The case of the day is Receivers of Sabena SA v. Deutsche Bank AG (N.Y. App. Div. 2016). Sabena, before it became insolvent, was Belgium’s national airline. It provided airplane maintenance services to Sudan Airways Ltd. In 1997, to pay for some services Sabena had provided for its planes, Sudan Airways initiated an electronic funds transfer for $360,000 with Sabena as the beneficiary. Sudan Airways’s bank was the National Bank of Abu Dhabi. Generale Bank was Sabena’s bank. Bankers Trust, in New York, was the intermediary bank. Its successor-in-interest was Deutsche Bank.
To understand the case, you need to know a little about electronic funds transfers, which are governed by Article 4-A of the UCC (or more precisely in this case, New York’s enactment of the UCC). Here is a brief description that the court quoted in its opinion:
An EFT is nothing other than an instruction to transfer funds from one account to another. When the originator and the beneficiary each have accounts in the same bank[,] that bank simply debits the originator’s account and credits the beneficiary’s account. When the originator and beneficiary have accounts in different banks, the method for transferring funds depends on whether the banks are members of the same wire transfer consortium. If the banks are in the same consortium, the originator’s bank debits the originator’s account and sends instructions directly to the beneficiary’s bank upon which the beneficiary’s bank credits the beneficiary’s account. If the banks are not in the same consortium—as is often true in international transactions—then the banks must use an intermediary bank. To use an intermediary bank to complete the transfer, the banks must each have an account at the intermediary bank. … After the originator directs its bank to commence an EFT, the originator’s bank would instruct the intermediary to begin the transfer of funds. The intermediary bank would then debit the account of the bank where the originator has an account and credit the account of the bank where the beneficiary has an account. The originator’s bank and the beneficiary’s bank would then adjust the accounts of their respective clients
The day before Sudan Airways initiated the EFT, the President issued an executive order under the International Emergency Economic Powers Act and the National Emergencies Act blocking “all property and interests in property of the Government of Sudan that are in the United States, that hereafter come within the United States, or that hereafter come within the possession or control of United States persons.” So when Bankers Trust received the EFT, it debited the account of the National Bank of Abu Dhabi, but because the property was blocked, it did not credit the account of Generale Bank. Instead, it segregated the funds.
In 2012, Sabena applied for and received a license authorizing Deutche Bank to release the funds. But once it was clear of the blocking order, Deutsche Bank released the funds to the National Bank of Abu Dhabi—effectively, to Sudan Airways. Sabena sued Deutsche Bank, and Deutsche Bank moved to dismiss. The trial judge denied the motion, and Deutsche Bank appealed.
On appeal, the court reversed. First, it held that the UCC was the exclusive source of rights relating to funds transfers. That established, it noted the basic rule of Article 4-A: the receiving bank has no duty to accept a payment order. Once the bank accepts the order, it does have obligations, but banks other than the the beneficiary’s bank accept an order only by executing it. In other words, before execution, there is no duty. Sabena, the beneficiary, had no rights regarding the transfer order from its customer’s bank to the intermediary bank: its only remedy was against Sudan Airways. At the time the funds transfer is in the hands of the intermediary bank, it is not the property of the beneficiary or of the originator. Due to the passage of time, the transfer order, which had not been executed, had been cancelled by operation of law. Thus the bank was obligated to return the funds to the originating bank.
The court had to face an earlier decision in Bank of N.Y. v Norilsk Nickel, 14 A.D.3d 140 (2004), and another similar case, where the intermediary bank had brought an interpleader action and the court had ordered the funds released to the beneficiary. The court distinguished the case on the grounds that there, the intermediary, by bringing an interpleader action, had effectively disclaimed any interest in the funds transfer order. Moreover, in Norilsk, the dispute was between the beneficiary and a creditor of the originator, not between the beneficiary and the originator.