to BPBA as a result of the January 1995 loan was $ 12,637.12.
After the Central Bank began its Intervention, but before the April 19, 1995 set-off, Banco Feigin's Buenos Aires branch sent BPBA a request to transfer $ 245,000 from Banco Feigin's account with BPBA in New York to a Banco Feigin account at BayBank in Boston (the "wire transfer request"). According to BayBank, Banco Feigin intended to use the transferred funds to repay amounts it owed to BayBank. BPBA received the wire transfer request on March 24, 1995, but did not accept the payment order or transfer the funds because of the administrative freeze on Banco Feigin's account and BPBA's then existing but as yet unexercised right of set-off.
In a letter to BPBA dated August 4, 1995, BayBank demanded that BPBA pay it $ 245,000, plus interest, representing the monies not sent on March 24, 1995 to Banco Feigin's BayBank account. In its letter, BayBank stated its intent to initiate legal proceedings if the demand was not met in full by August 31, 1995.
BPBA commenced this action against BayBank in the Supreme Court of the State of New York, County of New York, on September 1, 1995. The case was subsequently removed to this Court based upon the parties' diversity of citizenship under 28 U.S.C. §§ 1332(a)(2) and 1348, and under 12 U.S.C. § 632, since the defendant is a banking corporation organized under the laws of the United States and the lawsuit involves international banking transactions.
In its complaint, plaintiff seeks a declaratory judgment that on April 19, 1995, BPBA had the right to set-off against the funds in Banco Feigin's account at BPBA, and that this right to set-off was superior to any right BayBank may have had as the bank maintaining an account of Banco Feigin to which Banco Feigin had requested its funds be sent. BayBank counterclaims in the amount of $ 245,000 plus interest, alleging BPBA wrongfully converted its money when it refused to execute the wire transfer request. Claiming that the $ 245,000 became its property upon BPBA's receipt of Banco Feigin's wire transfer request, BayBank seeks a declaratory judgment that the set-off exercised by BPBA was unlawful and that BayBank's right to the funds which were the subject of the wire transfer request of Banco Feigin was superior to BPBA's right to such funds.
I. The Standard for Summary Judgment
Summary judgment is appropriate where the moving party has established that "there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Rule 56(c), Fed. R. Civ. P. On a motion for summary judgment, the Court must determine "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). In making this determination, the Court "must view the evidence in the light most favorable to the non-moving party and draw all reasonable inferences in its favor." Consarc Corp. v. Marine Midland Bank, N.A., 996 F.2d 568, 572 (2d Cir. 1993).
Initially, the moving party must show that there is "an absence of evidence to support the non-moving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). Once the moving party has carried its burden under Rule 56, the non-moving party must set forth "specific facts showing that there is a genuine issue for trial." Rule 56(e), Fed. R. Civ. P. The non-moving party is required to introduce evidence beyond the mere pleadings to show that there is an issue of material fact concerning "an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322.
II. N.Y. U.C.C. Article 4-A
Disputes arising from wire transfers are now governed by Article 4A of the Uniform Commercial Code. Article 4A was enacted in the wake of technological advances allowing the electronic transfer of funds, a means by which up to a trillion dollars is shifted daily. Sheerbonnet, Ltd. v. American Express Bank, Ltd., 951 F. Supp. 403, 407 n.1 (S.D.N.Y. 1995). At the time Article 4A was drafted, "there was no 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, p. 559. The statute reflects "[a] deliberate decision . . . to use precise and detailed rules to assign responsibility, define behavioral norms, allocate risks and establish limits on liability, rather than to rely on broadly stated, flexible principles." Id.
The electronic transfer of funds is accomplished through the use of one or more payment orders. A payment order is sent by the "sender" to the "receiving bank," for ultimate payment to the "beneficiary" or the "beneficiary's bank." In the instant case, Banco Feigin is both the sender and the beneficiary, BPBA is the receiving bank, and BayBank is the beneficiary's bank. The first step in a funds transfer is the sender's transmission of a payment order to a receiving bank. Before the transfer proceeds, the receiving bank must accept the sender's payment order.
A. BPBA properly rejected the payment order under N.Y. U.C.C. § 4-A-209(1)
Under § 4-A-209(1), "a receiving bank other than the beneficiary's bank accepts a payment order when it executes the order." This provision has been interpreted to give receiving banks other than the beneficiary's bank general discretion in choosing whether to accept or reject payment orders. Sheerbonnet, 951 F. Supp. at 413. BPBA contends that its refusal to execute the payment order constituted a rejection of the payment order that was within its discretion.
According to BayBank, BPBA does not have absolute discretion in deciding whether to accept or reject payment orders.
BayBank contends that
it can hardly promote the purposes of Article 4-A to equate a general discretion to accept or reject payment orders with a ban on judicial inquiry into the circumstances under which that discretion was exercised and what followed its exercise.
Sheerbonnet, 951 F. Supp. at 411. This Court agrees that receiving banks' exercise of discretion in accepting or rejecting payment orders should not be above judicial scrutiny.
In examining the circumstances under which BPBA rejected the payment order, however, it becomes clear that BPBA's rejection was neither an abuse of discretion nor in bad faith. At the time BPBA rejected the payment order, Banco Feigin's BPBA account -- which consisted solely of proceeds of BPBA's January 1995 loan to Banco Feigin -- was under an administrative freeze, and Banco Feigin's banking activities had been suspended as part of an Intervention by the Central Bank of Argentina. As discussed in Section III infra, BPBA knew that the Intervention gave it an immediate right of set-off under N.Y. Debt. and Cred. Law § 151. Moreover, Banco Feigin's debt to BPBA exceeded the balance in the account. Under those circumstances, it was not unreasonable for BPBA to refuse to wire the entire balance of the account to Banco Feigin's BayBank account. Therefore, BPBA's rejection of the payment order was a proper exercise of its discretion under § 4-A-209.
B. Since BPBA properly rejected the payment order, it incurred no duty to Banco Feigin or BayBank
Liability of receiving banks arises only if the receiving bank accepts a payment order, or if there is an express agreement between the sender and the receiving bank which requires the receiving bank to execute payment orders. Section § 4-A-212, entitled, "Liability and Duty of Receiving Bank Regarding Unaccepted Payment order," provides:
If a receiving bank fails to accept a payment order that it is obliged by express agreement to accept, the bank is liable for breach of the agreement to the extent provided in the agreement or in this Article, but does not otherwise have any duty to accept a payment order. . . . Liability based on acceptance arises only when acceptance occurs as stated in Section 4-A-209.
BPBA incurred no liability since there was no acceptance under § 4-A-209 and there was no agreement between BPBA and Banco Feigin requiring BPBA to accept the payment order. Molloy Aff. P 12.
III. BPBA's set-off was lawful under N.Y. Debtor and Creditor Law § 151
N.Y. Debtor and Creditor Law § 151(a) gives creditors an immediate right to set-off the indebtedness of a debtor, upon "the commencement of any proceeding under any foreign bankruptcy, insolvency, debtor relief or other similar statute or body of law, by or against a [debtor]." The Intervention of Banco Feigin by the Central Bank of Argentina, and the resulting liquidation and sale of Banco Feigin's assets, qualifies as a proceeding similar to one for debtor relief or insolvency under § 151.
According to BayBank, no right of set-off was triggered under § 151. First, BayBank argues that there was no Intervention, since Banco Feigin voluntarily suspended its operations on March 17, 1995. See note 2, supra. That Banco Feigin asked the Central Bank to suspend its operations does not persuade the Court that there was no Intervention or that the Central Bank would not have intervened absent Banco Feigin's request. The several resolutions issued by the Central Bank, id., make clear that Banco Feigin was insolvent at the time of the set-off.
Second, BayBank contends that an Intervention does not constitute an insolvency proceeding for purposes of N.Y. Debt. & Cred. L. § 151. This defies reason. Once Banco Feigin had lost 49% of its deposits, the Central Bank intervened, first suspending Banco Feigin's operations, then revoking its authorization to operate as a bank under Argentine law, and finally, liquidating and selling its assets at auction.
Finally, BayBank argues that BPBA's set-off was improper, since under New York law, "when a bank is on notice that funds in a depositor's account are owned by a third party, the bank cannot appropriate those funds in order to set them off against a debt of the depositor."
Daly v. Atlantic Bank of New York, 201 A.D.2d 128, 129, 614 N.Y.S.2d 418, 419 (1st Dep't 1994). As explained more fully in Section IV infra, however, BayBank has failed to establish that it owned the funds in question. Nor has it shown that BPBA was aware of any claim it may have had.
IV. BayBank's Conversion Claim
For a conversion claim arising from a funds transfer to stand, it must not be inconsistent with Article 4A, which is
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.