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SECURITIES FUND, ETC. v. AM. NAT. BANK & TRUST CO.

May 27, 1982

SECURITIES FUND SERVICES, INC., PLAINTIFF,
v.
AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, DEFENDANT.



The opinion of the court was delivered by: Leighton, District Judge.

MEMORANDUM

I

This is a civil diversity action for damages arising out of a wire transfer transaction. New England Merchants National Bank of Boston (NEMB), at the direction of plaintiff Security Fund Services (SFS), requested, by wire, a transfer of funds disbursed by SFS to an account purportedly in the American National Bank and Trust Company of Chicago (ANB), the defendant. The dispute arises from questions now being raised concerning crediting of the funds by ANB.

The complaint is in nine counts. Count I alleges that defendant engaged in reckless, willful and wanton misconduct constituting gross negligence. Count II alleges a failure to act in accordance with reasonable commercial standards. Count III alleges that defendant acted negligently and failed to exercise ordinary care. These three counts (I-III) will be collectively referred to as the negligence claims. Count IV alleges a breach by the defendant of its duties as an agent of NEMB and SFS. Count VIII alleges a breach of defendant's obligation as agent to act in strict accordance with its instructions. Counts IV and VIII will be referred to as the agency claims. Count V alleges defendant breached its duties as a bailee. Count VI alleges that the plaintiff is a third-party beneficiary to the contract that the defendant breached in failing to properly deliver the funds as directed by NEMB. Count IX alleges that defendant is estopped to deny the existence of a deposit contract and that it breached its duties under that contract. The cause is before the court on defendant's motion to dismiss all nine counts. For the following reasons, Counts I-IV and VII-VIII are allowed to stand, while Counts V, VI and IX are dismissed.

In deciding a motion to dismiss, the court accepts the well-pleaded allegations of fact as true, and reads them in the light most favorable to the plaintiff. Lundell v. Massey-Fergusen Services, 277 F. Supp. 940, 941 (N.D.Iowa 1967); Murphy v. Wheaton, 381 F. Supp. 1252, 1258 (N.D.Ill. 1974); Jung v. K & D Mining Co., 260 F.2d 607, 608 (7th Cir. 1958). Accordingly, the following are accepted facts.

II

SFS is the Shareholder Service Agent for Templeton Growth Fund Ltd. (Templeton). SFS processes and records the purchases and redemptions of Templeton shares. In October, 1980, one of Templeton's shareholders was Mr. John Bushman, acting as a trustee for approximately 260,000 shares valued at more than $2 million. On or about October 14, 1980, SFS received instructions, bearing Bushman's signature, requesting that his shares be redeemed and the proceeds be wired to his account at ANB. The account number was said to be 204471. SFS processed the redemption, and directed NEMB, custodian of Templeton's funds, to make the requested wire transfer. NEMB did so and directed the amount of the redemption, the sum of $2,017,867.50, credited to the account of "John Bushman, Trustee // 204471." The transferred funds and accompanying written instructions were received by ANB on or about October 15, 1980. However, the true facts were that ANB had no account in the name of John Bushman, either individually or as trustee. Account 204471 was registered to Gerald S. Haberkorn, Inc. Notwithstanding this discrepancy, ANB credited the funds to Haberkorn's account without addressing any inquiry to either NEMB, SFS, or Templeton. On or about November 4, 1980, SFS learned that the redemption instructions had been forged and that the real John Bushman had no knowledge of the redemption and had no account or relationship with ANB. And, on inquiry, SFS learned from ANB that the funds were credited to Haberkorn's account. Haberkorn had previously agreed to sell approximately $2 million worth of diamonds and jewels to two individuals who promised to pay by wiring the funds into Haberkorn's account at ANB.

After the transfer of funds, Haberkorn delivered the merchandise to the two individuals. Neither the funds transferred into Haberkorn's account nor the jewels purchased with those funds have been recovered. SFS, upon discovery of the forgery, reissued the redeemed shares to the real John Bushman, Trustee, pursuant to an agreement between it and Templeton. The shares were paid for in cash by SFS. In having made whole Templeton and John Bushman, Trustee, SFS brings this suit, contending that it has succeeded to their interests in all claims and rights arising out of these events. In Counts IV and VIII of the complaint, it alleges that ANB, by accepting the transfer of the funds from NEMB with instructions to credit the account of John Bushman, Trustee, became an agent for NEMB, the company which was its agent. Further, SFS claims that ANB's subsequent actions constituted a breach of its duty to act in strict accordance with the instructions it had received, and to inform its principal of all material facts concerning the transaction. Thus, SFS contends that ANB acted as its agent in this transaction.

III

An agency relation may be implied from the facts of the particular case and need not be express. "The existence of an agency relationship and its nature and extent may be shown by reference to the situation of the parties, the property and the acts of the parties." Kalman v. Bertacchi, 57 Ill. App.3d 542, 15 Ill.Dec. 204, 373 N.E.2d 550, 556 (1st Dist. 1978). This rule of Illinois law is well known. Judge Roszkowski of this court had occasion to apply and follow it in Evra Corp. v. Swiss Bank Corp., 522 F. Supp. 820 (N.D.Ill. 1981), reversed on other grounds, 673 F.2d 951 (7th Cir. 1982). It is helpful for this case to analyze this recent decision.

In Evra Corp., plaintiff entered into a standard form time charter contract with the Pandora Shipping Company for lease of an ocean transport ship. The contract called for monthly payments "in advance" to an account with the Banque de Paris in Switzerland (Swiss Bank). The charter provided for the right of termination by Pandora if the payments were not timely made. As to the particular payment in question, the plaintiff initiated a wire transfer through Continental Bank of Chicago. Continental used the Swiss bank as its correspondent for most of these wire transfer transactions; it performed these services for Continental since the latter did not have direct access to bank operations in Switzerland. Continental in Chicago forwarded the request for transfer to its branch in London and then debited plaintiff's account. After the telex operator in London failed to reach Swiss Bank through its general telex number, Continental diverted the telex message to Swiss Bank's Foreign Exchange Department, a number used by Continental in the past. The facts amply showed that Swiss Bank received the message before the deadline for payment of the charter; however, the payment was never recorded and the transfer was not completed. Swiss Bank had no procedure in its Foreign Exchange Department for transferring telex messages destined for other departments. The court found that Swiss Bank failed to record the message due to either a loss of the message or a failure to keep paper in the machine (there was no automatic shutoff on the machine when the paper ran out). Due to Swiss Bank's negligence in not recording the message, the plaintiff lost its charter contract and suffered damages.

Judge Roszkowski concluded that Swiss Bank breached the duty of care that it owed Evra Corp. By analogy, he reasoned that since there was a contract between plaintiff and Continental, Continental owed plaintiff a duty of care, and Swiss Bank, as Continental's correspondent bank, owed plaintiff that same duty. Citing Delbrueck v. Manufacturers Hanover Trust Co., 609 F.2d 1047 (2d Cir. 1979), which analogized the conceptual use of the finality of checks once accepted to irrevocable wire transfers, he found a similarity between a "collecting bank" as defined in Art. IV of the U.C.C., Ill.Rev.Stat. ch. 26, § 4-105(d) (1979), and Swiss Bank's role as "corresponding bank." This U.C.C. provision states that a collecting bank is "any bank handling the item for collection except the payor bank," U.C.C. 4-105(d).

A corresponding bank is one which "regularly performs services for another in a place or market to which the other does not have direct access." Black's Law Dictionary (1979). Under U.C.C. 4-201(1), "[u]nless a contrary intent clearly appears . . . the [collecting] bank is an agent or subagent of the owner of the item." Thus, as Judge Roszkowski held in Evra, a correspondent bank in a wire transfer may be presumed to be an agent of the initiator of the transaction until such time as the transaction is completed. Swiss Bank was held to be the agent of Evra Corp. with the same duty of care owed to it by Continental.

In the present case, SFS (like Evra) is the initiator of the wire transfer. NEMB (like Continental Bank) is the custodial bank for funds disbursed by SFS. ANB, as the receiver of the wire transfer, is in the same position as Swiss Bank. In light of the holding in Evra, this court concludes that under the facts alleged, an agency relation existed between SFS and ANB. Accordingly, ANB owed SFS a duty of care which its ...


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