor old Citibank some 30 years later.

This case is not about restitution at all: it is about the simple law of contract. Spedley had an obligation to pay, on that day, and its agent discharged that obligation. Spedley might have a complaint against its agent for exceeding its mandate, but this is hardly Banque Worms’ problem. Unlike a crime or a tort, there is no mens rea associated with contractual performance. It doesn’t matter whether I intended to perform the contract; if I — or my agent — did, that is the end of it. There is no equity in denying Banque’s right to keep money I paid it, that I was due to pay it, but that I simply didn’t mean to pay. There is no need to resort even to Banque’s right of banker’s set-off let alone the arcane fiddly area of restitution, albeit that the law does appear to have made an intervention here.

But the extension of restitutionary principles to an environment where there is a governing contract — a place where restitutionary angels should fear to tread —while of no moment in Banque Worms, created a total shitstorm in Citigroup v Brigade Capital Management, since in that case the debt purportedly discharged was not even due at the time of the mistaken payment.

See also

• discharge-for-value defense
• Revolving credit facility