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United States

The law in the United States relating to electronic funds transfers is new and undeveloped. Article 4A, governing these types of transactions, has been added to the Uniform Commercial Code and adopted by many states, including New York. A case recently reported, Sheerbonnet Ltd v American Express Bank Ltd, 951 F Supp 403 (SDNY 1995), sheds some light on the interplay between Article 4A and the common law.

Sheerbonnet a British trading company, had contracted to sell troop carriers to Hady Establishment, a Saudi Arabian company. Sheerbonnet was to be paid through a letter of credit issued by Banque Scandanave in Geneva. Sheerbonnet requested that the amount due under the letter of credit, US$12.4 million, be paid through a funds transfer to its account at Bank of Credit and Commerce, SA (BCCI) in London.

Because Sheerbonnet was to be paid in US dollars, Banque Scandanave initiated payment on July 3 1990 by instructing its correspondent bank in New York, Northern Trust International, to transfer US$12.4 million to American Express Bank (AEB) for credit to BCCI's account at AEB in New York. BCCI could then transfer the funds to Sheerbonnet's account in London. However, due to the collapse of BCCI, the funds never left New York and Sheerbonnet never received payment for the troop carriers.

On the morning of July 5 regulators in England and Luxembourg suspended the operations of BCCI. On the same day, the Federal Reserve Bank of New York advised AEB of the suspension of BCCI accounts worldwide, including the seizure of BCCI's New York assets and operations.

Shortly, thereafter, AEB received by wire transfer from Northern Trust the payment order for the transfer of US$12.4 million to the BCCI account at AEB in New York. Knowing the account was frozen by the banking regulators, AEB nevertheless credited to it the US$12.4 million. After crediting the funds to the BCCI account, AEB asserted its rights over the entire account as an offset against debts owed to it by the insolvent BCCI. Thus the funds were never transferred to Sheerbonnet.

Sheerbonnet brought suit against AEB in federal court in New York for conversion, tortuous interferences with contract and unjust enrichment. These are common law claims based on tort and contract. AEB moved to dismiss the suit on the grounds that Article 4A of the New York Uniform Commercial Code; and a subsequent court order in the liquidation of BCCI barred the suit.

AEB argued that Article 4A provides the exclusive remedy for claims arising out of electronic funds transfers and, since Sheerbonnet's complaint ignored Article 4A, it should be dismissed. The district court found that Article 4A was not intended to serve as the exclusive remedy for claims involving funds transfers and the rights and obligations flowing from payment orders. In the court's view, Article 4A only extinguished common law claims that are redundant of or inconsistent with its provisions.

Sheerbonnet's claims were not found to be inconsistent with Article 4A and therefore could be asserted against AEB. the court pointed out that the crux of Sheerbonnet's claims was that AEB had knowledge that the US12.4 million it was asked to receive and transfer was destined for a seized account (where it could be used as an offset against BCCI) and there is no provision in Article 4A dealing with this situation.

Twenty-two months after the receipt by AEB of the US$12.4 million transfer, the Supreme Court of the State of New York entered an order instructing a number of banks in New York including AEB, to cede BCCI funds to the New York Superintendent of Banking, less set-offs claimed by the banks. Having already claimed the funds in the BCCI account as a set-off, AEB did not turnover any funds to the Superintendent. The federal district court rejected AEB's argument that this turnover order barred any further proceedings against it based on the BCCI account. The court found that Sheerbonnet's claims were not dealt with by the turnover order and, in any event, Sheerbonnet was not afforded a full and fair opportunity to have its claims heard by the New York Supreme Court.

The federal district court's opinion in this case is significant in that it defines the boundaries of Article 4A in the electronic funds transfers area. While common law claims may still be brought against banks, these claims may not be inconsistent with the provisions or approach of Article 4A.

Robert S Rendell

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