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Sheerbonnet, Ltd. v. American Express Bank

October 24, 1995; as amended May 1, 1996


The opinion of the court was delivered by: Preska, District Judge


Instructed by the Court of Appeals not to abstain from further determinations, Sheerbonnet v. American Express Bank, Ltd., 17 F.3d 46 (2d Cir.), cert. denied, 513 U.S. 813, 115 S.Ct. 67, 130 L.Ed.2d 23 (1994), I return to this case to address the remaining arguments in defendant's renewed motion to dismiss. The facts having been set out in my earlier order, as well as by the Court of Appeals, will only be summarized here. They should be considered retrospectively, in light of the seizure by the Superintendent of Banks of the State of New York ("Superintendent"), as part of a worldwide seizure in July of 1991, of the New York assets of the Bank of Credit and Commerce, S.A. ("BCCI"). The collapse of BCCI and the subsequent seizure of its assets has spawned a legion of lawsuits, of which this is but one.


Plaintiff Sheerbonnet, Ltd. ("Sheerbonnet") is a British trading company which contracted in 1990 to sell troop carriers to the Hady Establishment ("Hady"), a Saudi Arabian company. The carriers were to be used by Allied forces during the Persian Gulf War. For payment, Hady obtained an irrevocable $14,080,000 letter of credit from Banque Scandanave, in Geneva, Switzerland. Ten percent of this price was downpayment, the remainder due after delivery. After receiving the downpayment and fulfilling its obligations under the contract, Sheerbonnet awaited the balance, approximately $12.4 million, due on July 5, 1991.

Sheerbonnet requested that the payment be made through a funds transfer to its account at BCCI in London. Because Sheerbonnet was to be paid in U.S. dollars, Banque Scandanave initiated payment on July 3rd by instructing its correspondent bank in New York, Northern Trust International ("Northern Trust"), to transfer $12.4 million to American Express Bank ("AEB") for credit to BCCI's account at AEB in New York on July 5th.

On the morning of July 5th, regulators in England and Luxembourg suspended the operations of the faltering BCCI. On the same day in the United States, the Federal Reserve Bank advised AEB and other banks of the suspension of BCCI accounts worldwide, including the seizure of BCCI's New York operations. At 9:00 a.m., the Superintendent closed BCCI's New York Agency and announced the seizure of all "business and property" of BCCI in New York.

Shortly thereafter, AEB received by wire from Northern Trust the payment order for the transfer of $12.4 million to the BCCI account at AEB in New York. Knowing the account was frozen, AEB nevertheless credited to it the $12.4 million. Because of the freeze, these assets remained in New York.

After crediting the funds to the BCCI account, AEB asserted its rights over virtually the entire account as an off-set against debts owed to it by the insolvent BCCI. The $12.4 million transferred by wire from Northern Trust on July 5, 1991 remains in AEB's control, none of this money having ever reached Sheerbonnet.

The Superintendent, pursuant to New York Banking Law § 606(4)(a), thereafter began liquidation proceedings to dispose of BCCI's assets in New York. In March of 1992, the Superintendent petitioned the Supreme Court of the State of New York ("Liquidation Court") for an order compelling AEB and several New York banks to turn over any BCCI funds held in their accounts. A settlement agreement was reached, and the Liquidation Court entered a Turnover Order on April 27, 1992 instructing the banks to cede BCCI funds to the Superintendent, less set-offs claimed by the banks. Upon remittance, the Turnover Order provided that the banks would be "discharged from liability with respect to claims for funds of BCCI, S.A. located in New York." Having already claimed the BCCI London account as a set-off, AEB did not turn over any funds to the Superintendent.

In September of 1992, Sheerbonnet commenced suit against AEB in this Court. After motion by the defendant, I abstained from the case under the federal abstention doctrine enunciated by the Supreme Court in Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943). That order was reversed by the Court of Appeals, and defendant now renews its motion to dismiss.


AEB has moved to dismiss the complaint on three grounds: (1) that Sheerbonnet has failed to state a claim upon which relief can be granted, under Fed.R.Civ.P. 12(b)(6); (2) that the claim is barred by a previous order of the Liquidation Court; and (3) that Sheerbonnet has failed to join an indispensable party, under Fed.R.Civ.P. 19. I will address these arguments in order. For the reasons set forth, I find each argument to be unpersuasive.

I. Failure to State a Claim

AEB has offered two reasons why Sheerbonnet's claim fails to state a legally cognizable claim. The first is that Article 4–A of the New York Uniform Commercial Code provides the exclusive remedy for the type of injury alleged, and the complaint not only ignores Article 4–A but is inconsistent with several of its provisions. The question of the exclusivity of Article 4–A as a whole, or the preclusive effect of any of its parts, has yet to be directly addressed in this Circuit. The second reason offered by AEB is that Sheerbonnet's common law claims, even if not excluded by Article 4–A, are inadequate as a matter of law. Neither position is supportable.

A. NY—UCC Art. 4–A Does Not Bar Sheerbonnet's Claim

Effective as of January 1, 1991, Article 4–A is the latest addition to New York's Uniform Commercial Code. Its exact contours, its reach, and the implications of its various provisions have not yet been tested in state or federal courts. The provisions of Article 4–A are dense, and a preliminary discussion of their subject matter is helpful before addressing AEB's first argument for dismissal, grounded as it is on the purpose and scope of the provisions. Article 4–A governs "funds transfers" or "wire transfers." N.Y. U.C.C. § 4–A–102 (McKinney 1991). A by-product of new communications technology, funds transfers are a specialized "method of payment in which the person making the payment ('the originator') directly transmits an instruction to a bank either to make payment to the person receiving payment ('the beneficiary') or to instruct some other bank to make payment to the beneficiary." N.Y. U.C.C. § 4–A–104, Official Comment, at p. 561. A funds transfer is initiated by a "payment order," which is an instruction from the person making the payment to a "receiving" or "intermediary" bank to transfer the funds to the bank account of the beneficiary, normally in the "beneficiary's bank." N.Y. U.C.C. § 4–A–103. A payment order may pass through several banks on its route from the sender, or originator, to the beneficiary. A payment order must be for a fixed or determinable sum, must not state a condition for payment to the beneficiary other than time, must require the receiving bank to be reimbursed by debiting or otherwise receiving payment from the originator, and must be communicated directly to the receiving bank (as opposed to the originator's bank). See id. Furthermore,

payment by the originator to the beneficiary is accomplished by providing to the beneficiary the obligation of the beneficiary's bank to pay. Since this obligation arises when the beneficiary's bank accepts a payment order, the originator pays the beneficiary at the time of acceptance and in the amount of the payment order accepted."

N.Y. U.C.C. § 4–A–406, Official Comments, at p. 623.

Most often, funds transfers are made to discharge an underlying payment obligation which arose through earlier commercial dealings between the originator ( e.g., a purchaser of goods or services) and the beneficiary ( e.g., a provider of goods or services). Insofar as they facilitate the efficient, high-speed, low-cost, national and international transfer of huge sums of money, usually between sophisticated institutional parties, funds transfers have become an integral component of large business transactions.*fn1

1. Article 4–A is not Exclusive

Article 4–A responded to the growing use of funds transactions and the absence of a "comprehensive body of law—statutory or judicial—that defined the juridical nature of a funds transfer or the rights and obligations flowing from payment orders." N.Y. U.C.C. § 4–A–102, Official Comment, at p. 559. The pastiche of laws—statutory, administrative and judicial—applied to funds transfers prior to Art. 4–A was found to be unsatisfactory. See id.

The drafting committee made "a deliberate decision ... to use precise and detailed rules to assign responsibility, define behavioral norms, allocate risks and establish limits on liability, rather than rely on broadly stated, flexible principles." Id. AEB relies heavily on passages selected from the official commentary to support its argument that Article 4–A is the exclusive remedy for claims like Sheerbonnet's arising out of funds transfers:

In the drafting of Article 4A, a deliberate decision was made to write on a clean slate and to treat a funds transfer as a unique method of payment to be governed by unique rules that address the particular issues raised by this method of payment....

... The[se] rules ... represent a careful and delicate balancing of [competing] interests and are intended to be the exclusive means of determining the rights, duties and liabilities of the affected parties in any situation covered by particular provisions of the Article. Consequently, resort to principles of law or equity outside of Article 4A is not appropriate to create rights, duties and liabilities inconsistent with those stated in this Article.

N.Y. U.C.C. § 4–A–102, Official Comments, p. 559.

These passages are the foundation for AEB's conclusion that "[b]ecause Sheerbonnet has not alleged that AEB violated any provision of Article 4–A, the Complaint has failed to state a cognizable cause of action and should be dismissed." Defendant's Memorandum of Law in Support of Renewed Motion to Dismiss, at 11. AEB's conclusion is unjustified for several reasons.

On their face, the above passages fail to establish a legislative intent to preclude any and all funds transfer actions not based on Article 4–A. A desire to start on a "clean slate" implies only that in drafting the Article, the legislature was neither borrowing from related U.C.C. regulations, such as Article 4 (Bank Deposits and Collections) or Article 3 (Commercial Paper), nor from principles of common law or equity. Clearly, parties whose conflict arises out of a funds transfer should look first and foremost to Article 4–A for guidance in bringing and resolving their claims, but the article has not completely eclipsed the applicability of common law in the area.*fn2 The exclusivity of Article 4–A is deliberately restricted to "any situation covered by particular provisions of the Article." Conversely, situations not covered are not the exclusive province of the Article. The legislative intent reflected here is that carefully drafted provisions, designed to bring uniformity, predictability, and finality to an increasingly important area of commercial law, are not be side-stepped when convenient by reference to other sources of law. But where the ...

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