My apologies for yet another post arising out of Receivers of Sabena v. Deutsche Bank, but there is one more important point to be made if you’ll bear with me. (For background, here are links to the first post and the second post.)

Last week, in the second post on this subject, I talked about a transfer made by a hypothetical Sally Jones Heavy Machinery LLC which was blocked by the intermediary bank because of the SDN Listing for Sakinah Hussain a.k.a. Sally Jones. In that hypothetical, the intermediary bank’s maximum damages to Sally Jones Heavy Machinery LLC were limited to interest on the blocked funds if the bank blocked when it should not have. On the other hand, penalties to OFAC would have been up to $1 million if the bank did not block and should have. In that light, it was easy to figure out why the intermediary bank had little interest in hearing whether Sally Jones’s company and Sakinah Hussain were related.

But what if the funds transfer had been initiated by Sally Jones as an individual consumer? Would things have been different? Section 4A-108 exempts from its coverage wires covered by the Electronic Fund Transfer Act of 1978, 15 U.S.C.§ 1693. This means that wires with an individual consumer on either end, with some exceptions such as wires initiated in person at a money transfer agency, are exempted from Article 4A and are covered by the EFTA instead. So in this instance, this would mean that the liability limitations set forth in section 4A-305 would not govern the liability of the intermediary bank.

But that’s not the end of the story. Section 1693h sets forth the liability of financial institutions, and it does provide for damages that are the proximate result of a financial institutions failure to execute properly instructions received from the consumer. That, however, doesn’t cover the intermediary bank because it has not received instructions from the consumer, just instructions from the consumer’s bank. So the EFTA neither establishes nor disclaims liability. And the limitation on liability doesn’t apply.

Or does it? Look at this in the Official Comment to section 4A-108

A court might, however, apply appropriate principles from Article 4A by analogy in analyzing any part of the funds transfer that is not subject to the provisions of EFTA or other law, such as the obligation of the intermediary bank to execute the payment order of the originator’s bank (Section 4A-302)

And, of course, if a court did that (as the banks and their lawyers that drafted Section 4A clearly hope), all that the intermediary bank owes to Sally is interest on the blocked account which conveniently is sitting in that account already. So once again, it may be better to be the bank than to be Sally Jones, which probably comes as no big surprise.

Photo Credit: Copyright Clif Burns 2013 (www.clifburns.net)

Remember Sabena, the ill-fated Belgian airline that declared bankruptcy in 2001? Well, to quote Ford Madox Ford, this is the saddest story I have ever heard.

One of the things that Sabena did, other than fly people back and forth to Brussels, was to provide repair and technical services to other airlines. One of those was Sudan Airways, which originated a wire transfer of $360,500 to pay Sabena. One day before the wire transfer, on November 3, 1997, President Clinton blocked the assets of the government of Sudan, including those of Sudan Airways. So when the wire from Sudan Airway’s bank hit Bankers Trust in New York on November 4 on its way to Sabena’s bank in Belgium, Banker’s Trust blocked the transfer and put the funds in a blocked account where they sat for more than a decade.

In 2009 Sabena requested that OFAC unblock the funds. In 2012, OFAC issued a license to Banker’s Trust (by then Deutsche Bank) to release the funds. The receivers for Sabena were doing a happy dance over getting the license from OFAC when their celebration was abruptly cut short. Deutsche Bank relied on the license Sabena obtained and sent the funds not to Sabena’s bank but to Sudan Airways bank. It’s something like renting a hall and a band for a party and then not being allowed to attend but rather forced to watch through the windows as your guests eat all your food and drink all your champagne.

So the receivers for Sabena decided to get even: they sued Deutsche Bank for not sending the money to them. But poor Sabena just can’t get a break. On July 14, a New York appeals court dismissed the Sabena complaint and upheld the return of the unblocked funds to Sudan Airways.

To get there, the appeals court relied on Article 4A of the Uniform Commercial Code that governs fund transfers. Specifically the court relied on two provisions. First, it relied on section 4A-212, which says that an intermediary bank, like Bankers Trust, has no liability to the beneficiary of the funds transfer. Second, it relied on section 4A-402 which requires the intermediary bank to return to the sender any uncompleted funds transfer. Once the funds were blocked, then the transfer order was cancelled under section 4A-211(d) five days after the intermediary bank received a transfer request and did not execute it. And once cancelled, then section 4A-402(d) requires the funds to go back to the sender.

The moral of the story is this: intended recipients of blocked fund transfers should not waste their time trying to get an unblocking license.

Photo Credit: Sabena Airbus A321-211 by Aero Icarus [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/8PJXJn [cropped and color processed]. Copyright 2010 Aero Icarus