Citibank gets support from TCH and BPI in $900M payment error lawsuit
A lawsuit brought by Citibank against a number of entities that kept parts of a $900 million payment allegedly made by error continues at the New York Southern District Court. Citibank has now secured help from a number of organizations, including The Clearing House Association LLC, The Clearing House Payments Company LLC and the Bank Policy Institute (BPI).
TCH and BPI are trying to submit briefs as amici curiae (friends of the Court) – non-parties to a case that try to help the Court make the right decision. In this case, TCH and BPI’s members are banks that have a substantial interest in the legal standards governing wire transfers, including in particular the rights of transferors and transferees when erroneous payments are made. The positions advocated by defendants in this case would substantially expand the discharge for value defense under New York law, potentially exposing Amici’s members to extraordinary liability for innocent errors.
Defendants’ contentions, if accepted, would impose overly broad and inequitable risks on banks that provide critically important wire transfer services to the public, TCH and BPI argue.
Put briefly, TCH and BPI argue against the so-called “discharge for value” defense used by the defendants (that is, the companies that got the money sent by mistake and kept it).
The “discharge for value” defense, raised by defendants in this case, is a narrow exception to the general rule. The defense is applicable in limited circumstances defined by the case law in New York and other jurisdictions.
Amici urge the Court to reject application of the discharge for value defense because such an expansion of the defense would impose overly broad and inequitable risks on banks that provide important wire transfer services to the public.
TCH and BPI argue that, in most instances, banks process and complete wire transfers precisely as instructed and intended without errors. However, technological or human mistakes can and do occur with respect to wire transfers, most commonly relating to the payment of funds to the wrong beneficiary or in an incorrect amount. The willingness of banks to continue this business model depends, of course, on their perceived risks, including the potential exposure to large and disproportionate losses in the event of an error.
Simply put, it is bad policy to subject banks that provide wire transfer services to expanded, potentially extraordinary liability for errors in executing wire transfers. Doing so would undermine the critical role banks play in providing this essential, low-cost payment system to participants in the financial markets. A ruling in defendants’ favor would markedly expand the application of the discharge for value defense, and the natural outcome of such a ruling would be a reduction in the number of banks willing to offer wire transfers and an increase in charges and costs to market participants.
At the same time, recipients of erroneous transfers would be more likely to obtain unjustified windfalls, and they would be incentivized to act in a commercially unreasonable manner to retain those windfalls.
Let’s note that the Court has not yet decided whether to accept the proposed Amici Curiae briefs.