Discharge-for-value defense
The discharge-for-value defense defeats a claim for unjustified enrichment under New York law where a recipient, without notice of mistake and not having induced the payment, receives funds that discharge a valid debt:
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Negotiation Anatomy™
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“When a beneficiary receives money to which it is entitled and has no knowledge that the money was erroneously wired, the beneficiary should not have to wonder whether it may retain the funds; rather, such a beneficiary should be able to consider the transfer of funds as a final and complete transaction, not subject to revocation.” Banque Worms v Bank America (1991) 570 N.E. 2d 189
This is based on American Law Institute’s[1] 1937 Restatement (First) of Restitution, Section 14 of which 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.”
Note in particular the finding in Citigroup v Brigade Capital Management — which, in our humble opinion, rather mounts the pavements — sidewalks, sorry — and runs down peaceable pedestrians perambulating the common law of contract – that it makes no difference that, at the time of the mistaken payment, the debt in question was not yet due under the contract.
There is no equivalent under the English law of restitution, where an enriched lender has to return the money: Barclays Bank Ltd v WJ Simms. This darkened cranny of the common law was exposed to harsh daylight when Citigroup tripped over it while trying to reclaim half a yard they’d accidentally shelled out to some distressed debt lenders to Revlon in 2020.
It seems to me — for the little that is worth; I am but a traveller in the modern lands — that this discharge for value defense[2] needs to be understood where the payer has a general obligation to pay to the receiver: a trade-creditor relationship; for example. Here, the receiver expects payment soon; perhaps not necessarily today, but within 30 days, and this period is not so much an agreed term of finance but a practical, customary indulgence that merchants allow each other to recognise that account payments go on a cycle, in batches, and it is no enormous deal if one is not paid the instant one delivers a service.
In that case, say a debtor owes a creditor £100, and then pays such a payment, again, sensible practice and custom would be to allow the creditor to treat that amount as satisfying that debt. This is not, really, a defense to an action in restitution so much as the operation of basic principles of set-off. It would be perverse indeed, and frivolous, for a debtor to try to claw back funds it was going to have to pay in the next week or so anyway.
But the court went further than that. It could find no authority to support the argument that the debt needed to be immediately due: it just needed to be a bona fide debt:
“In sum, the court concludes that the recipient of funds need not show that an outstanding debt was “due” when it received the funds in order to invoke the discharge-for-value defense. Instead, it is sufficient for the party invoking the defense to show that, at the time the funds were received, it was a bonafide creditor. Defendants meet that burden here ...”
This, I submit, is on-its-face bonkers. Take the scenario where the creditor and debtor have an agreed term loan payable in, say, 25 years. You know, like a mortgage. Often it will be a condition of the mortgage that the borrower’s salary is paid into an account at the same bank. If the discharge-for-value defense operates as interpreted in Citigroup v Brigade Capital Management, the bank could apply the borrower’s total salary in retirement of the principal on the loan, notwithstanding the principal amortisation schedule in the mortgage loan, and refuse to let the borrower have any money to pay her bills. That is plainly potty.
In any case, I bet Citi wished they were English.