In re the Liquidation of the New York Agency

banking operations in New York and Los Angeles because of losses. At some point prior to July 1991, the BCCI New York agency stopped accepting deposits and was in the process of reducing its New York presence.

Thus, by early 1991, if not years before, financial officials worldwide were on notice that BCCI was a rogue bank, and that there were substantial risks involved in doing business with it. Indeed, in United States v BCCI Holdings (Luxembourg) ( 961 F Supp 287 [D DC]), Judge Joyce Green held that the substantial publicity concerning BCCI’s illegal operations prior to the bank’s collapse put American Express Bank on notice that any moneys deposited with BCCI risked criminal forfeiture. Judge Green also noted that many international banks had cut their ties with BCCI based on the widespread reports of wrongdoing.

Shortly before BCCI’s collapse, Price Waterhouse submitted its audit findings to the Bank of England. The report showed that the bank had been fraudulently concealing huge worldwide losses. It was this report that, on Friday, July 5, 1991, led the Bank of England to close BCCI’s operations in that country. This in turn triggered action by Luxembourg authorities, and led eventually to the bank’s worldwide shutdown. However, the bank’s operations worldwide did not shut down completely on July 5, 1991. Notably, on that very day, officials in Hong Kong declared the bank "sound and viable.” In addition, the BCCI Tokyo branch did not terminate its operations until the following Monday, and then only on instructions from the bank’s headquarters in Luxembourg. It was not until two weeks later that the government of Japan took any official action against the Tokyo branch.

Despite cautions from its board of directors in 1990 and 1991 about doing business with BCCI, CITIC had been doing "dollar placements” with the BCCI Tokyo branch about twice a week throughout 1991. These dollar placement transactions involved deposits of U.S. dollars by CITIC into a BCCI Tokyo branch account at BAI in New York. During the evening of July 4th and early morning hours of July 5, 1991^[1] (the Tokyo business day on July 5, 1991), CITIC and BCCI Tokyo negotiated a Eurodollar agreement, whereby CITIC agreed to transfer $31 million to the BCCI Tokyo branch over the weekend. BCCI Tokyo was to repay the money with interest the following Monday. CITIC

apparently chose to deal with BCCI, despite the warnings from its board, because BCCI offered a higher interest rate. To carry out this transaction, CITIC agreed to deposit the $31 million into the BCCI Tokyo account at BAI in New York City as of July 5th Tokyo time. This agreement is evidenced by a telex sent by CITIC to the BCCI Tokyo branch at 7:25 p.m. on July 4th.

At 3:56 a.m. on July 5th, CITIC entered and approved a funds transfer order into the Citibank computer system, ordering Citibank to transfer the funds to the BCCI Tokyo branch account at BAI in New York City. The transfer order was entered through a special terminal which Citibank had provided in CITIC’s Beijing office. Because it was the end of the July 5th business day in Tokyo, the transaction was credited in the Tokyo branch books at that time and interest was credited to CITIC.

Due to the type of transaction, the transfer order was directed to Citibank operations in New York via the Clearing House Interbank Payment System (CHIPS).^[2] The nature of Eurodollar transactions is that dollars are simply transferred from one New York bank Federal Reserve (Fed) account into another New York bank Fed account, regardless of where the ultimate beneficiary of the transfer is located (see, Stigum, The Money Market, at 199-202 [3d ed 1990]). The transfer order took its place in the queue of transactions which Citibank would execute that day. Citibank had a policy of deferring large transfers until the end of the business day; the transaction, therefore, kept moving to the back of the queue.

On the morning of July 5, 1991, in response to the actions taken by authorities in England and Luxembourg, the New York Superintendent of Banks seized the New York agency of BCCI and took possession of the business and property of BCCI in this State on the grounds that BCCI was in an unsound and unsafe condition and could not with safety and expediency continue business (see, Banking Law § 606 [1]). Pursuant to the order of the Superintendent, a notice was posted at the BCCI New York agency at approximately 9:00 a.m. on July 5th. The New York agency’s operations were stopped, and its telex machines disabled. The Federal Reserve also issued a press

release at 8:30 that morning announcing the seizure by the international regulators and the Superintendent. At approximately 10:40 a.m., upon learning that the BCCI Tokyo branch maintained a bank account at BAI, Michael Lesser, an Assistant Deputy Superintendent of Banks, called BAI to inform it that the Superintendent had taken over the business and property of BCCI in New York, and that no moneys should be allowed out of any BCCI accounts at BAI.

At 3:10 p.m., the CITIC transfer order came up for payment in the Citibank queue. However, at that point, the CITIC account balance was insufficient to cover the transfer. Ironically, an expected transfer of $41 million into the CITIC account from an unrelated BCCI overseas transaction had not been credited in the account due to the worldwide seizure of BCCI assets. The Citibank transfer order was held in a balance retry queue. The bank’s computer periodically attempted to release all transactions or payments in the queue if a sufficient balance existed in the respective accounts. It was not until a Citibank account manager authorized an overdraft that the Citibank computer finally sent the money to BAI at 5:27 p.m. EDT. BAI received the transfer almost instantaneously, but did not credit the Tokyo branch account until 6:26 p.m.

Under CHIPS rules, a stored order can be canceled by the sender (CITIC) at any time prior to acceptance by the beneficiary’s bank (BAI) (see also, UCC 4-A-211 [2]). There were no communications from CITIC to Citibank from the time Citibank received the payment order to the time the funds were actually transferred to BAI. CITIC had never previously stopped a dollar placement transaction such as this, although it was aware that other banks had done so.

Prior to the start of the New York business day on July 5th, the BCCI Tokyo account at BAI contained approximately $400,000. By the end of the day, after all deposits were credited, the Tokyo branch account contained $85 million.^[3] In total, BAI had $177 million on deposit in accounts of various BCCI entities. This represents a substantial proportion of BCCI assets in this country.

Following the dismissal of a Federal interpleader action brought by BAI,^[4] and the payment of the $177 million in BCCI assets held by BAI into a segregated account, the Superintendent by order to show cause dated July 13, 1992 brought this action seeking release of the $85 million seized from the BCCI Tokyo branch BAI account. CITIC objected to the application.^[5]

Supreme Court held that CITIC was entitled to a return of its $31 million under common-law restitution principles. The court treated this transaction as if it were a deposit with the seized New York agency and then, applying principles derived from common-law receivership and bankruptcy law, concluded that the Superintendent’s acceptance of the deposit was an ultra vires act. The court made no attempt to analyze the Superintendent’s actions in terms of the statutory powers granted under the Banking Law.

Objecting to language in the decision indicating that the Superintendent had instructed BAI to continue to accept deposits, the Superintendent moved for reargument. Supreme Court denied the motion, holding that, regardless of whether the Superintendent issued any specific instructions, "it was the intent of the Superintendent to leave the BCCI SA account at Bankamerica open to accept deposits while precluding the pay out of monies.”

The Appellate Division reversed. The Court examined the powers granted the Superintendent under the Banking Law, and concluded that Banking Law § 606 (4) (a) vests the Superintendent with broad discretion to seize the business and property of a foreign bank. The Court held that the powers granted under the Banking Law were broad enough to validate, if not require, the seizure of these funds. The Court rejected CITIC’s contentions that the contract was the result of a mistake of fact, or that CITIC was entitled to the imposition of a constructive trust, noting that CITIC had made a deliberate decision to continue doing business with BCCI despite knowledge of

BCCI’s difficulties. The Court also noted that its decision placed CITIC in a position no better and no worse than any of the bank’s other creditors or depositors. We granted CITIC leave to appeal, and now affirm.

Since this case involves the Superintendent’s powers to seize assets of a failed foreign bank, it is appropriate at the outset to consider the scope of the Banking Law provisions which define these powers.^[6] Under Banking Law § 606 (4) (a), the Superintendent can:

"take possession of the business and property in this state of any foreign banking corporation * * * upon his finding that any of the reasons enumerated in subdivision one of this section exist with respect to such corporation * * * Title to such business and property shall vest by operation of law in the superintendent and his successors forthwith upon taking possession. Thereafter, the superintendent shall liquidate or otherwise deal with such business and property in accordance with the provisions of this chapter.” (Emphasis added.)

Pursuant to Banking Law § 606 (4) (c),

"the phrase 'business and property in this state’ includes, but is not limited to, all property of the foreign corporation, real, personal or mixed, whether tangible or intangible, (1) wherever situated, constituting part of the business of the New York agency or branch and appearing on its books as such, and (2) situated within this state whether or not constituting part of the business of the New York agency or branch or so appearing on its books.” (Emphasis added.)

Finally, Banking Law § 618 (1) provides that:

"The superintendent is authorized, upon taking possession of any banking organization to liquidate the affairs thereof and to do all acts and to make such expenditures as in his judgment are necessary to conserve its assets and business.” (Emphasis added.)

failed foreign banking entity in order to protect the integrity, stability and reliability of the New York financial market. The efficacy of this policy is apparent when one considers that since 1945, only three banks, including BCCI, have failed, and in the first two cases, all New York creditors were paid in full, with a surplus available for the foreign liquidator in each case. In all likelihood, there will be a similar result in the BCCI matter (see, Report of Superintendent’s Advisory Committee on Transnational Banking Institutions, at 10 [Mar. 1992]).^[7]

CITIC’s argument also ignores the organization of an international banking corporation. In essence, a branch/agency is nothing more than a stall in the money market bazaar of international banking in New York (see, Report of Superintendent’s Advisory Committee, op. cit., at 9). A branch or agency of a bank is not a separate entity. It has no separate capital, but rather has the entire worldwide capital of the foreign bank behind its transactions and its lending limits (see, Report of Superintendent’s Advisory Committee, op. cit., at 8-9). Because of its lack of independent local capitalization, an agency is not allowed to accept deposits from U.S. citizens .or residents (Banking Law § 202-a [1]). On the other hand, although an agency/ branch is part of a foreign banking corporation, it is regulated as a separate entity in certain ways. A foreign bank seeking to establish an agency/branch in New York must obtain a license from the Superintendent pursuant to article 5 of the Banking Law (Banking Law §§ 200, 201). After having obtained a license, the agency is subject to close regulation and a substantial number of legal proscriptions (see, Banking Law §§ 200-209). The New York agency is the only part of BCCI that the Superintendent can control, license or regulate. But that relationship does not require us to determine that CITIC’s contract with another branch of BCCI in Tokyo (subject to Japan’s laws of commerce and banking) was incapable of performance at the time the Superintendent took control of the New York agency.

In short, on the facts presented, the analogy between the Superintendent’s powers under Banking Law § 606 (4) (c) (2) and receivership law, while generally applicable to the seizure of a New York agency or branch, does not control this seizure

of an asset located in New York, belonging to a foreign bank branch not located in New York. As applied here, the receivership analogy is incompatible with (1) the language of the statute establishing the Superintendent’s powers; (2) the policies underlying those powers; and (3) the operations of a multinational banking institution. The Superintendent had no power to control the Tokyo branch of BCCI; he did, however, have the power to seize any assets of that branch which made their way into New York. In addition, under article 4-A of the New York Uniform Commercial Code, once Citibank wired the money to BAI, CITIC could not revoke the transaction except for reasons inapplicable here (see, UCC 4-A-211 [3] [b]).^[8] The agreement to deposit the funds was made and effectuated prior to the closing of the Tokyo branch. Once those funds were deposited into the BAI account, they became property in New York of BCCI Tokyo. The Superintendent then had the authority to seize the funds.

Neither Friede v National City Bank ( 250 NY 288 ) nor Cragie v Hadley ( 99 NY 131 ), relied on by CITIC as authority for the proposition that the seizure of these funds was proscribed by settled principles of State law, provide persuasive authority for that proposition. Those cases involved the insolvency (Cragie) or seizure (Friede) of the bank receiving funds. In this case, the bank receiving the funds (BAI) was not insolvent. Moreover, both cases predated enactment of Banking Law § 606 (4) (c) (2), and neither involved a factual scenario remotely resembling the one at issue here.

CITIC also contends that it is entitled to the return of its funds under the doctrine of constructive trust. CITIC relies primarily on In re Koreag, Controle et Revision ( 961 F2d 341 [2d Cir], cert denied sub nom. Koreag v Refco F/ X Assocs., 506 US 865 [1992]). Koreag was the Swiss liquidator of a bankrupt foreign bank (Mebco). It asserted a claim, under section 304 of the Bankruptcy Code (11 USC), to assets held in one of Mebco’s New York bank accounts at Swiss Bank-N. Y. The claim was opposed by a New York company (Refco) which had transferred

money into the account pursuant to currency exchange agreements with Mebco.^[9] In Koreag the transactions that Refco sought to undo took place after the foreign bank had been seized by the foreign liquidator. This is a significant* difference from the case before us.

Moreover, while the Second Circuit found that the equities in Koreag favored Refco (In re Koreag, supra, at 354), the facts in this case support the Appellate Division’s conclusion that the equities do not favor CITIC. CITIC cannot be portrayed as an innocent victim here. At the time it agreed to transfer funds to BCCI Tokyo, CITIC knew or should have known that BCCI was a rogue bank whose operations had come under close scrutiny by both U.S. and British authorities. Indeed, CITIC’s own board of directors had warned its personnel about extensive dealings with BCCI. Banks that chose to do business with BCCI did so at their own risk.

In addition, there is no inequity in treating CITIC in the same manner as any other depositor/creditor who was unfortunate enough to have placed its money with BCCI prior to the time the New York agency was seized. Even assuming, arguendo, that there is a legal reason to distinguish between a transfer order executed at 8:59 and a transfer executed at 9:01, there is no reason to differentiate between the two based upon "equity and good conscience,” the fundamental requirement for imposition of a constructive trust (see, Simonds v Simonds, 45 NY2d 233 , 242).

V.

CITC also contends that this transaction was executed under a mistake of fact, and that recovery is warranted under the contract doctrine of impossibility / impracticability of performance. At the time that CITIC and the BCCI Tokyo branch entered into this transaction, the Tokyo branch was a fully functioning branch of an international bank. The doctrine of mutual mistake requires that the mistake exist at the time the contract is negotiated (Matter of Gould v Board of Educ., 81 NY2d 446 , 453; Restatement [Second] of Contracts § 151, comment a). Clearly, the parties were not mistaken concerning the status of the Tokyo branch at the time of the contract.